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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to __________
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:
Common stock, par value $.01 per share
(Title of class)
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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 17, 1999, was
approximately $158.8 million.
The number of outstanding shares of the registrant's common stock on December
17, 1999 was 23,324,415.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for registrant's 2000 Annual Meeting of
Stockholders 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
<TABLE>
<CAPTION>
PART I Page
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<S> <C> <C>
Item 1: Business.................................................................................. 4
Item 2: Properties................................................................................ 36
Item 3: Legal Proceedings......................................................................... 37
Item 4: Submission of Matters to a Vote of Security Holders....................................... 37
PART II
Item 5: Market for Registrant's Common Equity and
Related Stockholder Matters........................................................... 37
Item 6: Selected Financial Data................................................................... 38
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 39
Item 7A: Quantitative and Qualitative Disclosures about Market Risk................................ 51
Item 8: Financial Statements and Supplementary Data............................................... 55
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................................................ 92
PART III
Item 10: Directors, Executive Officers, Promoters and
Control Persons of the Registrant..................................................... 92
Item 11: Executive Compensation.................................................................... 92
Item 12: Security Ownership of Certain Beneficial Owners
and Management........................................................................ 92
Item 13: Certain Relationships and Related Transactions............................................ 92
PART IV
Item 14: Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................................................... 92
SIGNATURES .......................................................................................... 97
</TABLE>
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PART I
ITEM 1. BUSINESS
General
The Company operates a diversified financial business encompassing real
estate finance, equipment leasing and energy. The Company's real estate finance
business focuses on the acquisition and resolution of commercial real estate
mortgage loans. The Company also sponsored Resource Asset Investment Trust, a
real estate investment trust, and currently owns 14% of Resource Asset's common
shares of beneficial interest. The Company's equipment leasing business focuses
primarily on small ticket equipment lease financing, although it also manages
five publicly-owned equipment leasing partnerships and provides lease finance
placement and advisory services. The Company's energy business focuses on the
sponsorship of investment programs which drill for and produce natural gas from
wells on properties in New York, Ohio and Pennsylvania acquired from the
Company.
Real Estate Finance
General
The Company's real estate finance business involves the purchase, at a
discount, of troubled commercial real estate mortgage loans, and the
restructuring and refinancing of those loans. These loans are generally acquired
from private market sellers, primarily financial institutions. Loans acquired by
the Company typically involve legal and other disputes among the lender, the
borrower and/or other parties in interest, and generally are secured by
properties which are unable to produce sufficient cash flow to fully service the
loans in accordance with the original lender's loan terms. The Company's
commercial mortgage loan portfolio consists of 41 loans with aggregate
outstanding loan balances of $747.1 million. These loans were acquired at an
investment cost of $488.8 million, including subsequent advances which had been
anticipated by the Company at the time of acquisition and were included in its
analysis of loan costs and yields and senior lien interests to which the
properties were subject at the time of acquisition. While the Company
historically acquired loans in the $1.0 million to $15.0 million range, in 1998
the Company shifted its focus to include larger loans. During the fiscal years
ended September 30, 1999, 1998, and 1997, the Company's yield on its net
investment in commercial mortgage loans (including gains on sale of senior lien
interests in, and gains, if any, resulting from refinancings of commercial
mortgage loans) equaled 22%, 40% and 35%, respectively, while its gross profit
(revenues from loan activities minus costs attributable thereto, including
interest and provision for possible losses, and less depreciation and
amortization, without allocation of corporate overhead) from its commercial
mortgage loan activities for the same periods were $35.3 million, $43.7 million
and $16.5 million, respectively. The Company seeks to reduce the amount of its
own capital invested in commercial mortgage loans after their acquisition, and
to enhance its returns, through borrower refinancing of the properties
underlying its loans. Prior to January 1, 1999, the Company also sought to sell
senior lien interests; however, following that date, the Company has sought to
structure its senior lien transactions as financings rather than sales. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations: Real Estate Finance." At September 30, 1999,
senior lenders held outstanding obligations of $398.4 million. The excess of
operating cash flow over required debt service on senior lien obligations is,
pursuant to agreements with most borrowers, generally retained by the Company as
debt service on the outstanding balance of the Company's loans.
Business 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
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
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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, prior
to January 1, 1999, 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) while maintaining a significant continuing position in the
original loan. See "Business - Real Estate Finance - Refinancings and Sales of
Senior Lien Interests in Portfolio Loans."
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 - Forbearance Agreements"), the Company will seek to
foreclose upon and sell the underlying property or otherwise liquidate the loan.
In appropriate cases the Company may agree to forbear (or further forbear) from
the exercise of remedies available to it.
Acquisition and Administration Procedures for Commercial Mortgage Loans
Before 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:
o 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.
o The Company's initial investment should be at a discount to both the
amount of outstanding loan balance and the appraised value of the
property underlying the loan (generally utilizing an appraisal dated
within one year of acquisition).
o There is the possibility of either prompt refinancing of the loan by
the borrower or by the Company that will result in an enhanced yield
to the Company on its (reduced) funds still outstanding.
o 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
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opportunity. 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 - 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 a forbearance agreement pursuant to which
foreclosure or other action on the mortgage is deferred so long as the
arrangements reflected in the forbearance agreement are met. The Company will
typically require appointment of a property manager acceptable to it (see
"Business - Real Estate Finance - Forbearance Agreements") and may advance funds
for purposes of paying property improvement costs, unpaid taxes and similar
items. 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 is paid into an operating account
which the Company or its managing agent controls. All property expenditures
(including debt service, taxes, operational expenses and maintenance costs) are
paid from this controlled account and are reviewed and approved by a senior
officer of the Company before payment. The Company further requires that its
approval be obtained before any material contract or commercial lease affecting
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 before the beginning of a year, which must be reviewed and approved by the
Company, and submit both a monthly cash flow statement and a monthly occupancy
report. The Company analyzes these reports in comparison with each other and
with account activity in the operating account.
The Company may alter the foregoing procedures in appropriate
circumstances. Where a borrower has refinanced a loan held by the Company (or
where the Company has acquired a loan subject to existing senior debt), the
Company may agree that the revenues be paid to an account controlled by the
senior lienor, with the excess over amounts payable to the senior lienor being
paid directly to the Company. As of September 30, 1999, 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 and Management, Inc., a
property manager affiliated with the Company (see "Business - Real Estate
Finance Forbearance Agreements"), the Company may direct that property revenues
be paid to Brandywine Construction and Management, as the Company's managing
agent. As of September 30, 1999, revenues are being paid to Brandywine
Construction and Management 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, 1999,
the Company permitted borrowers with respect to seven loans (loans 24, 31, 32,
37, 41, 50 and 51) to do so.
Refinancings
In evaluating a potential commercial mortgage loan, the Company places
significant emphasis on the likelihood of its being able to finance its 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, the Company will obtain net refinance proceeds in an
amount representing a major portion of (and sometimes exceeding) the amount of
its investment in the loan. After refinancing, the Company will typically retain
an interest in the loan, subordinated to the interest of the refinance lender or
senior lienholder.
In refinancings, the Company reduces the amount outstanding on its loan
by the amount of net refinancing proceeds received by it and either converts the
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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. The interest rate on the refinancing is typically less than the
interest rate on the Company's retained interest.
Prior to January 1, 1999, the Company sought to sell senior lien
interests in its loans. Although the Company has made a strategic decision to
structure its transactions after that date as financings, the Company retains
the right to sell a senior interest in a loan where it is economically
advantageous to the Company to do so. When 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, 1999, 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. Two other senior lien interests obligate the Company, upon
their respective maturities in fiscal 2003, to repurchase the senior lien
interest (if not already paid off) at a price equal to the outstanding balance
of the senior lien interest plus accrued interest. These aggregate outstanding
balances will be $2.5 million and $2.8 million at maturity, respectively,
assuming all debt service payments have been made. See "Business - Real Estate
Finance - Loan Status."
After a refinancing or sale of a senior lien interest, the Company's
retained interest will usually be secured by a subordinate lien on the property.
In certain situations, however, the Company's retained interest may not be
formally secured by a mortgage because of conditions imposed by the senior
lender. In these situations, the Company 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. The Company's retained interests in eight loans
aggregating $32.1 million and constituting 12.7%, by book value, of the
Company's loans as of September 30, 1999 are not secured.
Forbearance Agreements
Commercial mortgage loans acquired by the Company typically are subject
to forbearance agreements with borrowers pursuant to which the holder of the
loan (the Company, upon loan acquisition)
o 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).
o 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).
o 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
the requirement of retaining a property management firm acceptable to the loan
holder, Brandywine Construction and Management 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, 1999. In eight instances, the President of Brandywine
Construction and Management (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 - Accounting for Discounted
Loans") are not recognized as revenue to the Company until actually paid.
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When a loan is refinanced 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 must
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 to the
particular property), and general economic conditions. In the event the borrower
does not or cannot do so, the Company anticipates that it will seek to sell the
property underlying the loan or otherwise liquidate the loan. Alternatively,
where the Company already controls all of the cash flow and other economic
benefits from the property, or where the Company believes that the cost of
foreclosure is more than any benefit the Company could obtain from foreclosure,
the Company may continue its forbearance.
Loan Status
At September 30, 1999, the Company's loan portfolio consisted of 41
loans of which 34 loans were acquired as first mortgage liens and seven loans
were acquired as junior lien obligations. As of September 30, 1999:
o The Company had sold senior lien interests in 18 loans in its
portfolio (including senior interests in four loans initially
acquired by the Company as junior lien loans).
o The Company had purchased senior lien interests in two loans
initially acquired by the Company as junior lien interests.
o Borrowers with respect to 17 of the Company's loans had obtained
refinancing.
After such sales, acquisitions and refinancings, the Company held
subordinated interests in 34 loans of which eight interests, constituting
approximately 12.7% of the book value of the Company's loan portfolio, are not
collateralized by recorded mortgages (see "Business - Real Estate Finance -:
Sale of Senior Lien Interests and Refinancings").
The following table sets forth information relating to the Company's
investments in commercial mortgage loans, grouped by the type of property
underlying the loans, as of September 30, 1999.
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<TABLE>
<CAPTION>
Appraised
Fiscal Value
Year Outstanding of Property
Loan Type of Loan Loan Securing
Number Property Location Seller/Originator Acquired Receivable(1) Loan(2)
- ------ -------- -------- ----------------- -------- ------------- ------------
Office Properties
<S> <C> <C> <C> <C> <C> <C>
005 Office Pennsylvania Shawmut Bank(8) 1993 $ 7,547,740 $ 1,700,000
011(10) Office Washington, D.C. First Union Bank(8) 1995 1,587,237 1,500,000
014 Office Washington, D.C. Nomura/Cargill/Eastdil Realty(11) 1995 18,880,106 14,000,000
020 Office New Jersey Cargill/Eastdil Realty(11) 1996 7,512,104 4,600,000
026(10) Office Pennsylvania The Metropolitan Fund/FirsTrust FSB 1997 9,324,575 5,000,000
029(10) Office Pennsylvania Castine Associates, L.P. 1997 8,262,797 4,025,000
035(14) (10) Office Pennsylvania Jefferson Bank 1997 2,551,865 2,550,000
036 Office North Carolina Union Labor Life Insurance Co. 1997 4,681,629 4,150,000
044(16) Office Washington, D.C. Dai-Ichi Kangyo Bank 1998 103,951,077 98,000,000
046 Office Pennsylvania Corestates Bank 1998 6,073,962 5,300,000
048(18) Office Pennsylvania Institutional Property Assets 1998 67,288,103 65,000,000
049(19) Office Maryland Bre/Maryland 1998 98,436,234 99,000,000
053(20) Office Washington, D.C. Sumitomo Bank, Limited 1999 127,828,556 83,000,000
------------ ------------
Office Totals $463,925,985 $387,825,000
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Multifamily Properties
001(22) Multifamily Pennsylvania Alpha Petroleum Pension Fund 1991&99 9,191,243 5,300,000
003 Multifamily New Jersey RAM Enterprises/Glenn Industries
Pension Plan 1993 3,027,898 1,350,000
015 Condo/Multifamily North Carolina First Bank/ SouthTrust Bank 1995&97 5,120,738 5,019,500
021(23)(10) Multifamily Pennsylvania Bruin Holdings/Berkley Federal
Savings Bank 1996&97 9,419,349 3,776,240
022 Multifamily Pennsylvania FirsTrust FSB 1996 5,903,080 4,300,000
024 Multifamily Pennsylvania U.S. Dept. of Housing and Urban
Development 1996 3,363,060 3,250,000
028 Condo/Multifamily North Carolina First Bank/South Trust Bank 1997 462,005 455,500
031 Multifamily Connecticut John Hancock Mutual Life Ins. Co. 1997 12,348,000 12,500,000
032 Multifamily New Jersey John Hancock Mutual Life Ins. Co. 1997 12,790,941 13,278,000
034 Multifamily Pennsylvania Resource America, Inc. 1997 414,593 450,000
037 Multifamily Florida Howe, Soloman & Hall Financial, Inc. 1997 8,004,714 3,500,000
041 Multifamily Connecticut J.E. Robert Companies 1998 20,902,521 21,000,000
042 Multifamily Pennsylvania Fannie Mae(24) 1998 5,644,752 5,740,000
043(25) Multifamily Pennsylvania Downingtown National Bank 1998 2,118,028 2,275,000
045(26) Multifamily Maryland Lennar Partners 1998 19,900,000 19,500,000
047(10) Multifamily New Jersey Credit Suisse First Boston Mortgage
Capital, Inc. 1998 3,548,325 3,375,000
050 Multifamily Illinois J.E. Roberts Companies 1998 48,588,707 23,400,000
051 Multifamily Illinois J.E. Roberts Companies 1998 24,858,282 22,500,000
054(28) Multifamily Connecticut Forge Square 1999 1,600,000 2,000,000
------------ ------------
Multifamily Totals $197,206,236 $152,969,240
------------ ------------
Commercial Properties
007 Single User/Retail Minnesota Prudential Insurance, Alpha Petroleum
013(10)(29) Single User/ Pension Fund 1993 4,826,156 2,545,000
Commercial California California Federal Bank, FSB 1994 2,858,273 2,600,000
016 Single User/Retail California Mass Mutual, Alpha Petroleum Pension
Fund 1995&96 7,543,659 3,000,000
017(30)(10) Single User/Retail West Virginia Triester Investments(8) 1996 1,560,770 1,900,000
018 Single User/Retail California Emigrant Savings Bank/ Walter R.
Samuels & Jay Furman(31) 1996 3,013,932 6,400,000
033 Single User/Retail Virginia Brambilla, LTD 1997&99 4,525,877 2,650,000
040 Retail Virginia Lehman Brothers Holdings 1998 45,365,850 47,000,000
------------ -----------
Commercial Totals(7) $ 69,694,517 $ 66,095,000
------------ ------------
Hotel Properties
025(33) Hotel/Commercial Georgia Bankers Trust Co. 1997 7,092,241 8,500,000
030 Hotel Nebraska CNA Insurance 1997 9,226,534 5,100,000
------------ -----------
Hotel Totals $ 16,318,775 $ 13,600,000
------------ ------------
Balance as of September 30, 1999 $747,145,513 $620,489,240
============ ============
</TABLE>
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[TABLE CONTINUED]
<TABLE>
<CAPTION>
Company's Net
Ratio of Proceeds from Interest in Maturity of Loan
Cost of Refinancing or Outstanding /Expiration of
Cost of Investment to Sale of Senior Net Book Value Loan Forbearance
Investment(3) Appraised Value Lien Interests Investment(4) of Investment(5) Receivables(6) Agreement(7)
- ------------- --------------- -------------- ------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$ 1,246,629 73% $ 940,000(9) $ 306,629 $ 836,691 $ 6,707,740 02/07/01
1,187,419 79% 660,000(9) 527,419 790,887 902,237 06/01/00
12,412,435 89% 6,487,000 5,925,435 7,104,363 12,027,811
11/30/98(12a)
3,267,878 71% 2,562,000 705,878 2,265,621 5,142,087 02/07/01
2,485,078 50% 2,231,693 253,385 1,519,657 7,152,593 09/30/03
3,069,977 76% 2,625,000(13) 444,977 1,390,176 5,681,852 07/01/02
1,838,806 72% 1,750,000(15) 88,806 782,832 808,570 09/25/02
3,077,323 74% 1,750,000(15) 1,327,323 1,798,475 2,939,709 12/31/11
79,990,948 82% 71,500,000(17) 8,490,948 21,018,970 23,301,288 08/01/08
3,815,026 72% 0 3,815,026 3,815,815 6,073,962 09/30/14
59,954,572 92% 44,000,000 15,954,572 18,069,472 23,827,911 08/01/08
88,883,032 90% 60,000,000 28,883,032 36,350,392 39,276,234 10/01/03
69,962,010 84% 60,000,000(21) 9,962,010 71,272,533 58,927,231 04/01/04
- ------------- ------------ -------------- ------------ ------------
$ 331,191,133 $254,505,693 $ 76,685,440 $167,015,884 $192,769,225
- ------------- ------------ ------------- ------------ ------------
4,686,887 88% 0 4,686,887 5,208,279 9,191,243 08/01/21
1,117,651 83% 627,000 490,651 724,901 2,416,969 01/01/03
2,073,045 41% 3,000,000 (926,955) 2,133,499 2,137,589 03/23/09
2,521,741 67% 3,372,755(9)(15) (851,014) 873,693 6,570,800 07/01/16
2,453,757 57% 3,435,000 (981,243) 968,824 2,477,823 05/03/29
2,740,136 84% 2,318,750 421,386 801,320 907,879 11/01/22
451,010 99% 0 451,010 446,000 462,005 03/23/09
4,787,541 38% 9,375,000 (4,587,459) 1,888,832 2,973,000 01/01/14
7,404,156 56% 6,000,000(17) 1,404,156 4,966,442 7,072,030 09/01/05
401,500 89% 0 401,500 412,746 414,593 10/01/02
2,763,699 79% 2,096,000(9) 667,699 1,234,550 5,908,714 07/01/00
14,733,084 70% 14,100,000 633,084 7,224,698 6,888,583 07/01/03
4,234,556 74% 3,000,000(13) 1,234,556 1,903,794 2,681,276 12/31/02
1,585,342 70% 1,000,000(27) 585,342 963,407 1,118,028 07/01/02
1,300,000 7% 0 1,300,000 1,459,689 3,900,000 06/30/08
2,636,457 78% 1,800,000(15) 836,457 1,361,885 1,748,325 10/31/08
18,325,521 78% 15,350,000 2,975,521 7,243,066 33,249,133 04/30/03
17,367,539 77% 0 17,367,539 18,432,071 24,858,282 09/30/02
843,236 42% 0 843,236 1,600,000 1,600,000 09/30/11
- ------------- ------------ ------------- ------------ ------------
$ 92,426,858 $ 65,474,505 $ 26,952,353 $ 59,847,696 $116,576,272
- ------------- ------------ ------------- ------------ ------------
1,359,055 53% 2,099,000 (739,945) 659,344 2,802,160 12/31/14
1,701,049 65% 1,975,000(9) (273,951) 402,325 858,273 05/01/01
2,166,220 72% 2,375,000(9) (208,780) 559,393 5,143,659 12/31/00
890,619 47% 1,000,000(15) (109,381) 522,748 577,099 12/31/16
2,344,879 37% 1,969,000(9) 375,879 968,327 1,044,932 12/01/00
2,425,997 92% 1,800,000(15) 625,997 886,334 2,766,283 02/01/21
43,157,075 92% 35,250,000(32) 7,907,075 8,831,315 10,745,546 12/01/02
- ------------- ------------ -------------- ------------ ------------
$ 54,044,894 $ 46,468,000 $ 7,576,894 $ 12,829,786 $ 23,937,952
- ------------- ------------ ------------- ------------ ------------
6,556,375 77% 875,000(33) 5,681,375 7,091,992 6,217,241 12/31/15
4,563,895 89% 0 4,563,895 4,850,198 9,226,534 09/30/02
- ------------- ------------ -------------- ------------ ------------
$ 11,120,270 $ 875,000 $ 10,245,270 $ 11,942,190 $ 15,443,775
- ------------- ------------ ------------- ------------ ------------
$ 488,783,155 $367,323,198 $ 121,459,957 $251,635,556 $348,727,224
============= ============ ============= ============ ============
</TABLE>
10
<PAGE>
(1) Consists of the original stated or face value of the obligation plus
interest and the amount of the senior lien interest at September 30, 1999.
(2) The Company generally obtains appraisals on each of its properties at least
once every three years. Accordingly, appraisal dates range from 1996 to
1999, except with respect to loan 3, as to which the borrower has informed
the Company of its intention to place the property on the market for sale
after January 1, 2000, therefore no appraisal has been performed since
1995.
(3) Consists of the original cost of the investment to the Company (including
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 the 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 $1.4 million. For a discussion of
accretion of discount and allocation of gains, see "- Accounting for
Discounted Loans."
(6) Consists of the amount set forth in the column "Outstanding Loan
Receivable" less senior lien interests at September 30, 1999.
(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 (24) below). For the remaining
loans, the date given is the expiration date of the related forbearance
agreement.
(8) Successor by merger to the seller.
(9) 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.
(10) With respect to loans 13, 17 and 26, the President of Brandywine
Construction and Management 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 35, he is the President of the general
partner of the borrower. In addition, with respect to loan 21, which
consists of 31 separate mortgage loans on 45 individual condominium units
in a single building, the President of Brandywine Construction and
Management is the trustee of one borrower (for 12 mortgage loans) and the
President of the general partner of another borrower (for 4 mortgage
loans). With respect to loan 47, the President of the borrower is an
employee of Brandywine Construction and Management.
(11) Seller was a partnership of these entities.
(12) From 1993 to October 1997, an officer of the Company served as the general
partner of the seller.
(12a)The Company continues to forbear from exercising its remedies with respect
to this loan since the Company believes it receives all of the economic
benefit from the property without having to incur the expense of
foreclosure.
(13) Two senior lien interests sold to Crusader Bank, Philadelphia,
Pennsylvania. The Company has the obligation to repurchase these senior
lien interests, at Crusader's option, on or after March 31, 2003 (loan 29)
and June 25, 2003 (loan 42).
(14) The borrower is a limited partnership formed in 1991. The general partner
of the partnership is owned by the President of Brandywine Construction and
Management; 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.
(15) Senior lien interest sold to Peoples Thrift Savings Bank which has the
right, upon default by borrower, to require the Company to substitute a
performing loan.
(16) See note 3 to Consolidated Financial Statements, "- Relationships with
Resource Asset."
(17) A senior lien interest was sold to Resource Asset. See "Business - Real
Estate Finance - Sponsorship of Real Estate Investment Trust."
11
<PAGE>
(18) The borrower for this loan is a partnership of which Brandywine
Construction and Management owns an 11% interest and Resource Asset owns an
89% interest.
(19) 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.
(20) The Company and Resource Asset jointly purchased this loan, with Resource
Asset contributing $10.0 million of the purchase price.
(21) The Company borrowed $60.0 million from a non-related third party in
connection with the acquisition of loan 53. The loan is secured by a first
priority lien. Accordingly, the debt is included in the cost of investment
carried on the books of the Company.
(22) The Company acquired a first mortgage loan at face value from Resource
Asset. The loan is secured by property in which the Company has held a
subordinate interest since 1991.
(23) The loan acquired consists of 27 separate mortgage loans on 41 individual
condominium units in a single building. Nine of such loans are due July 1,
2016, 13 are due January 1, 2015, one is due October 1, 2007, one is due
July 7, 2003, one is due March 1, 2001 and two are due October 9, 2001. The
president of Brandywine Construction and Management 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 Brandywine Construction and Management and the
beneficiary of which is a limited partnership for which a director of the
Company is general partner.
(24) Original lending institution.
(25) Consists of two related loans to one borrower secured by a single property
in the original principal amounts of $1.6 million and $404,026.
(26) The Company's interest is subordinate to a $4.0 million senior lien held by
Resource Asset and a $12.0 million senior lien held by an unaffiliated
third party.
(27) 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.
(28) Construction loan with a maximum borrowing of $1.6 million.
(29) The Chairman of the Company and his wife beneficially own a 40% limited
partnership interest in the borrower.
(30) The loan acquired consists of a series of notes becoming due yearly through
December 31, 2016.
(31) 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.
(32) Represents the amount of a refinancing of the loan by the Company
contemporaneously with the Company's investment.
(33) In May 1999, the Company borrowed $875,000 from a limited partnership in
which the Chairman and Vice Chairman of the Company beneficially own a 22%
limited partnership interest. The loan is secured by a first priority lien
on loan 25. Accordingly, the debt is included in the cost of investment
carried on the books of the Company.
12
<PAGE>
The following table sets forth 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 cash flow
coverage (the ratio of cash flow from the properties to debt service payable on
senior lien interests) for the three months ended September 30, 1999. The loans
are grouped by the type of property underlying the loans.
<TABLE>
<CAPTION>
Average Average Monthly Debt Average Monthly
Loan Monthly Cash Flow Service on Payment to the Cash Flow
Number from Property(1) Senior Lien Interests (2) Company's Interest Coverage
------ ----------------- ------------------------- ------------------ ---------
<S> <C> <C> <C> <C> <C>
Office
- ------
005 $ 11,449 $ 6,825 $ 4,624 1.68
011 8,324 5,566 2,758 1.50
014 76,737 62,733 14,004 1.22
020 34,202 19,527 14,675 1.75
026 27,751 21,600 6,151 1.28
029 25,142 22,254 2,888 1.13
035 37,569 15,902 21,667 2.36
036 38,326 15,902 22,424 2.41
044 709,351 556,101 153,250 1.28
046 47,030 0 47,030 N/A
048 417,280 288,314 128,966 1.45
049 728,849 450,000 278,849 1.62
053 796,308 681,300 115,008 1.17
---------- ---------- ----------
Office Totals $2,958,318 $2,146,024 $ 812,294 1.38
========== ========== ==========
Multifamily
- -----------
001 $ 33,834 $ 0 $ 33,834 N/A
003 8,876 6,058 2,818 1.47
015&028 (3) 26,443 23,675 2,768 1.12
021 14,254 24,865 (10,611)(6) 0.57
022 27,410 24,668 2,742 1.11
024 25,926 17,962 7,964 1.44
031 88,759 52,708 36,051 1.68
032 100,671 78,805 21,866 1.28
034 3,805 0 3,805 N/A
037 25,000 17,030 7,970 1.47
041 130,417 99,605 30,812 1.31
042 35,548 25,176 10,372 1.41
043 16,213 8,343 7,870 1.94
045 10,667 0 10,667 N/A
047 18,550 15,000 3,550 1.24
050 155,583 83,333 72,250 1.87
051 107,323 0 107,323 N/A
054(5) 6,538 0 6,538 N/A
---------- ---------- ----------
Multifamily Totals $ 835,817 $ 477,228 $ 358,589 1.75
========== ========== ==========
Commercial
- ----------
007 $ 20,400 $ 20,400 $ 0 1.00
013 26,051 15,833 10,218 1.65
016 23,917 19,500 4,417 1.23
017 10,690 9,087 1,603 1.18
018 (4) 26,243 15,998 10,245 1.64
033 21,940 19,342 2,598 1.13
040 375,000 249,497 125,503 1.50
---------- ---------- ----------
Commercial Totals $ 504,241 $ 349,657 $ 154,584 1.44
========== ========== ==========
Hotel
- ----
025 $ 49,004 $ 7,292 $ 41,712 6.72
030 30,000 0 30,000 N/A
---------- ---------- ----------
Hotel Totals $ 79,004 $ 7,292 $ 71,712 10.83
========== ========== ==========
Total Loans $4,377,380 $2,980,201 $1,397,179 1.47
========== ========== ==========
</TABLE>
13
<PAGE>
(1) "Cash Flow" as used in this table is that amount equal to 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) Monthly debt service consists of required payments of principal, interest
and other regularly recurring charges payable to the holder of the
refinanced loan or senior lien interest.
(3) Loans 15 and 28 represent different condominium units in the same property
and are, accordingly, combined for cash flow purposes.
(4) Includes one-twelfth of an annual payment of $118,000 received in December
of each year.
(5) Loan 54 is a construction loan which closed on September 30, 1999, and as
such, loan payments are based upon outstanding advances and are an estimate
based on said advances.
(6) Loan 21 consists of 27 separate mortgage loans on 41 individual condominium
units. During fiscal 1999 the Company sold, and recorded gains on four of
the units and held three units vacant in anticipation of future sales.
Accordingly, cash flow from the property decreased while debt service on
refinancing or senior lien interests remained constant.
Investments in Real Estate Ventures
In fiscal 1999, the Company received a deed-in-lieu of foreclosure for
a hotel property in Savannah, Georgia. The Company's net investment in the
property is $4.6 million and its carried cost is $4.5 million. The property has
an appraised value of $4.8 million. In addition, pursuant to the terms of a loan
the Company had acquired for its portfolio, the borrower with respect to an
office property in Philadelphia, Pennsylvania, exercised its right under the
loan documents to satisfy the loan by paying the Company $29.6 million in cash
and giving the Company a 50% equity interest in the property. The Company's net
investment in the property was $19.3 million and its carried cost was $11.9
million. The property has an appraised value of $45.0 million.
Accounting for Discounted Loans
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. 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 stated principal
amount of, and accrued interest and penalties on (collectively, the face value)
the loans. This discount from face value, as adjusted to give effect to
refinancings and sales of senior lien interests, totaled $98.5 million, $139.7
million and $86.3 million at September 30, 1999, 1998 and 1997, respectively.
The Company periodically reviews the carrying value in its various loans to
determine that it is not greater than the sum of the future projected cash
flows. If the carrying value were found to be greater, the Company would provide
an appropriate allowance through a charge to operations. 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. For
the year ended September 30, 1999, the Company recorded a provision for possible
losses of $500,000, thereby increasing its allowance for possible losses to $1.4
million.
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 and the portion retained based upon the fair value
of those respective portions on the date of sale. Gains on the financing of a
commercial mortgage loan only arise when the financing proceeds exceed the cost
of the mortgage loan financed. 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.
Prior to January 1, 1999, most of the Company's transactions involving
the sale of senior lien interests of its commercial mortgage loans were
14
<PAGE>
structured to meet the criteria for sale under generally accepted accounting
principles. Effective January 1, 1999, the Company made a strategic decision to
structure future transactions so as to retain the entire commercial mortgage
loans originated on its balance sheet rather than selling senior lien interest
in such loans. Thus, for most of its transactions, as described above, that were
completed prior to such date, the Company recorded a gain on sale. The cash
flows available to the Company, which are generally based on the cash flows of
the property underlying the Company's commercial mortgage loans and the resale
value of the property (as estimated by an appraisal), are unaffected by these
modifications. The primary effect of this change in structure is a shift from
the recognition of an immediate gain on the sale of a senior lien interest in a
commercial mortgage loan receivable to the retention of the full investment in
the loan on the Company's books, the recognition of interest income on that full
value over the life of the loan and the recording of debt for the proceeds from
the senior lien interest and the recognition of interest expense on that debt.
Competition
The commercial mortgage loan acquisition and resolution business is
competitive in virtually all of its aspects. Competitors include 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,
the Company will have to compete for capital based largely on the Company's
overall financial performance including the performance of the Company's loan
portfolio.
Sponsorship of Real Estate Investment Trust
The Company sponsored Resource Asset, a publicly held real estate
investment trust whose common shares of beneficial interest are listed on the
American Stock Exchange. Resource Asset'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 Resource Asset 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 Resource Asset's active
intervention. Resource Asset commenced operations on January 14, 1998.
As the sponsor of Resource Asset, the Company acquired 14% of Resource
Asset's common shares at a cost of approximately $12.0 million. So long as the
Company owns 5% or more of Resource Asset's common shares, the Company will have
the right to nominate one person to Resource Asset's board of trustees. For a
description of transactions between Resource Asset and the Company, see Part
III, Item 13, and Note 3, "Certain Relationships and Related Party
Transactions-Relationship with Resource Asset" in notes to Consolidated
Financial Statements. Resource Asset's declaration of trust permits it to
acquire loans from the Company to a maximum of 30% of Resource Asset's
investments (on a cost basis), excluding investments acquired from the Company
at the time of Resource Asset's initial public offering. Betsy Z. Cohen, spouse
of the Company's Chairman and Chief Executive Officer, Edward E. Cohen, and
mother of Daniel G. Cohen, President, Chief Operating Officer and director of
the Company, is the Chairman and Chief Executive Officer of Resource Asset.
Jonathan Z. Cohen, another son of Mr. and Mrs. Cohen and a Senior Vice President
of the Company, is the Company's nominee to Resource Asset's board of trustees
and is the Secretary of Resource Asset.
To limit conflicts between Resource Asset and the Company, the Company
agreed that, until January 14, 2000, (i) it will not sponsor another real estate
investment trust with investment objectives and policies which are the same as,
or substantially similar to, those of Resource Asset; (ii) if it 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), it must first offer the opportunity to Resource
Asset; and (iii) if it desires to sell any loan it has acquired that conforms to
Resource Asset's investment objectives and policies with respect to acquired
loans, it must first offer to sell it to Resource Asset. The Company believes
that complying with these restrictions has not materially affected the Company's
current operations. The Company has also agreed that if, following January 14,
2000, it sponsors a real estate investment trust with investment objectives
similar to those of Resource Asset, the Company's representative on Resource
Asset's board of trustees will recuse himself or herself from considering or
15
<PAGE>
voting upon matters relating to financings which may be deemed to be within the
lending guidelines of both Resource Asset and the real estate investment trust
then being sponsored by the Company.
Discontinued Operation
On September 28, 1999, the Company adopted a plan to discontinue its
residential mortgage lending business. The Company anticipates that the business
will be disposed of by September 30, 2000. Accordingly, the financial statements
of the Company report the business as a discontinued operation for the years
ended September 30, 1999 and 1998. Net assets of the discontinued operation at
September 30, 1999 consist primarily of mortgage note and loan receivables.
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 $28.0 million (original
equipment cost) in leased assets at September 30, 1999.
The Company's primary focus in its equipment leasing activities is its
small ticket leasing operations which began in 1996 and are conducted through
Fidelity Leasing, Inc. The Company also has public leasing partnership
management activities, which it conducts through F.L. Partnership Management,
Inc., and a small lease finance placement and advisory operation which it
conducts through F.L. Financial Services, Inc. F.L. Partnership Management's
operations will continue to be reduced over the next several years as
partnership assets are sold and cash is distributed back to the investors. F.L.
Partnership Management does not anticipate forming new limited partnerships in
the future. F.L. Financial Services will continue to operate its lease finance
placement and advisory business but it is not expected to constitute a material
source of revenues for the Company.
In September 1999, Fidelity Leasing filed an amended registration
statement with the SEC in connection with the public offering of 3,900,000
shares of its common stock (Registration No. 333-82237). Upon completion of the
offering, Fidelity Leasing will be a majority-owned subsidiary of the Company.
The Company can offer no assurance that the proposed offering will be completed
or as to the timing of the offering.
Small Ticket Leasing
General
Fidelity Leasing specializes in financing equipment within a price
range of $5,000 to $250,000. The equipment it finances includes communications
technology, industrial technology, information technology and office automation
equipment. Fidelity Leasing's leases are full-payout leases with lease payments
returning 100% of the equipment cost plus an interest charge over the lease
term.
Fidelity Leasing reaches the small business market by forming strategic
marketing alliances and other program relationships with equipment vendors.
Equipment vendors may be manufacturers, distributors or resellers of technology
equipment. Fidelity Leasing classifies a vendor program as a strategic alliance
when the marketing of Fidelity Leasing's financing is integrated into the
vendor's marketing process and the program literature and documentation bears
the vendor's name or bears both the name of the vendor and Fidelity Leasing's
name.
The equipment vendors in Fidelity Leasing's strategic marketing
alliances and in its other vendor relationships offer small businesses a total
solution for their equipment acquisition needs by providing equipment and
financing in one package. Fidelity Leasing provides the vendors in its programs
with the ability to offer Fidelity Leasing's financing as part of their
equipment marketing package. Fidelity Leasing also provides small business
leasing programs to commercial banks that want to offer a lease financing
product to their small business customers but do not want to invest in a leasing
infrastructure. As of September 30, 1999, participants in Fidelity Leasing's
strategic marketing alliances and banking programs include:
<TABLE>
<CAPTION>
<S> <C> <C>
o Cisco Systems, Inc. o Huntington Leasing Corporation o Minolta Business Systems
o Convergent Capital Corporation. o IBM Credit Corporation o Mitsui Machine Technology, Inc.
o Emtec, Inc. o Ingram Micro, Inc. o Quincy Compressor
o FISI Madison Financial Corp. o Lucent Technologies, Inc. o Systemax, Inc.
o Green Pages, Inc. o Midwest Micro Corporation o Tech Data Corporation
o GTE Leasing Corporation o Telrad Telecommunications, Inc.
</TABLE>
16
<PAGE>
In February 1999, Fidelity Leasing acquired JLA Credit Corporation, the
U.S. small ticket leasing subsidiary of Japan Leasing Corporation. JLA Credit
serves several technology sectors similar to those of Fidelity Leasing and uses
strategic and other marketing alliances with vendors as a marketing strategy.
Business Strategy
Fidelity Leasing's objective is to become the leading technology
equipment lease finance provider for small businesses. Key elements of that
strategy include:
Developing New Strategic Marketing Alliances. Fidelity Leasing has
developed strategic marketing alliances with leading technology equipment
manufacturers and vendors and commercial banks. For the year ended September 30,
1999, approximately 35% of Fidelity Leasing's lease originations, measured by
equipment costs, came from its strategic marketing alliances. These
relationships enable Fidelity Leasing to reach its targeted small business
market as a designated lease financing source of these companies and as a lease
financing provider to which they refer their distribution networks. Fidelity
Leasing intends to build on that marketing position by expanding the formation
of strategic marketing alliances with other leading technology providers.
Expanding Lease Financing Technology and Integrating it with the
Marketing Processes of Participants in Strategic Marketing Alliances. Fidelity
Leasing has developed sophisticated lease financing technology systems to
deliver its lease finance services. Currently, Fidelity Leasing's Internet
application enables it to establish a hyperlink between a manufacturer's or
distributor's web site and Fidelity Leasing's web site to permit vendors, or
their authorized dealers and resellers, to do the following:
o complete a leasing application;
o receive credit approval and equipment purchase authorization or,
alternatively, a request for further information;
o request a computer generated lease or a priced financial proposal;
and
o print out the lease documents online.
Fidelity Leasing intends to expand its technology systems by offering additional
services to participants in its strategic marketing alliances such as customer
data mining, lessee asset management and lease products in which lease payments
are based upon use, as, for example, copier lease payments based upon the number
of copies made. Fidelity Leasing intends to enhance its Internet capabilities by
adding such products as a master lease line of credit in which a previously
approved lessee can directly draw down on a lease line of credit for additional
equipment acquisitions.
Serving the Customer through Technology. Fidelity Leasing has developed
a computer-based lease processing and accounting system which automates a
substantial portion of the leasing process, giving Fidelity Leasing the
capability of underwriting and servicing high volumes of small ticket leases.
Fidelity Leasing intends to continue development of this system to maintain and
enhance its ability to service the lease financing needs of its vendors and
their customers rapidly and efficiently. For leases involving equipment costs of
under $50,000, Fidelity Leasing has developed the E-FastFunds rapid response
process. E-Fast Funds features include:
o one hour guaranteed credit response;
o one page, plain language form of lease;
o electronic preparation and transmission of lease documents;
o rapid funding to the vendor upon verification of equipment
installation and lessee acceptance; and
o single company contact for the vendor.
Under E-FastFunds, Fidelity Leasing provides a credit response--an
acceptance, decline or solicitation for additional information--within one hour.
The form of lease Fidelity Leasing uses is written in easily understood language
designed not to intimidate small business lessees. Fidelity Leasing's
administrative process has been designed to avoid the difficulties a small
business lessee or its vendor may encounter in obtaining responses to its
inquiries from a multi-department financial institution by providing a single
client manager as the sole point of contact throughout the lease term.
17
<PAGE>
Maintaining a Singular Competitive Focus--One Product for One Market.
Fidelity Leasing intends to maintain its singular competitive focus on small
ticket leasing of technology equipment to small businesses.
This focus allows for:
o one set of operating systems;
o one skill set for Fidelity Leasing's employees; and
o consistent credit underwriting processes, operating policies and
transaction documents.
This focus is directed at serving the lease financing needs of small
businesses without the distraction of dealing with other products, services and
markets. As a result, Fidelity Leasing believes that it can reach a larger share
of the small business lease financing market by offering better service to
vendors and lessees at a lower cost to Fidelity Leasing and underwrite lease
financings with greater predictability of lease receivables performance.
Moreover, the small size of a typical transaction relative to Fidelity Leasing's
total lease portfolio reduces its credit risk exposure from any particular
transaction.
Increasing Recognition of Fidelity Leasing's Corporate Identity.
Fidelity Leasing intends to actively develop its presence at the dealer and
reseller level by establishing national name recognition for Fidelity Leasing as
a premier provider of lease financing to the small business customers of
technology equipment manufacturers and vendors. Fidelity Leasing intends to
establish its name recognition through an emphasis on co-branding its lease
finance services with the names of leading technology equipment manufacturers
and vendors, thus positioning itself with these manufacturers and vendors, and
their products, as a designated financial services provider. Fidelity Leasing
will also seek to link its financial services with these manufacturers and
vendors through its technology systems and web site hyperlinks.
Expanding Fidelity Leasing's Market Beyond the United States. Fidelity
Leasing believes that the Internet enables it to access substantial
opportunities for small ticket lease financing in non-U.S. markets. In 1998, it
commenced operations in Canada through Fidelity Leasing Canada, Inc. Fidelity
Leasing intends to develop its presence internationally by developing
international strategic marketing alliances, by expanding domestic strategic
marketing alliances internationally and by establishing international sales
offices.
Leasing Operations Growth
The following table sets forth the growth in leasing operations for the
years ended September 30, 1999, 1998 and 1997, including growth attributable to
the acquisition of JLA Credit:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------
1999 1998 1997
-------- -------- -------
(dollars in thousands)
<S> <C> <C> <C>
Number of leases funded....................................... 19,001 8,832 3,241
Original cost of equipment leased............................ $305,060 $ 92,648 $34,567
Gross managed receivables.................................... $607,875 $117,025 $36,094
</TABLE>
18
<PAGE>
Asset Quality
The table below sets forth lease delinquencies for Fidelity Leasing's
equipment lease portfolio as of the dates indicated:
<TABLE>
<CAPTION>
As of September 30,
---------------------------------------------------------------------------
1999 1998 1997
-------------------------- ------------------------ ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross managed receivables..... $607,875 100.0% $117,025 100.0% $36,094 100.0%
Current....................... 591,965 97.4 114,596 97.9 34,665 96.0
Delinquencies:
31-60 days past due........ 7,716 1.3 1,407 1.2 1,007 2.8
61-90 days past due........ 2,725 0.4 450 0.4 274 0.8
Over 90 days past due...... 5,469 0.9 572 0.5 148 0.4
-------- ----- -------- ----- ------- -----
Total delinquencies...... $ 15,910 2.6% $ 2,429 2.1% $ 1,429 4.0%
======== ===== ======== ===== ======= =====
</TABLE>
The following table sets forth the allowance for possible losses for
the fiscal years ended September 30, 1999, 1998 and 1997, and the related
provisions for possible losses, write-offs and recoveries for such periods and
as a percentage of the gross managed receivables:
<TABLE>
<CAPTION>
Allowance for
Possible Losses
---------------
(dollars in thousands)
<S> <C>
Fiscal 1999:
Balance at beginning of year............................................................... $ 1,602
Provision for possible losses.............................................................. 4,117
Allowance related to portfolio of acquired subsidiary at date of acquisition............... 7,200
Net write-offs............................................................................. (2,902)
--------
Balance at end of year..................................................................... $ 10,017
========
Percentage of gross managed receivables at September 30.................................... 1.6%
========
Fiscal 1998:
Balance at beginning of year............................................................... $ 248
Provision for possible losses.............................................................. 1,422
Net write-offs............................................................................. (68)
--------
Balance at end of year..................................................................... $ 1,602
========
Percentage of gross managed receivables at September 30.................................... 1.4%
========
Fiscal 1997:
Balance at beginning of year............................................................ $ 7
Provision for possible losses.............................................................. 253
Net write-offs............................................................................. (12)
--------
Balance at end of year..................................................................... $ 248
========
Percentage of gross managed receivables at September 30.................................... 0.7%
========
</TABLE>
19
<PAGE>
Portfolio Composition
The table below sets forth the distribution of equipment Fidelity
Leasing leased, by technology type and by percentage of dollar value of
equipment purchased, during the fiscal years ended September 30, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------------
1999 1998 1997
---- ---- ----
(percent by dollar volume of equipment purchased)
<S> <C> <C> <C>
Communications technology................... 14.0% 32.1% 35.5%
Industrial technology....................... 21.0(1) 0.6 0.1
Information technology...................... 26.0 14.4 7.5
Office automation........................... 26.0 40.7 52.1
Other equipment............................. 13.0 12.2 4.8
---- ---- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
- ----------
(1) The increase in this sector resulted from the acquisition of JLA Credit on
February 4, 1999.
Communications technology equipment includes telephone systems and
related equipment. Industrial technology equipment includes printing,
woodworking, materials handling and industrial compressor equipment. Information
technology equipment includes computers, printers, computer software, point of
sale and audio/visual equipment. Office automation equipment includes copiers,
facsimile machines, accounting machines and office security systems. Other
equipment includes medical, dental and laboratory testing equipment.
Fidelity Leasing has a broad lessee and vendor base. As of September
30, 1999, measured by the dollar amount of lease receivables, no single lessee
accounted for more than 0.3% of its managed lease portfolio and its 25 largest
lessees accounted for less than 5.1% of its managed lease portfolio. Except for
two vendors which accounted for 4.1% and 3.4% of its managed lease portfolio
measured by equipment cost at September 30, 1999, no single vendor accounted for
more than 3.3% of its managed lease portfolio, measured by equipment cost, and
Fidelity Leasing's top 25 vendors accounted for 35.6% of its managed lease
portfolio.
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. Leases are classified under accounting rules
as either capital or operating leases. For lessors, capital leases are further
subclassified as sales-type leases, leveraged leases or direct financing leases.
Fidelity Leasing's leases meet the criteria for classification as direct
financing leases. Direct financing leases transfer substantially all of the
benefits and risks of equipment ownership to the lessee. A lease is a direct
financing lease if the creditworthiness of the lessee and the collectibility of
lease payments are reasonably certain and the lease meets one of the following
criteria:
o it transfers ownership of the equipment to the lessee by the end of
the lease term.;
o it contains a bargain purchase option;
o the term at inception is at least 75% of the estimated economic life
of the leased equipment; or
o 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.
Fidelity Leasing's investment in leases consists of the sum of the
total future minimum lease payments receivable, the estimated unguaranteed
residual value of leased equipment and initial direct costs, less unearned lease
income. Unearned lease income consists of the excess of the total future minimum
lease payments receivable plus the estimated unguaranteed residual value
expected to be realized at the end of the lease term over the cost of the
related equipment. Fidelity Leasing typically structures a lease so that the
present value of the minimum lease payments exceeds the fair market value of the
equipment at lease inception and the lessee has an option at lease termination
to purchase the equipment at its fair market value or at a stated percentage of
the cost of the equipment. However, as a result of the acquisition of JLA
20
<PAGE>
Credit, a substantial portion of Fidelity Leasing's managed leases provide the
lessee with the option to purchase the underlying equipment for a nominal
amount.
Residual Value. Unguaranteed residual value in leases that do not have
bargain purchase options represents the estimated amount to be received at lease
termination from lease extensions or disposition of the leased equipment.
Fidelity Leasing bases these estimates on available industry data and on its
senior management's experience with respect to comparable equipment. Current
estimates of residual values may vary from the original recorded estimates.
Fidelity Leasing reviews residual values from time to time to determine if the
fair market value of the equipment is below the recorded estimate of the
residual value. If required, it adjusts residual values downward to reflect
adjusted estimates of fair market value; generally accepted accounting
principles do not permit upward adjustments to residual values.
Securitizations and Other Lease Sales. Fidelity Leasing initially funds
lease originations through warehouse lines of credit, intercompany borrowings
and through working capital. It thereafter refinances the leases through
securitization transactions as follows:
o Sales by Assignment. From December 1996 through September 1997,
Fidelity Leasing sold leases and interests in the related equipment
and residuals to unaffiliated bankruptcy remote, special purpose
entities, which in turn sold these assets to institutional
purchasers.
o Commercial Paper Conduit Securitizations. In these transactions,
Fidelity Leasing sells lease receivables and interests in the related
equipment to special purpose, bankruptcy remote entities. Beginning
in April 1998, these entities have been wholly-owned subsidiaries of
Fidelity Leasing. The special purpose entity, in turn, securitizes
the leases by simultaneously selling or pledging its interest in the
lease receivables and equipment to a commercial paper conduit. The
commercial paper conduit funds the securitization by issuing
commercial paper secured, in part, by the leases.
o Term Note Securitizations. In these transactions, a special purpose,
wholly-owned subsidiary obtains the lease receivables previously sold
or pledged to a commercial paper conduit. Interests in these leases
are simultaneously sold or pledged to a trust that issues notes to
investors secured by payments under the leases and the related
equipment.
To date, Fidelity Leasing has retained the right to service all of the leases it
has securitized.
In each securitization transaction, Fidelity Leasing receives, as
consideration for transferring the leases, cash equal to a substantial
percentage of the aggregate present value of the adjusted future cash flows from
such leases. In addition, where Fidelity Leasing accounts for securitizations as
sales, it retains a non-certificated undivided interest including the equipment
residual values in the remaining future cash flow from securitized leases after
all obligations to securitization lenders have been paid. To date, the retained
interest has been approximately 10% to 12% of the present value of the aggregate
future cash flows due under the pools of leases securitized in commercial paper
conduit securitizations and no more than 6% of the present value of the
aggregate future cash flows due under the pools of leases securitized in term
note securitizations. However, where Fidelity Leasing accounts for
securitizations as financings, both the securitized leases and the related
securitization indebtedness are recorded on the Company's balance sheet.
Securitization indebtedness is recorded as the remaining balance due to the
noteholders.
Over the life of a securitized lease pool, Fidelity Leasing is eligible
to receive the excess cash flow attributable to the retained interest resulting
from the excess, if any, of the lease payments and collections on equipment
residuals received, net of defaults, over the sum of:
o servicing, backup servicing, trustee, custodial and insurance and
credit enhancement fees, if any, and other securitization and sale
expenses and
o either (a) the portion of the lease payments and collections in
equipment residuals due to the purchaser of the securitized leases or
(b) amounts of principal and interest due to the noteholders to whom
securitized leases have been pledged as collateral.
21
<PAGE>
As a result, Fidelity Leasing's retained interest in its securitized
lease pools, including equipment residual values, if any, is effectively
subordinated. Consequently, all credit losses incurred on the entire portfolio
of leases transferred in a particular securitization or sale transaction are
borne by Fidelity Leasing to the extent of its retained interest.
Gains on Sales of Leases and Terminations. Through March 31, 1999,
Fidelity Leasing structured a substantial part of its lease financing
transactions, other than warehouse revolving lines of credit and certain
financings relating to JLA Credit (see "Liquidity and Capital Resources
- --Equipment Leasing--Commercial Paper Conduit Securitizations" and "--Term Note
Securitizations"), to meet the criteria for treatment of sales under generally
accepted accounting principles. Pursuant to these criteria:
o Fidelity Leasing obtained legal opinions from counsel that these
transactions included "true sales" of lease assets to special purpose
entities and that the lease assets so transferred would be beyond the
reach of Fidelity Leasing or its creditors, even in the event of
Fidelity Leasing's bankruptcy;
o the transferee of the assets obtained the right to pledge or exchange
the transferred assets; and
o Fidelity Leasing did not have the option to repurchase and maintain
effective control over the transferred assets.
Thus, for all such transactions completed through March 31, 1999,
Fidelity Leasing recorded gains on sales and terminations. These gains have been
material: $5.2 million in fiscal 1999, $7.6 million in fiscal 1998 and $3.7
million in fiscal 1997.
On April 1, 1999, Fidelity Leasing elected to alter the structure of
future securitizations so that Fidelity Leasing retains leases that it
securitizes as investments on its balance sheet and records the related
securitization indebtedness on its balance sheet as debt for accounting
purposes. Fidelity Leasing also modified its $100.0 million commercial paper
conduit facility so that it would retain leases as investments and record
related securitization indebtedness as debt on its balance sheet. The primary
effect of these modifications is that Fidelity Leasing will recognize income
over the lives of the lease receivables rather than recognize an immediate gain
upon the sale of the lease receivables. Fidelity Leasing's cash flow, which is
influenced by the advance rates and discount rates provided for by the
commercial paper conduit facilities, was unaffected by these modifications.
Fidelity Leasing currently has two sales facilities that, as a result
of the requirements of the strategic alliance participants in connection with
those facilities, continue to be structured in a way that requires Fidelity
Leasing to treat transactions under the facilities as sales for accounting
purposes. All leases generated through these alliances must be sold under these
facilities.
Other Equipment Leasing Operations
F.L. Partnership Management acts as the general partner and manager of
five public limited partnerships formed between 1986 and 1990 with total assets
at September 30, 1999 of $33.4 million, including $5.9 million (book value) of
equipment with an original cost of $28.0 million and investments in direct
financing leases of $10.2 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, F.L. Partnership Management
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. F.L. Partnership Management's interest, as general partner, in cash
distributions from the partnerships is 3.5% (one partnership) and 1% (four
partnerships).
22
<PAGE>
F.L. Financial Services 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. F.L. Financial Services 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, F.L.
Financial Services also enters into a remarketing agreement that entitles it to
fees upon residual sale.
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 further 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.
Energy Operations
General
The Company's energy business focuses on the sponsorship of general and
limited partnership investment programs which drill natural gas wells on
properties in New York, Ohio and Pennsylvania acquired from the Company. The
Company produces natural gas and, to a lesser extent, oil from these properties
for the account of the partnerships. The Company typically retains an interest
in these partnerships for its own account and manages the operations of these
partnerships and their wells on a fee basis. The Company, to a substantially
lesser extent, also drills wells directly for its own account. In recent years,
the Company's energy operations have expanded significantly by the acquisition
of The Atlas Group, Inc. in fiscal 1998 and Viking Resources Corporation in
fiscal 1999. At September 30, 1999 the Company had (either directly or through
partnerships and joint ventures managed by it) interests in 3,990 wells
(including royalty or overriding interests with respect to 346 wells), of which
the Company operates approximately 2,200 wells, 1,300 miles of natural gas
pipelines and 347,500 acres (net) of mineral rights. Natural gas produced from
wells operated by the Company is collected in gas gathering pipeline systems
owned or operated 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.
In June 1999, the Company sponsored Atlas Pipeline Partners, L.P. which
was formed to acquire substantially all of the Company's gathering system
assets. In December 1999, Atlas Pipeline Partners filed an amended registration
statement with the SEC in connection with the public offering of 2,500,000 of
its common units of limited partnership interest (Registration No. 333-85193) to
fund the proposed acquisition. See "Energy Operations - Pipeline Operations,"
below.
Business Strategy
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 by sponsorship of investment partnerships and
through acquisition of energy industry companies. The Company also seeks to
generate fee-based income from its drilling activities on behalf of its
investment partnerships, the operation of their wells and the management of
partnership activities.
23
<PAGE>
Well Operations
The following table sets forth information as of September 30, 1999
regarding productive oil and gas wells in which the Company has a working
interest, including wells acquired in connection with the acquisition of Viking
Resources:
<TABLE>
<CAPTION>
Number of Productive Wells
--------------------------
Gross(1) Net(1)
-------- ------
<S> <C> <C>
Oil wells....................................... 329 199
Gas wells....................................... 3,315 1,692
------- ------
Total......................................... 3,644 1,891
======= ======
</TABLE>
- --------
(1) Includes the Company's equity interest in wells owned by 85 partnerships and
various joint ventures. Does not include royalty or overriding interests
with respect to 346 wells held by the Company.
The following table sets forth net quantities of oil and natural gas
produced, average sales prices, and average production (lifting) costs per
equivalent unit of production, for the periods indicated, including the
Company's equity interests in the production of 85 partnerships and various
joint ventures.
<TABLE>
<CAPTION>
Average Lifting
Cost per
Production Average Sales Price Equivalent
Fiscal ----------------------------- --------------------------- ----------
Period Oil(bbls) Gas(mcf) per bbl per mcf mcf(1)
- ------ --------- ------- ------ ------- -----
<S> <C> <C> <C> <C> <C>
1999(2) 85,045 4,342,430 $14.57 $2.37 $1.04
1998(3) 48,113 1,485,008 $14.38 $2.66 $1.14
1997(3) 35,811 1,227,887 $19.68 $2.59 $1.13
</TABLE>
- ----------
(1) Oil production is converted to mcf equivalents at the rate of six mcf per
barrel.
(2) Includes production relating to Viking Resources for the one month period
from the August 31, 1999 date of Viking Resource's acquisition to the end of
the fiscal year.
(3) Excludes production relating to The Atlas Group, Inc. and Viking Resources,
which were not acquired by the Company until the end of the 1998 and 1999
fiscal years, respectively.
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 at any time during the fiscal years 1999, 1998 and 1997, regardless of
when drilling was initiated, drilled directly for the Company's account. The
table excludes wells drilled for investment programs sponsored by the Company.
<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>
1999(1) - - 1.0 .20 145.0 41.9 - -
1998(2) 1.0 .25 2.0 .75 3.0 3.0 - -
1997 1.0 .50 - - - - - -
</TABLE>
- ----------
(1) Includes wells drilled by Viking Resources only since August 31, 1999, the
date of its acquisition.
(2) Excludes wells drilled by Atlas Group, 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.
24
<PAGE>
Oil and Gas Reserve Information
An evaluation of the Company's estimated proved developed oil and gas
reserves as of September 30, 1999, including those acquired with Viking
Resources, was reviewed by Wright & Company, Inc., an independent petroleum
engineering firm. Such study showed, subject to the qualifications and
reservations set forth in the study, reserves of 108.2 million mcf of gas and
1.7 million barrels of oil. See Note 18 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,
1999, including acreage acquired in connection with the acquisition of Viking
Resources. The information in this table includes the Company's equity interest
in acreage owned by 85 partnerships and various 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........................... 1,450 1,362 19,327 18,157
Louisiana.......................... 1,819 206 - -
Mississippi........................ 40 3 - -
New York........................... 22,590 16,976 15,970 15,970
Ohio............................... 106,760 79,995 53,839 50,628
Oklahoma........................... 4,243 635 - -
Pennsylvania....................... 43,926 40,573 83,520 83,520
Tennessee.......................... - - - -
Texas.............................. 4,520 209 - -
West Virginia...................... 500 497 38,622 38,368
------- ------- ------- -------
188,568 140,879 211,278 206,643
======= ======= ======= =======
</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 $394,000 in fiscal 1999
were paid to maintain leases on such acreage.
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, 1999, 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 85 partnerships and various joint ventures.
Pipeline Operations
The Company operates various gas gathering pipeline systems totaling
approximately 1,300 miles in length. The pipeline systems are located in Ohio,
New York and Pennsylvania. See Note 18 to the Consolidated Financial Statements.
The Company has sponsored Atlas Pipeline Partners, which the Company anticipates
will acquire substantially all of these gathering systems for $35.7 million,
plus subordinated units of limited partnership interest representing a 20%
limited partnership interest. Atlas Pipeline Partners has filed a registration
statement with respect to an offering of its common units of limited partnership
interest to fund the acquisition. The Company can offer no assurance that the
offering will be completed or as to the timing of the offering and,
consequently, can offer no assurance as to the acquisition of the gathering
systems. At the closing of the offering, the Company and Atlas Pipeline Partners
will enter into agreements that will:
25
<PAGE>
o Require the Company to connect its wells within specified distances
of the gathering systems to them and to drill and connect a minimum
of 225 wells.
o Require the Company to provide stand-by construction financing for
gathering system extensions and additions to a maximum of $1.5
million per year for five years.
o Require the Company to pay gathering fees for natural gas gathered by
the gathering systems of the greater of $.35 per mcf ($.40 per mcf in
certain instances) or 16% of the gross sales price of the natural
gas.
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 1999, 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 1999, gas sales to two purchasers accounted for 26% and 14%,
respectively, of the Company's total production revenues. For the years ended
September 30, 1998 and 1997, gas sales to two purchasers accounted for 35% and
14%, and 29% and 12%, 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.
Markets
The availability of a ready market for oil and gas produced by the
Company, and the price obtained, 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.
26
<PAGE>
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
General
The Company has historically relied upon internally generated funds to
finance its growth. During the past three 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. In addition, Fidelity
Leasing is capital intensive and requires access to short-term, medium-term and
long-term financing to fund new equipment leases. Historically, Fidelity Leasing
has financed this business through warehouse facilities, commercial paper
conduit facilities, intercompany borrowings and term note securitizations.
The following is a summary of the terms of the Company's debt offering
and credit facilities outstanding as of December 1999.
12% Senior Notes
In July 1997, the Company issued $115.0 million of 12% Senior Notes
(the "12% Notes") which 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
and (f) enter into any arrangement that would impose restrictions on the ability
of subsidiaries to make dividend and other payments to the Company except in
connection with specified indebtedness. 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.
Equipment Leasing Credit Facilities
Warehouse Facilities. In December 1996, Fidelity Leasing entered into a
line of credit for $20.0 million of warehouse financing with First Union
National Bank. Fidelity Leasing uses this facility to fund its daily lease
originations. In September 1998, the parties amended the facility to add
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European American Bank as an additional lender. First Union has committed $12.5
million and European American Bank has committed $7.5 million under the
facility. Their commitments expire March 31, 2000. Borrowings under the facility
are at variable interest rates equal to, at Fidelity Leasing's election, either
the LIBOR market index rate or LIBOR plus 150 basis points. Fidelity Leasing
pledged as collateral all of the receivables of, and the equipment subject to
leases funded through, the facility and the outstanding stock of JLA Credit. The
facility requires that the Company or Abraham Bernstein, Fidelity Leasing's
Chairman and Chief Executive Officer, own a majority of Fidelity Leasing's
outstanding voting stock and that Mr. Bernstein continue to act as Fidelity
Leasing's Chief Executive Officer, and restricts Fidelity Leasing from incurring
or guaranteeing further indebtedness other than subordinated indebtedness, trade
debt in the ordinary course of business, non-recourse debt and unsecured
intercompany debt that does not exceed 300% of the outstanding principal of
Fidelity Leasing's subordinated indebtedness. These restrictions on indebtedness
do not limit Fidelity Leasing's ability to securitize its leases through special
purpose subsidiaries. In addition, the facility requires Fidelity Leasing to
maintain a certain level of tangible net worth, and restricts it from exceeding
certain debt to tangible net worth and operating cash flow to fixed charges
ratios. It also requires Fidelity Leasing to continue to engage in substantially
the same line of business. Fidelity Leasing's failure to comply with these
requirements or to make payments due under the facility or certain other
recourse indebtedness on a timely basis, among other defaults, could result in
termination of the facility and acceleration of the then outstanding
indebtedness. The Company guaranteed the performance of Fidelity Leasing's
obligations under this facility.
In May 1999, Fidelity Leasing Canada, Inc., Fidelity Leasing's
operating subsidiary in Canada, established a Canadian dollars ("C") $5.0
million (equivalent to $3.4 million based on the value of the Canadian dollar on
September 30, 1999) line of credit with the Bank of Montreal to finance leases
originated in Canada under Fidelity Leasing's strategic marketing alliance with
IBM Canada Ltd. The interest rate under this facility is a variable rate equal
to the Banker's Acceptance Rate plus 2% or the lender's prime rate plus 0.75%.
The facility expires in May 2000. This facility contains covenants and
restrictions similar to those described in the preceding paragraph, including
change of control provisions. In addition, termination of or amendment to
Fidelity Leasing's vendor program agreement with IBM Canada constitutes an event
of default absent the lender's prior written consent to such termination or
amendment. Together with the Company, Fidelity Leasing guaranteed Fidelity
Leasing Canada's obligations under the facility. Fidelity Leasing Canada will
sell leases financed under this facility to IBM Canada on a periodic basis.
In September 1999, Fidelity Leasing Canada established a C$15.0 million
line of credit with the Bank of Montreal (equivalent to $12.2 million based on
the value of the Canadian dollar on September 30, 1999). The interest rate under
this facility is a variable rate equal to the Banker's Acceptance Rate plus 1.5%
or the lender's prime rate plus 0.75%. The facility expires on September 2000
but is subject to annual renewal at the Bank of Montreal's option. Unlike the
C$5.0 million warehouse line of credit, this facility does not revolve and
Fidelity Leasing Canada may use it to finance leases originated in Canada under
any of Fidelity Leasing's strategic marketing alliances approved by the Bank of
Montreal. This facility contains covenants and restrictions similar to those of
the C$5.0 million warehouse line of credit. In addition, Fidelity Leasing Canada
is restricted from paying any dividends on its capital stock.
Sales by Assignment. Beginning in December 1996 and in each quarter
thereafter through September 1997, Fidelity Leasing entered into sales
transactions where it sold lease receivables and interests in the related
equipment and residuals to an unaffiliated special purpose entity for an amount
equal to 100% of the present value of the lease receivables and a note equal to
the estimated present value of the residual interests. The special purpose
entity resold the lease receivables to unrelated third parties. The Company
provided to these third parties a guaranty of payment of a portion of the lease
receivables due under any defaulted leases and of Fidelity Leasing's performance
as servicer. These transactions were accounted for as sales for financial
reporting purposes.
Commercial Paper Conduit Securitizations. In December 1997, Fidelity
Leasing again sold lease receivables and interests in the related equipment and
residual interests to an unaffiliated entity on terms similar to those of the
sales by assignment, except that Fidelity Leasing received from the special
purpose entity cash equal to a substantial portion of the present value of the
lease receivables and a promissory note in an amount equal to the remaining
portion of the present value of the lease receivables and the residual
interests. The special purpose entity resold the receivables to a commercial
paper conduit administered by First Union. The transaction was accounted for as
a sale for financial reporting purposes. The lenders' commitment on this
facility terminated in April 1999.
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In June 1998, Fidelity Leasing established a revolving commercial paper
conduit facility having a funding commitment of $100.0 million with a conduit
administered by First Union. This facility was later amended to increase the
funding commitment to $125.0 million. With this facility, Fidelity Leasing began
retaining the residual interests in the securitized lease pools on its balance
sheet for accounting purposes and the purchaser under this facility was Fidelity
Leasing's wholly owned special purpose subsidiary. This facility contains events
of default which are triggered when lease delinquencies or defaults in the
securitized portfolio exceed specified thresholds. In addition, an event of
default would occur if there is a change in Fidelity Leasing's Chairman and
Chief Executive Officer, President or Senior Vice President or if Fidelity
Leasing merges or consolidates with another company and is not the survivor. The
lenders' commitment on this facility expired in June 1999. Because assets
transferred under this facility are treated as sales for financial reporting
purposes, Fidelity Leasing did not renew this facility.
In December 1998, Fidelity Leasing entered into a revolving commercial
paper conduit facility administered by PNC Bank that has a funding commitment of
$100.0 million. The commitment period expires in December 2000, but is subject
to annual renewal at the option of the commercial paper conduit and its
liquidity banks. Fidelity Leasing anticipates that this facility will be renewed
through December 2000. This facility contains provisions regarding events of
default which are substantially similar to the $125.0 million facility described
in the immediately preceding paragraph. This facility was amended to permit
Fidelity Leasing to treat additional securitizations as financings for financial
reporting purposes.
In February 1999, Fidelity Leasing established a $143.0 million
commercial paper conduit facility, administered by First Union, in order to
finance its acquisition of JLA Credit. In connection with this facility,
Fidelity Leasing sold a portfolio of JLA Credit originated lease receivables to
a special purpose subsidiary, which pledged the receivables to the commercial
paper conduit. This facility contains default provisions substantially similar
to Fidelity Leasing's $125.0 million and $100.0 million facilities. Fidelity
Leasing treated this transaction as a financing for financial reporting
purposes.
In July 1999, Fidelity Leasing established a revolving multi-conduit
facility administered by First Union. As of September 30, 1999, one commercial
paper conduit lender had committed $300.0 million of funding. Fidelity Leasing
intends to solicit other commercial paper conduits for up to an additional
$200.0 million of funding. The commitment period expires in July 2000, but is
subject to annual renewal at the option of the lenders. This facility contains
default provisions substantially similar to the $125.0 million and $100.0
million facilities. In addition, Fidelity Leasing is required to maintain a
specified level of tangible net worth and ratio of earnings to interest expense.
Fidelity Leasing must also maintain revolving credit facilities aggregating at
least $400.0 million. Only facilities whose funding commitments have not
terminated are considered in determining whether the latter requirement is
satisfied. Thus, for example, the $125.0 million commercial paper conduit
facility is not considered for purposes of satisfying this requirement, but the
$100.0 million commercial paper conduit facility combined with the $300.0
million committed under this facility does satisfy the requirement. Fidelity
Leasing treats this facility as a financing for financial reporting purposes.
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Sales Facilities. In December 1998, Fidelity Leasing entered into
agreements with IBM Credit Corporation and IBM Canada Ltd. that allow it to
finance, on a monthly basis, all of the leases it originates under its strategic
marketing alliances with them. Fidelity Leasing formed two special purpose
subsidiaries for purposes of these sales, one for lease originations in the U.S.
and the other for lease originations in Canada. IBM Credit and IBM Canada
require Fidelity Leasing to account for these transfers as sales for financial
reporting purposes.
Term Note Securitizations. In June 1997, JLA Credit securitized leases
in a $75.0 million private placement of floating rate notes. The transaction has
a 20% optional repurchase feature, allowing Fidelity Leasing to treat the
securitization as a financing for accounting purposes. In February 1998, JLA
Credit securitized leases in a $125.0 million private placement of fixed and
floating rate notes. This transaction also has a repurchase option, which
permits Fidelity Leasing to treat the securitization as a financing for
financial reporting purposes.
In June 1999, Fidelity Leasing privately placed $158.8 million of fixed
rate notes through First Union Capital Markets Corp. This transaction
effectively refinanced a substantial portion of the $143.0 million commercial
paper conduit facility Fidelity Leasing established at the time it acquired JLA
Credit. As servicer, Fidelity Leasing has the right to prepay the outstanding
notes when the remaining balance of the leases is approximately $23.8 million.
The transaction was accounted for as a financing for financial reporting
purposes.
Term Loans and Other Credit Facilities. As part of the consideration
for the acquisition of JLA Credit, Fidelity Leasing gave the seller a promissory
note with an original principal amount of $6.7 million, which bears interest at
the Treasury Rate plus 2.5% for the first two years and at the Treasury Rate
plus 4.0% until maturity in February 2004. The note is payable in quarterly
installments and is subordinate to all of Fidelity Leasing's other indebtedness,
including its intercompany debt. At the closing of the JLA Credit acquisition,
the seller was unable to deliver complete lease files on certain of JLA Credit's
assets. As a consequence, the originally bargained for $8.8 million note was
reduced by $2.1 million to $6.7 million. To the extent that any lease files are
subsequently completed, Fidelity Leasing must add a portion of the lease's net
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investment value to the outstanding principal balance on the note, up to an
aggregate of $2.1 million. As of September 30, 1999, the principal balance of
the note had been increased by $1.0 million as a result of lease files having
been completed.
In addition, as part of the JLA Credit acquisition, Fidelity Leasing
acquired a small pool of automobile leases. To finance this portfolio, Fidelity
Leasing entered into a 36-month term loan with First Union for $5.7 million
which bears interest at LIBOR plus 1.0%.
In conjunction with the $300.0 million commercial paper conduit
facility, in July 1999, two of Fidelity Leasing's wholly owned special purpose
subsidiaries each entered into credit facilities with First Union that permit a
maximum aggregate borrowing of $10.0 million. Amounts outstanding under the
facilities bear interest equal to LIBOR plus 2.0% and are secured by a second
priority interest in the lease receivables securing the $125.0 million and
$300.0 million commercial paper conduit facilities. The commitment period for
each facility expires in July 2000, but is subject to annual renewal at First
Union's option. The facilities have default provisions substantially similar to
the $125.0 million and $300.0 million commercial paper conduit facilities.
Fidelity Leasing must prepay each facility if it raises $20.0 million of
additional equity capital other than from the Company, or from subordinated
debt. In addition, Fidelity Leasing must prepay these facilities upon repayment
through term note securitizations of the $125.0 million and $300.0 million
commercial paper conduit facilities.
In September 1999, Fidelity Leasing entered into a 5-year term loan
with Commerce Bank, N.A. for $4.1 million. Amounts outstanding under this loan
bear interest at LIBOR plus 4.5% and are secured by Fidelity Leasing's retained
interest in the lease receivables securitized in the June 1999 term note
securitization. Fidelity Leasing is required to make periodic principal payments
on this loan only if it realizes amounts from its retained interest. The Company
guaranteed Fidelity Leasing's obligations under this loan.
Commercial Mortgage Loan Credit Facilities
In March 1998, the Company, through certain operating subsidiaries,
established an $18.0 million revolving credit facility (with current permitted
draws of $7.0 million) with Jefferson Bank for its commercial mortgage loan
operations which expires in April 2000. 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. As amended in August 1999, 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.
In July 1999, certain operating subsidiaries of the Company established
a $15.0 million line of credit with Sovereign Bank. The facility bears interest
at the prime rate reported in The Wall Street Journal and expires in July 2001,
subject to annual extension at the bank's election. The facility is secured by
the borrowers' interest in certain commercial loans and real estate and by
certain bonds held by the Company. Credit availability is based on the value of
the real estate pledged as security. The facility imposes limitations on the
incurrence by the borrowers of future indebtedness and sales, transfers or
leases of their assets and requires the borrowers to a specified level of equity
and debt service coverage ratio.
At the same time, the Company established a similar $5.0 million line
of credit with Sovereign Bank. This facility bears interest at the same rate as
the $15.0 million line of credit and also expires in July 2001, subject to
annual extension at the bank's election. The facility is secured by a pledge of
the Company's common shares in Resource Asset and by a guaranty from the
borrowers under the $15.0 million line of credit. Credit availability is based
on the value of those shares. The facility restricts the Company from making
loans to its affiliates (except for subsidiaries) other than (i) existing loans,
(ii) loans in connection with lease transactions in an aggregate not to exceed
$50,000 in any fiscal year and (iii) loans to Resource Asset made in the
ordinary course of business.
In connection with the acquisition of loan 53, the Company obtained two
loans from Merrill Lynch Mortgage Capital, Inc., secured by the borrower's
interest in loan 53. The senior loan is in the amount of $49.5 million, and
bears interest at 30 day LIBOR (5.4% at September 30, 1999) plus between 300 and
350 basis points. The junior loan is in the amount of $9.4 million and bears
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interest at 17.5% of which 15% is payable monthly with the balance accruing.
These loans were paid in full in October 1999.
Energy Credit Facilities
At the time of its acquisition by the Company, Atlas Group and its
subsidiaries maintained a $40.0 million credit facility (with permitted draws of
$27.0 million) with PNC Bank, N.A. The line was continued by the Company until
September 1999, when it was refinanced with the credit facility described in the
next paragraph. The Atlas Group credit facility was divided into two principal
parts: a revolving credit facility and a term loan facility. The facility
permitted draws based on the remaining proved developed producing, proved
developed non-producing and proved undeveloped gas and oil reserves attributable
to the borrowers' wells and the borrowers projected fees and revenues from
transportation of gas through their pipelines, operation of wells and management
of investment partnerships. The revolving credit facility permitted draws of
$20.0 million and bore interest at one of the following two rates, at borrower's
election, which increased as the amount outstanding under the facility
increased: (i) the PNC Bank prime rate plus 0 to 50 basis points, or (ii) LIBOR
plus 137.5 to 212.5 basis points. The term loan facility permitted draws of $7.0
million and bore interest at, at borrower's election, at either (i) the PNC Bank
prime rate plus 12.5 to 62.5 basis points, or (ii) LIBOR plus 150 to 225 basis
points. The credit facility contained financial covenants of Atlas Group,
including maintaining (x) a current ratio of .75 to 1.0, (y) a ratio of fixed
charges to earnings of 2.0 to 1.0 and (z) 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 imposed the following limits: (a) Atlas Group's exploration
expense could be no more than 20% of capital expenditures plus exploration
expense; (b) sales, leases or transfers of property by Atlas Group were limited
to $1.0 million; and (c) Atlas Group could not incur debt in excess of $2.0
million to other lenders.
In September 1999, the Company's energy subsidiaries, Atlas America,
Resource Energy and Viking Resources, entered into a $45.0 million revolving
credit facility administered by PNC Bank. The facility permits draws based on
the remaining proved developed producing, proved developed non-producing and
proved undeveloped gas and oil reserves attributable to the borrowers' wells and
the borrowers projected fees and revenues from transportation of gas through
their pipelines, operation of wells and management of investment partnerships.
Up to $14.0 million of the borrowings under the facility may be in the form of
standby letters of credit. Borrowings under the facility are secured by a
security interest in the assets of the borrowers and their subsidiaries,
including pledges by the borrowers of the stock of their subsidiaries. Loans
under the facility bear interest at one of the following two rates, at
borrower's election, which increase as the amount outstanding under the facility
increases: (i) the PNC Bank prime rate plus 0 to 75 basis points, or (ii) the
Eurodollar rate plus 150 and 225 basis points. Draws under any letter of credit
bear interest at the PNC Bank prime rate plus 0 to 75 basis points. The credit
facility contains financial covenants, including the requirement that the
borrowers maintain: (x) a current ratio of .85 to 1.0, (y) a ratio of fixed
charges to earnings of 1.5 to 1.0, increasing to 2.0 to 1.0 in July 2000 and 2.5
to 1.0 in January 2001, and (z) a leverage ratio of not less than 3.25 to 1.0,
reducing to 3.0 to 1.0 in April 2000. In addition, the facility prohibits the
borrowers' exploration expenses from exceeding 20% of capital expenditures and
limits sales, leases or transfers of property by the borrowers and the
incurrence of additional indebtedness. The facility terminates in November 2002,
when all outstanding borrowings must be repaid.
Other Facilities
The Company's discontinued subsidiary maintains a $2.0 million
warehouse line of credit with Sovereign Bank. As of September 30, 1999, there
was $1.0 million outstanding. Borrowings under this credit facility are
guaranteed by the Company.
Employees
As of September 30, 1999, the Company employed 423 persons, including
35 in general corporate, 5 in real estate finance, 231 in equipment leasing and
152 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"
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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
business environment and could render actual outcome 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:
General
o The Company's real estate finance and equipment leasing businesses
rely on outside capital and borrowings in order to sustain current
growth. A decrease in availability of outside funds could restrict
the Company's ability to finance its activities, thereby reducing its
growth or its ability to conduct current operations. 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 by
the Company or in the volume of equipment leases originated by the
Company could materially affect the Company's results of operations
and financial condition.
o Unforeseen interest rate increases could increase the Company's costs
of funds. This could have many material adverse effects on the
Company including reduction in its return on its commercial loan
portfolio as a result of increased rates payable on existing or
future senior lien interests and reduction in demand for the
Company's equipment leasing products. In addition, in 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 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 an 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. The Company typically
enters into interest rate swap agreements to hedge against the risk
of interest rate increases in the floating-rate financing with which
it funds equipment leases. Such hedging activities limit the
Company's ability to participate in the benefits of lower interest
rates with respect to the hedged portfolio. In addition, these
hedging activities may not protect the Company from interest
rate-related risks in all interest rate environments, including
interest rate increases after a lease origination but before
commercial paper conduit securitization.
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 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.
Real Estate Finance
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 before
the 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 conditions of the underlying property, there may be a
higher risk of default with these loans as compared to conventional
loans.
o Declines in real property values generally and/or in those specific
markets where the properties securing the Company's commercial
mortgage loans are located could affect the value of and default
rates under those 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.
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o At September 30, 1999, the Company's allowance for possible losses
was $1.4 million (0.6%) of book value of its commercial mortgage loan
portfolio at that date. The Company can offer 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.
Equipment Leasing
o The Company markets its leasing programs through strategic marketing
alliances and other vendor program relationships with manufacturers,
distributors, dealers, resellers and other vendors of equipment and
commercial banks. For the year ended September 30, 1999, its
strategic marketing alliances accounted for approximately 35% of
lease originations, measured by equipment cost. Termination of one or
more of its principal relationships, a material adverse change in the
financial condition or the operations of a vendor or bank in one of
these relationships or a decision by one or more of the vendors or
banks not to refer business to the Company could have a material
adverse impact on the Company's ability to originate leases. Many of
these relationships are not formalized in written agreements.
Moreover, most of the relationships that are formalized by written
agreements are terminable at will. None of the Company's strategic
marketing alliances or other relationships commits a vendor or bank
to provide a minimum number of lease transactions to the Company nor
do the Company's relationship's require the vendors or banks to
direct all of their lease transactions to it.
o The Company specializes in leasing equipment to small businesses.
Small businesses may be more vulnerable to economic downturns and
often need substantial additional capital to expand or compete.
Moreover, the success of a small business and its ability to make
lease payments typically depends upon the management talents and
efforts of one person or a small group of persons at the business.
The death, disability or resignation of one or more of these persons
could have an adverse impact on the operations of that business.
Small business leases, therefore, may entail a greater risk of
non-performance and more delinquencies and losses than leases entered
into with larger, more creditworthy lessees. In addition, there is
typically only limited publicly available financial and other
information about small businesses and they often do not have audited
financial statements. Accordingly, in making credit decisions, the
Company's small business underwriting relies upon the accuracy of
information about these small businesses obtained from third party
sources, primarily credit agencies. If the information it obtains
from these sources is incorrect, the Company's underwriting will not
be effective and its ability to make appropriate credit decisions
will be impaired.
o Delinquent and defaulted leases do not qualify as collateral against
which advances may be made under the Company's warehouse or
commercial paper conduit facilities and the Company cannot include
them in term note securitizations. This can reduce the funding
available to the Company under the warehouse or commercial paper
conduit facilities and amounts it can obtain through term note
securitizations. Higher than expected lease delinquencies or defaults
will result in additional charges to operations, which will adversely
affect the Company's earnings, possible materially. In addition,
increasing rates of delinquencies or charge-offs could result in
adverse changes in the structure of the Company's future warehouse
facilities, commercial paper conduit securitizations and term note
securitizations, including increased interest rates payable to
investors and the imposition of more burdensome credit enhancement
requirements. Any of these occurrences could have a material adverse
effect on the Company's business, financial condition and results of
operations.
o In connection with the Company's lease financing, the Company records
an allowance for possible losses to provide for estimated losses. The
allowance for possible losses is based on past collection experience,
industry data, lease delinquency data and the Company's assessment of
prospective risks. Although the Company considers the allowance for
possible losses reflected in its consolidated balance sheet at
September 30, 1999 to be adequate, it can offer no assurance that
this allowance will be adequate to cover losses in connection with
its portfolio of leases. Losses in excess of this allowance would
cause the Company to increase its provision for possible losses,
reducing its operating income. This allowance may prove to be
inadequate due to unanticipated adverse changes in the economy or
discrete events adversely affecting specific lessees or industries.
o The Company's leasing operations have grown significantly since their
commencement. The Company's ability to sustain continued growth
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depends on its ability to originate, evaluate, finance and service
increasing volumes of leases of suitable yield and credit quality.
Accomplishing such a result on a cost-effective basis is largely a
function of the Company's marketing capabilities, its management of
the leasing process, its ability to provide competent, attentive and
efficient servicing, its access to financing sources on acceptable
terms and the capabilities of its technology systems. Failure to
manage effectively any future growth could have a material adverse
effect on the Company's business, financial condition and results of
operations.
o The Company's recorded residual values are estimates based on
industry data about lease extensions, lessee purchases of equipment
at the end of the lease term and resale of used equipment in the open
market. Because the Company's equipment leasing operations have a
relatively short operating history, the Company's current experience
with respect to realization of residual interests may not be
indicative of what realizations may be in the future. The Company
reviews estimates of the value of its residual interests from time to
time to determine whether they are above the fair market value of the
residual interests. If the fair market values are less than the
estimates, the difference would be charged to operations. If, upon
sale or re-lease of the underlying equipment, the amount obtained is
less than the Company's recorded estimate, the difference also would
be charged to operations. These charges will reduce the Company's
operating income. Realization of residual values depends on numerous
factors, most of which are outside of the Company's control,
including: the general market conditions at the time of expiration of
the lease; the cost of comparable new equipment; the obsolescence of
the leased equipment; any unusual or excessive wear and tear on the
equipment; the effect of any additional or amended government
regulations; and the foreclosure by a secured party of our interest
in a defaulted lease.
o The Company's equipment leasing operations depend on its ability to
protect its technology systems, particularly its computer and
telecommunications equipment, against damage from fire and water,
power loss, telecommunications failure or a similar unexpected
adverse event. Moreover, if the capacity of its software or hardware
is exceeded due to an increase in the volume of products and services
delivered through its servers, the Company may have slower response
times and, possibly, system failures. Vendors with whom the Company
has relationships and their customers may become dissatisfied as a
result of any system failure that interrupts the Company's ability to
provide its lease financing. Sustained or repeated system failures
would reduce the attractiveness of the Company's lease financing
process. To the extent that the Company does not effectively address
any system failures or capacity constraints, vendors could seek other
lease finance providers.
Energy
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.
35
<PAGE>
o The Company annually reviews the carrying value of its oil and
natural gas properties under the full cost accounting rules of the
SEC. 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 SEC, 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 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.
ITEM 2. PROPERTIES
The Company maintains its executive office in Philadelphia,
Pennsylvania under a lease agreement for 7,173 square feet of office space which
expires May 2000. The Company's real estate finance operations are also located
at this location. The Company also maintains a 2,100 square foot office in New
York City and is under a lease agreement at that location until December 2001.
The Company's small ticket equipment leasing headquarters are located
in West Chester, Pennsylvania and consist of 20,000 square feet of office space
with a lease that expires in February 2005. The leasing business also has an
office in Torrance, California consisting of 7,325 square feet and is under a
lease agreement at that location until May 2004. The Canadian operations of the
Company's small ticket equipment leasing subsidiary leases 3,021 square feet of
office space in suburban Toronto, Canada and is under a lease agreement until
October 2008 with one five year renewal option. The Company's small ticket
leasing subsidiary also has six field offices located in: Charlotte, North
Carolina, Englewood, Colorado, Laguna Hills, California, Altamonte Springs,
Florida, Winter Park, Florida and Irving, Texas. The lease agreements for these
field offices expire at various dates over the next five years. The Company
feels that these offices are adequate for its leasing subsidiary's current
needs. The Company also leases 6,946 square feet of space in Philadelphia,
Pennsylvania for management operations with respect to its five public leasing
partnerships.
The Company's energy business owns a 9,600 square foot office building
and related land in Akron, Ohio, a 24,000 square foot office building in
Pittsburgh, Pennsylvania, which are both used for its energy operations, and a
17,000 square foot field office and warehouse facility in Jackson Centre,
Pennsylvania. The Company also rents two field offices in Ohio and New York on
month-to-month tenancies. In addition, as a result of the Viking Resources
acquisition, the Company owns an 8,600 square foot office building in North
Canton, Ohio, a field office in Deerfield, Ohio and rents a 950 square foot
office in Cincinnati, Ohio.
36
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company, together with certain of its officers and directors and
its independent auditor, Grant Thornton, LLP, has been named as a defendant in
actions that were instituted on October 14, 1998 in the U.S. District Court for
the Eastern District of Pennsylvania by stockholders of the Company on their own
behalf and on behalf of similarly situated stockholders who purchased shares of
the Company's common stock between December 17, 1997 and February 22, 1999. The
complaint seeks damages in an unspecified amount for losses allegedly incurred
as the result of misstatements and omissions allegedly contained in the
Company's periodic reports and registration statement filed with the SEC. The
asserted misstatements and omissions relate, among other matters, to the
Company's (i) use of the accretion of discount method of recognizing revenue on
distressed loans the Company purchased at a discount and (ii) accounting for the
profit realized by the Company on its sale of senior lien interests in such
loans. The Company believes that the complaint is 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.
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 fiscal
years and fiscal 2000 through December 17, 1999.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal 2000
First Quarter (through December 17, 1999).......................... $ 9.25 $ 6.75
Fiscal 1999
Fourth Quarter..................................................... 15.88 6.50
Third Quarter...................................................... 18.50 8.50
Second Quarter .................................................... 12.31 8.56
First Quarter...................................................... 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
</TABLE>
As of December 17, 1999, there were 23,324,415 shares of Common stock
outstanding held by 544 holders of record.
The Company has 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 - The Company: 12% Senior
Notes."
37
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data as of and for the five most recent fiscal years
ended September 30 are as follows (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
For the Years Ended September 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues
Real estate finance........................... $ 45,907 $ 55,834 $ 19,144 $ 7,171 $ 6,114
Equipment leasing............................. 41,129 13,561 7,162 4,466 -
Energy........................................ 54,493 6,734 5,608 5,157 5,331
Interest and other............................ 3,560 5,013 1,031 204 149
-------- -------- -------- ------- -------
Total revenues................................... $145,089 $ 81,142 $ 32,945 $16,998 $11,594
======== ======== ======== ======= =======
Income from continuing operations before income
taxes, extraordinary item and
cumulative effect of a change
in accounting principle....................... $ 39,539 $ 44,983 $ 14,931 $ 7,353 $ 3,344
Provision for income taxes....................... 12,847 14,811 3,980 2,206 630
-------- -------- -------- ------- -------
Income from continuing operations
before extraordinary item and
cumulative effect of a change in
accounting principle.......................... $ 26,692 $ 30,172 $ 10,951 $ 5,147 $ 2,714
Discontinued operations:
Loss from operations of subsidiary,
net of taxes of $2,190 and $1,443........... (7,687) (2,800) - - -
Loss on disposal of subsidiary,
net of taxes of $148........................ (275) - - - -
Extraordinary item, net of taxes of $142 and
$112........................................ 299 239 - - -
Cumulative effect of change in accounting
principle, net of taxes of $271............... (569) - - - -
-------- -------- -------- ------- -------
Net income....................................... $ 18,460 $ 27,611 $ 10,951 $ 5,147 $ 2,714
======== ======== ======== ======= =======
Net income per common share-basic:
From continuing operations.................... $ 1.21 $ 1.81 $ 1.05 $ .91 $ .48
Discontinued operations....................... (.36) (.17) - - -
Extraordinary item............................ .01 .01 - - -
Cumulative effect of change in accounting
principle................................... (.03) - - - -
--------- -------- -------- ------- -------
Net income per common share-basic................ $ .83 $ 1.65 $ 1.05 $ .91 $ .48
======== ======== ======= ======= =======
Net income per common share-diluted:
From continuing operations.................... $ 1.17 $ 1.75 $ .84 $ .62 $ .39
Discontinued operations....................... (.35) (.16) - - -
Extraordinary item............................ .01 .01 - - -
Cumulative effect of change in accounting
principle................................... (.02) - - - -
--------- -------- ------- ------- -------
Net income per common share-diluted.............. $ .81 $ 1.60 $ .84 $ .62 $.39
======== ======== ======= ======= =======
Cash dividends per common share.................. $ .13 $ .13 $ .13 $ .13 $.03
======== ======== ======= ======= =======
Balance Sheet Data:
Total assets..................................... $901,387 $424,352 $195,119 $43,959 $37,550
Total debt....................................... 577,822 145,446 118,786 8,966 8,523
Stockholders' equity............................. 263,787 236,478 64,829 31,123 26,551
</TABLE>
38
<PAGE>
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, equipment leasing and energy
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), 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 the Atlas Group in September 1998,
JLA Credit in February 1999 and Viking Resources in August 1999 were primarily
responsible for increasing the Company's capital (stockholders' equity plus
total debt) to $841.6 million as of September 30, 1999 from $381.9 million at
September 30, 1998 from $184.3 million at September 30, 1997.
Overview of Fiscal 1999
The Company's gross revenues were $145.1 million in fiscal 1999, an
increase of $63.9 million (79%) from $81.1 million in fiscal 1998, as compared
to an increase in fiscal 1998 of $48.2 million (146%) from $32.9 million in
fiscal 1997. The revenues from the Company's real estate finance business
decreased to $45.9 million, a decrease of $9.9 million (18%) from $55.8 million
in fiscal 1998, as compared to an increase of $36.7 million (192%) in fiscal
1998 from $19.1 million in fiscal 1997. Leasing revenues were $41.1 million in
fiscal 1999, an increase of $27.6 million (203%) from $13.6 million in fiscal
1998 as compared to an increase of $6.4 million (89%) from $7.2 million in
fiscal 1997. In addition, energy revenues were $54.5 million in fiscal 1999, an
increase of $47.8 million (709%) from $6.7 million in fiscal 1998 as compared to
an increase of $1.1 million from $5.6 million in fiscal 1997.
During the past three fiscal years, the Company's revenues, expressed
as a percentage of its total revenues, were distributed across its industry
segments as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Real estate finance............................... 32% 69% 58%
Equipment leasing................................. 28% 17% 22%
Energy............................................ 38% 8% 17%
</TABLE>
The balance (3% in 1999, 6% in 1998 and 4% in 1997) is attributable to corporate
assets not allocated to a specific industry segment, including cash and the
common shares held in Resource Asset. The Company anticipates that its energy
revenues, as a percentage of total revenues, will increase in fiscal 2000 as a
result of the acquisition of Viking Resources.
As of September 30, 1999, total assets were $901.4 million an increase
of $477.0 million (112%) from assets of $424.4 million at September 30, 1998, as
compared to an increase of $229.2 million (117%) from assets of $195.1 million
at September 30, 1997. During the past three fiscal years, the Company's assets,
expressed as a percentage of its total assets, were distributed across its
industry segments as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Real estate finance............................... 30% 50% 47%
Equipment leasing................................. 48% 7% 5%
Energy............................................ 15% 21% 8%
</TABLE>
The balance (7% in 1999, 22% in 1998 and 40% in 1997) is attributable to
corporate assets not attributable to a specific industry segment, as referred to
above.
39
<PAGE>
Results of Operations: Real Estate Finance
As a result of its increased resources, the Company has acquired loans
in recent years (and particularly following fiscal 1997) much larger than those
it previously acquired both as to the outstanding loan balance and the amount of
its net investment. 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 from refinancings
or sales of senior lien interests) typically between $1.0 million and $8.0
million. During the fiscal year ended September 30, 1999, the Company acquired
four loans and originated one loan for a cost of $88.9 million. For loans
acquired during this period, the average contractual receivable balance was
$33.9 million, the average investment cost was $17.8 million and the receivable
balances ranged from $1.5 million to $127.8 million. During the fiscal year
ended September 30, 1998, the Company acquired 12 loans for a cost of $337.1
million. For loans acquired during this period, the average outstanding
receivable balance was $37.2 million, the average investment cost was $27.8
million and the receivable balances ranged from $2.0 million to $100.7 million.
During the fiscal year ended September 30, 1997, the Company acquired 18 loans
for a cost of $71.7 million. For loans acquired during this period, the average
outstanding receivable balance was $6.1 million, the average investment cost was
$3.2 million and the loans acquired had outstanding receivable balances ranging
from $401,000 to $52.6 million.
The following table sets forth certain information relating to the
revenue recognized and cost and expenses incurred in the Company's commercial
real estate finance operations during the periods indicated:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenue:
Interest.......................................................... $17,280 $13,179 $ 4,877
Accreted discount................................................. 18,965 6,520 4,124
Fees.............................................................. 5,633 5,939 2,556
Gains on sales of senior lien interests and loans................. 2,370 30,196 7,587
Loan payments in excess of carrying value......................... 1,414 - -
Net rental income................................................. 245 - -
------- ------- -------
$45,907 $55,834 $19,144
======= ======= =======
Cost and expenses...................................................... $ 3,102 $ 1,801 $ 1,069
======= ======= =======
</TABLE>
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
Revenues from commercial mortgage loan acquisition and resolution
operations decreased $9.9 million (18%) to $45.9 million in the year ended
September 30, 1999. The decrease was primarily attributable to a decrease of
$27.8 million (92%) in gains from sales of senior lien interests and loans. The
decrease was primarily the result of a decrease in the number of loans sold or
loans in which senior lien interests were sold from 39 loans in the fiscal year
ended September 30, 1998 to two loans in the fiscal year ended September 30,
1999. Prior to January 1, 1999, most of the transactions in which senior lien
interests were created were structured to meet the criteria under generally
accepted accounting principles for sales of those interests to the senior
lienors. Effective January 1, 1999, the Company made a strategic decision to
structure future transactions as financings rather than as sales, thereby
retaining the entire principal amount of its commercial mortgage loans
originated on its balance sheet. Thus, for most transactions that were completed
prior to January 1, 1999 (including the two loans sold in fiscal 1999, referred
to above), the Company recorded a gain on sale which is included in the
Company's revenues; refinancing proceeds received subsequent to that date are
not recordable as revenues under generally accepted accounting principles.
Despite the decrease in revenues resulting from the foregoing change, the cash
flows available to the Company from its financing transactions, which were
generally based on the appraised value and the cash flows of the property
underlying the Company's commercial mortgage loans, are unaffected by these
modifications. The primary effect of this change in policy is a shift from the
recognition of an immediate gain upon the sale of a senior lien interest in a
commercial mortgage loan receivable to the recognition of interest income over
the life of the loan receivable.
40
<PAGE>
The decrease in gain on sale revenues was partially offset by the
following:
(i) An increase of $16.5 million (84%) in interest income (including
an increase of $12.4 million of accretion of discount) of which
$6.6 million resulted from the repayment in June 1999 of a
mortgage loan secured by a property located in Philadelphia,
Pennsylvania. The payment, which was made pursuant to the terms of
an existing loan restructuring agreement, was comprised of $29.6
million in cash plus a 50% interest in the property securing the
mortgage loan. The property interest includes significant cash
flow preferences in the underlying cash flows from the property.
Because the amount received in repayment of the loan and
anticipated to be received from the property interest exceeds the
amount of discounted cash flows previously estimated in
determining the Company's accretion of discount on the loan, the
Company revised its estimates in determining the accreted discount
on this loan and recognized $6.4 million of accretion to reflect
the fair value of the property interest. The Company records the
property interest as an investment in real estate ventures and,
accordingly, no accretion of discount was recognized with respect
to it after June 1999. In addition, two loans acquired at the end
of fiscal 1998 contributed $3.8 million in total interest income
in fiscal 1999 as compared to $35,000 in fiscal 1998. The book
value of loans outstanding during the current year increased to
$250.2 million as compared to $188.7 million in the prior fiscal
year, further increasing accretion of discount income.
(ii) An increase in $1.4 million in loan payments in excess of carrying
value of which $1.2 million resulted from the June 1999 mortgage
loan repayment referred to in (i).
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) decreased to 22%
in the year ended September 30, 1999 as compared to 40% in the year ended
September 30, 1998.
Costs and expenses of the Company's commercial mortgage loan
acquisition and resolution operations increased $1.3 million (72%) to $3.1
million in the year ended September 30, 1999. The increase was primarily a
result of hiring additional personnel, increased compensation to existing
employees and legal costs relating to management of the Company's portfolio.
As a result of the foregoing, the Company's revenues less costs and
expenses from commercial mortgage loan acquisition and resolution operations
decreased to $42.8 million in the year ended September 30, 1999, as compared to
$54.0 million in the same period in the prior year.
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
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 Resource Asset 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 Resource Asset, resulting in
proceeds of $18.0 million and a gain of $5.1 million.
41
<PAGE>
(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 Resource Asset; $4.1 million
for services to borrowers whose loans the Company later acquired
(of these fees, $840,000 was paid by a partnership whose partners
are Resource Asset and Brandywine Construction and Management);
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.
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.
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>
Years Ended September 30,
-----------------------------
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenues:
Small ticket leasing:
Interest and fees................................................. $33,795 $ 3,481 $1,081
Gains on sale of leases........................................... 5,241 7,598 3,711
Partnership management.............................................. 1,749 1,693 1,713
Lease finance placement and advisory services....................... 344 789 657
------- ------- ------
$41,129 $13,561 $7,162
======= ======= ======
Costs and expenses:
Small ticket leasing................................................ $10,808 $ 3,337 $2,051
Partnership management.............................................. 1,853 1,264 1,243
Lease finance placement and advisory services....................... 495 662 528
------- ------- ------
$13,156 $ 5,263 $3,822
======= ======= ======
</TABLE>
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
The Company experienced continued growth in its leasing business during
fiscal 1999, originating 19,001 leases having a cost of $305.1 million, as
compared to 8,832 leases having a cost of $92.6 million during the prior year.
This growth was further accelerated by the JLA Credit acquisition on February 4,
1999. The results of operations of JLA Credit are included in the Company's
consolidated results of operations from February 4, 1999.
Gains on sale of leases decreased to $5.2 million in fiscal 1999 from
$7.6 million in fiscal 1998, a decrease of $2.4 million (31%) because, through
March 31, 1999, the Company structured a substantial part of its lease financing
42
<PAGE>
transactions, other than warehouse revolving lines of credit and certain
financings relating to JLA Credit, to meet the criteria for treatment as sales
under generally accepted accounting principles. Thus, for all such transactions
completed through that date, the Company recorded gains on sales and
terminations. On April 1, 1999, the Company elected to alter the structure of
its future securitizations to retain leases that it securitizes as investments
on its balance sheet and record the related securitization indebtedness on its
balance sheet as debt for accounting purposes. The Company also modified its
existing $100.0 million commercial paper conduit facility so that it would
retain leases as investments and record related securitization indebtedness as
debt on its balance sheet. The primary effect of the change in securitization
structure and the modification of its commercial paper conduit facility is that
the Company will recognize income over the lives of the lease receivables it
securitizes or under its commercial paper conduit facility rather than recognize
an immediate gain upon the sale of the lease receivables. The Company's cash
flow, which is influenced by the advance rates and discount rates provided for
by the commercial paper conduit facilities, was unaffected by these
modifications.
The Company currently has two sales facilities, one with IBM Credit
and one with IBM Canada, that relate to equipment leases generated through those
companies. As a result of the requirements of IBM Credit and IBM Canada, these
facilities continue to be structured in a way that requires the Company to treat
transactions under the facilities as sales for accounting purposes. All leases
generated through IBM Credit and IBM Canada must be sold to these facilities.
Interest and fee income totaled $33.8 million in fiscal 1999, an
increase of $30.3 million (871%) over fiscal 1998, of which $22.1 million was
attributable to JLA Credit and the balance to the increase in lease
originations.
During the quarter ended June 30, 1998, the Company began to retain for
its own account the residual interests of leases sold. Prior to this quarter,
the Company had sold its residual interests, primarily for promissory notes
(aggregating $15.0 million at September 30, 1999). 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, 1999,
estimated unrealized residuals approximated $31.2 million.
Equipment leasing costs and expenses increased $7.9 million (150%) to
$13.2 million in the year ended September 30, 1999, as compared to the prior
year. The increase was primarily a result of the acquisition of JLA Credit ($3.1
million) and higher operating costs associated with the increase in lease
originations.
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
During fiscal 1998, the Company originated 8,832 leases having a cost
of $92.6 million, as compared to 3,241 leases having a cost of $34.6 million
during the prior year. During that period, the Company sold leases with a book
43
<PAGE>
value of approximately $78.4 million 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 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.
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. These
notes aggregated $14.1 million in principal amount at September 30, 1998. At
September 30, 1998, unrealized residuals were $6.3 million.
Results of Operations: Energy
On September 28, 1998 and August 31, 1999, the Company acquired the
Atlas Group and Viking Resources, respectively. Results of operations for the
respective years of acquisition include the operations of these companies from
their respective dates of acquisition and, accordingly, are not comparable to
the similar periods of the prior years.
The following tables set forth certain information relating to revenues
recognized and costs and expenses incurred, daily production volumes, average
sales prices, production costs as a percentage of oil and gas sales, and
production cost per equivalent unit in the Company's energy and energy finance
operations during the periods:
44
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenues:
Production.......................................................... $ 11,633 $ 4,682 $3,936
Well drilling....................................................... 32,421 - -
Well services....................................................... 9,430 2,052 1,672
Gain on sales of assets............................................. 1,009 - -
-------- ------- ------
$ 54,493 $ 6,734 $5,608
======== ======= ======
Costs and expenses:
Exploration and production.......................................... $ 5,585 $ 2,525 $1,823
Well drilling....................................................... 26,312 - -
Well services....................................................... 6,580 1,136 909
-------- ------- ------
$ 38,477 $ 3,661 $2,732
======== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenues:
Gas (1)............................................................. $10,296 $3,944 $3,178
Oil................................................................. 1,239 692 705
Production volumes:
Gas (thousands of cubic feet ("mcf")/day)(1)........................ 11,897 4,069 3,364
Oil (barrels ("bbls")/day).......................................... 233 132 98
Average sales price:
Gas (per mcf)....................................................... $ 2.37 $ 2.66 $ 2.59
Oil (per bbl)....................................................... $ 14.57 $14.38 $19.68
Production costs:
As a percent of sales............................................... 43% 43% 42%
Gas (per mcf)....................................................... $ 1.04 $ 1.14 $ 1.13
Oil (per bbl)....................................................... $ 6.21 $ 6.84 $ 6.80
- ----------
(1) Excludes sales of residual gas and sales to landowners.
</TABLE>
45
<PAGE>
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
Natural gas revenues increased $6.4 million (161%) in fiscal 1999,
compared to the same period of the prior fiscal year, due to a 192% increase in
production volumes partially offset by an 11% decrease in the average sales
price of natural gas. Oil revenues increased $547,000 (79%) for fiscal 1999 as
compared to fiscal 1998, due to a 77% increase in production volumes in fiscal
1999. Both gas and oil volumes were favorably impacted by the acquisition of the
Atlas Group at the end of fiscal 1998 and Viking Resources in August 1999.
Without the additions of the Atlas Group and Viking Resources, gas and
oil revenues would have been $3.6 million and $853,000 respectively, resulting
in an overall decrease of $182,000 (4%) compared to 1998. Average daily gas
production volumes would have been 3,498 mcf, a 3% decrease compared to 1998.
The average sales price per mcf would have decreased to $2.50. Average daily oil
production would have increased 39 barrels (29%) over 1998, offset by a 5%
decrease in the average sales price per barrel to $13.67.
Well drilling revenues and expenses in fiscal 1999 represents the
billing and costs associated with the completion of 145 wells for partnerships
sponsored by Atlas America, which acquired the Atlas Group at the end of fiscal
1998. Well services revenues and related costs increased significantly as a
result of an increase in the number of wells operated due to the acquisition of
the Atlas Group and Viking Resources.
Production costs (excluding exploration costs of $560,000) increased
$3.0 million (149%) to $5.0 million in the year ended September 30, 1999, 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.
Amortization of oil and gas property costs as a percentage of oil and
gas revenues was 25% in the year ended September 30, 1999 compared to 17% in the
year ended September 30, 1998. 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.
Years Ended September 30, 1998 Compared to Year Ended September 30, 1997
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.
Production costs (excluding exploration costs of $503,000) 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.
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.
Results of Operations: Other Revenues, Costs and Expenses
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
Interest and other income decreased $1.5 million (29%) to $3.6 million
in the year ended September 30, 1999, as compared to the year ended September
30, 1998, as a result of the following:
(i) The substantial decreases in the Company's uncommitted cash
balances and the temporary investment of such balances during the
year decreased interest income by $1.9 million in fiscal 1999 as
compared to fiscal 1998.
46
<PAGE>
(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). There were no similar reimbursements in fiscal 1999.
(iii) The above increases were partially offset by the receipt of
dividend income of $1.7 million from Resource Asset in fiscal
1999, as compared to $801,300 in fiscal 1998.
General and administrative expenses increased $486,000 (11%) to $4.9
million in the year ended September 30, 1999, as compared to $4.4 million the
year ended September 30, 1998, 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 $16.5 million (96%) to $33.7 million in the
year ended September 30, 1999 as compared to $17.2 million in the year ended
September 30, 1998, primarily reflecting an increase in borrowings as a result
of the acquisition of JLA Credit ($11.6 million) and the election on April 1,
1999 by the Company to alter the structure of its future securitizations to
retain leases it securitizes as investments on its balance sheet and to record
the related securitization indebtedness on its balance sheet as debt.
Provision for possible losses increased $2.7 million (140%) to $4.6
million in the year ended September 30, 1999 as compared to $1.9 million in the
year ended September 30, 1998. The increase was primarily the result of
increases in the provision for possible losses relating to equipment leasing
(to $4.1 million). The increased provision reflects the increase in lease
originations.
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 decreased to 32.5% in the year ended September
30, 1999 from 33% in the year ended September 30, 1998. The fiscal 1999 decrease
resulted from an increase in the generation of depletion for tax purposes due to
the Atlas acquisition and an increase in tax credits. These increases in tax
benefits were partially offset by an increase in state income taxes.
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Interest and other income increased $4.0 million (386%) to $5.0 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
Resource Asset 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 $11.9 million (226%) to $17.2 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.
47
<PAGE>
Provision for possible losses increased $1.3 million (195%) to $1.9
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 $505,000).
The increased provisions reflect the increases in both lease originations and
investments in real estate loans.
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.
Liquidity and Capital Resources
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
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 leasiing 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 small
ticket leasing and real estate finance businesses. However, through its
acquisitions of the Atlas Group and Viking Resources, 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 the continued
depressed price of the Company's common stock, the Company anticipates that
generating additional capital resources on terms similar to those available to
it during fiscal 1997 and 1998 may be restricted. Accordingly, the Company's
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.
The following table sets forth certain information relating to the
Company's sources and (uses) of cash for the years ended September 30, 1999,
1998, and 1997:
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Provided by (used in) operations....................................... $ 18,861 $ (2,475) $ 7,023
(Used in) investing activities......................................... (197,398) (84,040) (66,071)
Provided by financing activities....................................... 143,380 106,341 124,173
Provided by (used in) discontinued operations.......................... 775 (12,080) -
--------- --------- --------
(Decrease) increase in cash and cash equivalents....................... $ (34,382) $ 7,746 $ 65,125
========== ======== ========
</TABLE>
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
The Company had $42.6 million in cash and cash equivalents on hand at
September 30, 1999, as compared to $77.0 million at September 30, 1998. The
Company's ratio of earnings to fixed charges was 2.2 to 1.0 in the year ended
September 30, 1999 as compared to 3.6 to 1.0 in the year ended September 30,
1998.
Cash provided by operating activities in fiscal 1999 increased $21.3
million as compared to fiscal 1998, primarily as a result of the following:
decreases in gains on asset dispositions of $27.8 million offset by an increase
in accretion (net of interest income) of $4.3 million.
48
<PAGE>
The Company's cash used in investing activities increased $113.4
million in the year ended September 30, 1999 as compared to the year ended
September 30, 1998 as a result of the following:
(i) In small ticket leasing, cash used increased $93.9 million
primarily as a result of an increase of $212.5 million in cash
used to acquire equipment for lease. The Company also used $18.2
million to acquire JLA Credit. This increase in cash used was
partially offset by an increase in proceeds from the sale of
assets ($27.8 million) and an increase in payments in excess of
revenue recognized ($109.8 million).
(ii) In energy, cash used increased $30.5 million as a result of the
participation in the drilling of 142 wells through Atlas ($11.5
million) and cash used to acquire Viking Resources ($15.9
million).
(iii) The investment of $12.0 million in fiscal 1998 in Resource Asset.
(iv) In real estate finance, cash used increased $1.0 million as a
result of a decrease of $247.4 million in principal payments and
proceeds from the sale of loans, offset by a $245.7 decrease in
investments in real estate loans and ventures.
The Company's cash flow provided by financing activities increased
$37.0 million during the year ended September 30, 1999 as compared to the year
ended September 30, 1998. This increase resulted from a $141.6 million increase
in the Company's net borrowings, partially offset by a decrease of $118.5
million in proceeds from issuance of stock.
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
The Company had $77.0 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 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 $9.5
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 $2.0
million, respectively; increases in gains on asset dispositions, accretion of
discount and collection of interest income of $26.4 million, $2.4 million and
$2.3 million respectively; increases in operating assets of $2.1 million; and
decreases in operating liabilities of $4.4 million.
The Company's cash used in investing activities increased $18.0 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 real estate finance, 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 $275.7 million and $34.3 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 8,832 and 3,241 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's cash flow provided by financing activities decreased
$17.8 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.
Dividends
In the years ended September 30, 1999, 1998 and 1997, $2.9 million,
$2.3 million and $1.4 million were paid in dividends, respectively. The Company
has paid regular quarterly dividends since August 1995.
49
<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 interest 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. The Company's year 2000
compliance review included assessing its information technology and
non-information technology systems (collectively, the "Systems"), contacting
third party vendors, customers and other suppliers regarding their year 2000
compliance, testing the Systems and remediating any problems.
Based upon a recent assessment by the Company, the Company has year
2000 capable Systems for its real estate finance, equipment leasing and energy
operations.
In December 1998, the Company's equipment leasing subsidiary purchased
a new telephone system and a building security system which were developed to be
year 2000 compliant. Because all of its computer systems and software
applications have been purchased from third parties, it has obtained
certifications from all of its major software vendors as to the year 2000
compliance of their products. Fidelity Leasing also tested all of its servers
and core operating systems. Fidelity Leasing booked leases that expire in and
after the year 2000 into the system with no unresolved problems in its booking
system. As a result, the Company believes that its equipment leasing servers and
operating systems are year 2000 compliant.
The Company's real estate finance and energy operations have completed
an assessment of all systems that would be affected by the year 2000 issue if
not modified. These operations have completed all remediation disclosed by the
assessment and related testing.
The Company has initiated formal communications with all customers,
equipment vendors and other suppliers that are material to its operations. It
has received written assurances from all of its significant customers and third
party service providers responding to its year 2000 inquiries. The responses
indicate that these third parties expect, at this time, to be compliant by the
year 2000 based on their progress to date. In addition, the Company verified the
year 2000 readiness of much of its specific operations equipment, software, and
hardware through vendor published product bulletins. These assurances provide
comfort that its third party vendors are aware of and are addressing their year
2000 issues, but they cannot guarantee the Company that they will not encounter
year 2000 problems that could negatively impact the Company's business.
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.
50
<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 39 of the
41 loans held in the Company's portfolio as of September 30, 1999. The
presentation, for each category of information, aggregates the loans by their
maturity dates for maturities occurring in each of the fiscal years 2000 through
2004 and separately aggregates the information for all maturities arising after
the 2004 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 Years Ended September 30,
2000 2001 2002 2003 2004 Thereafter Totals
----------- ----------- ----------- ----------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding loan
receivable balances (to
the Company's interest) $18,838,762 $18,896,691 $41,693,266 $56,660,110 n/a $114,434,930 $250,523,759
Carried cost of loans
(fixed rate) $8,338,913 $4,630,032 $25,028,508 $19,910,578 n/a $78,011,672 $135,919,703
Average stated interest
rate (fixed rate) 12.30% 9.54% 9.68% 8.98% n/a 12.26%
Carried cost of loans
(variable rate) $790,887 $402,235 $1,390,176 $724,901 n/a $4,784,639 $8,092,928
Average stated interest
rate (variable rate) 9.00% 7.61% 12.65% 9.00% n/a 7.79%
Average interest payment
rate (2) (2) (2) (2) n/a (2)
Principal balance of
related senior lien
interests (3) $9,633,295 $9,579,017 $5,324,240 $55,706,265 n/a $190,114,147 $270,356,964
Average interest rate of
senior lien interests
(fixed rate) 8.43% 9.41% 9.58% 8.47% n/a 8.00%
</TABLE>
- ----------
(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 and, accordingly, depend upon future
events not determinable as of the date hereof.
(3) Maturity dates for senior lien interests are as follows:
<TABLE>
<CAPTION>
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, 1999
------------------ --------------------- -------------------------
<S> <C> <C>
2000 2000 $ 7,537,295
2002 2,096,000
2001 2000 2,000,000
2001 5,209,000
2007 2,370,017
2002 2003 5,324,240
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
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, 1999
------------------ --------------------- -------------------------
<S> <C> <C>
2003 2003 $ 18,913,979
2006 2,174,982
2008 34,620,304
2004 2004 None
Thereafter 2001 2,010,000
2003 3,564,140
2004 4,434,594
2008 142,565,162
2009 29,797,344
2010 5,718,911
2014 2,023,996
------------
Total $270,356,964
============
</TABLE>
The following table sets forth information concerning two of the 41
loans held in the Company's portfolio at September 30, 1999 that the Company
believes may be deemed to be interest rate sensitive.
<TABLE>
<CAPTION>
<S> <C> <C>
Outstanding receivable balance (to the
Company's interest)........................ $ 58,927,231 $39,276,234
Carried cost of loan........................ $ 71,272,533(1) $36,350,392
Stated interest rate........................ 10.647% Federal funds rate plus 87.5
basis points plus 200 basis
points default interest
Interest payment rate....................... Net cash flow from property Net cash flow from property
underlying loan underlying loan
Principal balance of related senior lien
interest.................................... $ 49,355,889 $59,160,000
Stated interest rate (senior lien interest). LIBOR plus 300 basis points LIBOR plus 250 basis points
(8.875% maximum rate)
Current interest payment rate (senior lien
interest)................................... 8.25% 7.875%
Maturity date (senior lien interest)........ 03/30/02 10/01/01
</TABLE>
- ------------------
(1) The carried cost of this loan includes $60.0 million of senior lien
indebtedness which was repaid in October 1999.
Interest Rate Risk and Hedging. Fidelity Leasing's commercial paper
conduit facilities, which are at variable rates of interest, require Fidelity
Leasing to enter into interest rate swap agreements for the benefit of the
purchaser of the leases. Because the cost of funding under the commercial paper
conduit facility is floating and the rental stream is fixed, an interest rate
swap is needed to hedge the resulting risk. Under an interest rate swap, the
related special purpose entity agrees to pay a fixed rate of interest and
receive payment of a floating rate from a counterparty. If short-term interest
rates increase, then the fixed rate of interest the special purpose entity is
paying under the swap will be less than the short-term rate it is receiving,
resulting in a payment to the special purpose entity. This payment will be used
to offset the higher borrowing costs under the commercial paper borrowings. If
short-term rates fall, then the fixed rate of interest the special purpose
entity is paying under the swap will be higher than the short-term rate it is
receiving, resulting in a payment to the counterparty. Therefore, the interest
rate swap has the effect of fixing the interest rate of the borrowings during
the securitization period. Fidelity Leasing entered into similar interest rate
swap agreements in connection with the C$15.0 million line of credit from the
Bank of Montreal and the $4.5 million term loan from Commerce Bank. Fidelity
Leasing intends to hold both of these swaps and the assets in these facilities
for their entire lives.
52
<PAGE>
Fidelity Leasing also uses interest rate swaps from commercial paper
conduit facilities to manage interest rate risk resulting from the term note
securitizations. This risk arises because benchmark fixed rates of interest,
including yields on treasury bonds and asset-backed bonds, are subject to normal
market fluctuations. Consequently, it is possible that fixed interest rates
payable on asset-backed securities may have increased since the time a lease was
originated, and that the prevailing market rate, and thus the rate paid on the
term note securitizations, may approach or exceed the implicit interest rate of
the leases securitized. Interest rate swaps can mitigate this risk.
An interest rate swap permits a special purpose entity to terminate a
swap in connection with the transfer of leases from a commercial paper conduit
facility to a term note securitization. Upon termination, the swap counterparty
determines the amount due from or owed to the special purpose entity in order to
terminate the swap. The amount of such payment is based on the prevailing market
rates for interest rate swaps. For example, if benchmark fixed rates of interest
have increased significantly since the commencement of the terminated swap, and
all other relevant factors have remained constant, the counterparty would most
likely be required to make a payment to the special purpose entity upon
termination. This payment would, in part, offset the negative impact of
securitizing the lease in a term note securitization at a time when fixed
interest rates for asset-backed securities have increased when compared to
benchmark fixed interest rates prevailing at the time the lease was originated.
In contrast, if benchmark fixed rates of interest have decreased significantly
since the commencement of the terminated swap and all other relevant factors
have remained constant, the special purpose entity would most likely be required
to make a payment to the counterparty upon termination. This payment by the
special purpose entity would have the effect of offsetting the otherwise
positive impact of securitizing the lease in a lower fixed interest rate
environment.
Interest rate hedge agreements outstanding at September 30, 1999 for
Fidelity Leasing's commercial paper conduit securitizations had an aggregate
notional value of approximately $248.1 million, required payments based on fixed
rates ranging from 5.2% to 6.0% and had a positive estimated fair market value
of approximately $1.2 million.
Interest Rate Sensitivity. The table below provides information as of
September 30, 1999 about the Company's derivative financial instruments and
other financial instruments that are sensitive to changes in interest rates,
including interest rate swaps and debt obligations. For debt obligations, the
table presents principal cash flows and related weighted average interest rates
by expected maturity dates. For interest rate swaps, the table presents notional
amounts and weighted average interest rates by expected contractual maturity
dates. Notional amounts are used to calculate the contractual payments to be
exchanged under the contract. Weighted average variable rates are based on LIBOR
as of September 30, 1999.
<TABLE>
<CAPTION>
Expected Maturity Date
------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Liabilities:
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate....................$114,158,100 $100,845,186 $49,933,477 $19,925,985 $6,744,338 $5,799,922 $297,407,008
Average interest rate......... 7.08% 7.62% 7.20% 6.36% 6.41% 6.60% 7.21%
Variable (commercial paper)...$ 44,882,938 $ 28,007,368 $21,935,810 $12,280,497 $7,832,244 $1,150,678 $116,089,535
Average interest rate......... 6.87% 7.01% 7.01% 7.04% 6.89% 6.88% 6.95%
Interest Rate Derivatives:
Interest rate swaps:
Variable to fixed.............$ 35,105,125 $ 34,807,368 $28,462,910 $15,894,706 $10,386,428 $1,565,689 $126,222,226
Average pay rate................ 6.24% 6.33% 6.28% 6.32% 6.26% 6.64% 6.29%
Average receive rate............ 5.40% 5.51% 5.46% 5.49% 5.41% 5.78% 5.46%
</TABLE>
53
<PAGE>
The following table sets forth certain information regarding the
Company's debt as of September 30, 1999, excluding debt relating to the
Company's equipment leasing operations discussed above.. For further information
regarding the Company's 12% Notes and credit facilities, see Item 1
"Business-Sources of Funds." The Company's interest-bearing assets are discussed
above in this item.
<TABLE>
<CAPTION>
Maturity Date
For the Year Ended September 30,
--------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate - - - - $101,400,000 - $101,400,000
Average interest
rate - - - - 12.00% - -
Variable rate $10,332,000 $20,833,000 - $40,810,000 - - $ 71,975,000
Average interest
rate 9.00% 8.28% - 7.87% - - -
</TABLE>
54
<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, 1999 and 1998, and
the related consolidated statements of income, comprehensive income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1999. 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, 1999 and 1998, and
the consolidated results of their operations and cash flows for each of the
three years in the period ended September 30, 1999, in conformity with generally
accepted accounting principles.
We have also audited Schedule IV as of September 30, 1999. 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 3, 1999
55
<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................................... $ 42,643 $ 77,025
Accounts and notes receivable and other prepaid expenses..................... 18,977 9,328
Investments in real estate loans (less allowance for
possible losses of $1,405 and $1,191)..................................... 250,231 202,050
Investments in real estate ventures.......................................... 18,159 1,781
Investments in leases and notes receivable (less allowance for
possible losses of $10,017 and $1,602)................................... 401,461 24,977
Investment in Resource Asset Investment Trust................................ 9,300 11,912
Property and equipment:
Oil and gas properties and equipment (successful efforts)................. 78,923 44,516
Gas gathering and transmission facilities................................. 18,061 6,751
Other..................................................................... 12,198 9,072
---------- -----------
109,182 60,339
Less - accumulated depreciation, depletion and amortization............... (21,213) (16,915)
----------- ------------
Net property and equipment.......................................... 87,969 43,424
Deferred income taxes........................................................ - 817
Other assets (less accumulated amortization of $6,058 and $3,112)............ 72,647 53,038
---------- -----------
$ 901,387 $ 424,352
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Warehouse debt............................................................ $ 15,291 $ 5,166
Non recourse debt......................................................... 439,943 31,975
Senior debt............................................................... 101,400 104,400
Other debt ............................................................... 21,188 3,905
---------- -----------
Total debt.......................................................... 577,822 145,446
Other liabilities:
Accounts payable.......................................................... 16,751 12,108
Accrued liabilities....................................................... 27,395 24,078
Estimated income taxes.................................................... 2,563 6,242
Deferred income taxes..................................................... 13,069 -
---------- -----------
Total liabilities................................................... 637,600 187,874
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................ 244 230
Accumulated other comprehensive income.................................... (1,764) (43)
Additional paid-in capital................................................ 221,084 208,588
Less treasury stock, at cost.............................................. (17,002) (17,890)
Less loan receivable from Employee Stock Ownership Plan .................. (1,488) (1,591)
Retained earnings......................................................... 62,713 47,184
---------- -----------
Total stockholders' equity.......................................... 263,787 236,478
---------- -----------
$ 901,387 $ 424,352
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
56
<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
REVENUES
Real estate finance........................................................ $ 45,907 $ 55,834 $ 19,144
Equipment leasing.......................................................... 41,129 13,561 7,162
Energy..................................................................... 54,493 6,734 5,608
Interest and other......................................................... 3,560 5,013 1,031
---------- ----------- -----------
145,089 81,142 32,945
COSTS AND EXPENSES
Real estate finance........................................................ 3,102 1,801 1,069
Equipment leasing.......................................................... 13,156 5,263 3,822
Energy..................................................................... 38,477 3,661 2,732
General and administrative................................................. 4,859 4,373 2,851
Depreciation, depletion and amortization................................... 7,643 1,918 1,614
Interest................................................................... 33,696 17,216 5,273
Provision for possible losses.............................................. 4,617 1,927 653
---------- ----------- -----------
105,550 36,159 18,014
---------- ----------- -----------
Income from continuing operations before income taxes,
extraordinary item and cumulative effect of a change in
accounting principle.................................................... 39,539 44,983 14,931
Provision for income taxes................................................. 12,847 14,811 3,980
---------- ----------- -----------
Income from continuing operations before extraordinary item
and cumulative effect of a change in accounting principle............... 26,692 30,172 10,951
Discontinued operations:
Loss from operations of subsidiary, net of taxes of $2,190 and $1,443... (7,687) (2,800) -
Loss on disposal of subsidiary, net of taxes of $148.................... (275) - -
----------- ----------- -----------
18,730 27,372 10,951
Extraordinary item, net of taxes of $142 and $112.......................... 299 239 -
Cumulative effect of change in accounting principle, net of taxes of $271.. (569) - -
----------- ----------- -----------
Net income................................................................. $ 18,460 $ 27,611 $ 10,951
========== =========== ===========
Net income per common share - basic:
From continuing operations.............................................. $ 1.21 $ 1.81 $ 1.05
Discontinued operations................................................. (.36) (.17) -
Extraordinary item...................................................... .01 .01 -
Cumulative effect of a change in accounting principle................... (.03) - -
----------- ----------- -----------
Net income per common share - basic........................................ $ .83 $ 1.65 $ 1.05
========== =========== ===========
Weighted average common shares outstanding................................. 22,108 16,703 10,434
========== =========== ===========
Net income per common share - diluted:
From continuing operations.............................................. $ 1.17 $ 1.75 $ .84
Discontinued operations................................................. (.35) (.16) -
Extraordinary item...................................................... .01 .01 -
Cumulative effect of a change in accounting principle................... (.02) - -
----------- ----------- -----------
Net income per common share - diluted................................... $ .81 $ 1.60 $ .84
========== =========== ===========
Weighted average common shares............................................. 22,803 17,268 13,074
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
57
<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income................................................................. $ 18,460 $ 27,611 $ 10,951
Other comprehensive income:
Unrealized loss on investment, net of taxes of $888 and $22............. (1,724) (43) -
Foreign currency translation adjustment................................. 3 - -
---------- ----------- -----------
(1,721) (43) -
----------- ------------ -----------
Comprehensive income....................................................... $ 16,739 $ 27,568 $ 10,951
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
58
<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1998, AND
1998 (in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Common stock Other Additional Treasury Stock
---------------------------- Comprehensive Paid-In ----------------------------
Shares Amount Income Capital Shares Amount
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996............... 2,047,209 $ 20 $ - $ 21,761 (152,448) $ (2,699)
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....................
Net income................................
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997............... 5,410,645 $ 54 $ - $ 56,787 (709,048) $ (13,664)
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..............................
Tax benefit of stock option plan.......... 405
Cash dividends ($.13 per share)...........
Repayment of ESOP loan....................
Net income................................
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998............... 22,969,108 $ 230 $ (43) $ 208,588 (1,109,151) $ (17,890)
Treasury shares issued.................... (498) 47,719 1,001
Issuance of common stock.................. 1,416,171 14 12,994
Treasury shares acquired.................. (10,000) (113)
Other comprehensive income:
Net unrealized loss on investment...... (1,724)
Foreign currency translation
adjustments............................ 3
Cash dividends ($.13 per share)...........
Repayment of ESOP Loan....................
Net income................................
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999............... 24,385,279 $ 244 $ (1,764) $ 221,084 (1,071,432) $ (17,002)
========== ========= ========== ========= =========== ===========
</TABLE>
<PAGE>
[RESTUB]
<TABLE>
<CAPTION>
ESOP Totals
Loan Retained Stockholders'
Receivable Earnings Equity
--------------------------------------------
<S> <C> <C> <C>
Balance, September 30, 1996............... $ (417) $ 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 64
Net income................................ 10,951 10,951
- ---------------------------------------------------------------------------------------
Balance, September 30, 1997............... $ (353) $ 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) (1,302)
Tax benefit of stock option plan.......... 405
Cash dividends ($.13 per share)........... (2,297) (2,297)
Repayment of ESOP loan.................... 64 64
Net income................................ 27,611 27,611
- ---------------------------------------------------------------------------------------
Balance, September 30, 1998............... $ (1,591) $ 47,184 $ 236,478
Treasury shares issued.................... 503
Issuance of common stock.................. 13,008
Treasury shares acquired.................. (113)
Other comprehensive income:
Net unrealized loss on investment...... (1,724)
Foreign currency translation
adjustments............................ 3
Cash dividends ($.13 per share)........... (2,931) (2,931)
Repayment of ESOP Loan.................... 103 103
Net income................................ 18,460 18,460
- ---------------------------------------------------------------------------------------
Balance, September 30, 1999............... $ (1,488) $ 62,713 $ 263,787
========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
59
<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................. $ 18,460 $ 27,611 $ 10,951
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization................................ 7,643 1,918 1,614
Amortization of discount on senior notes and deferred finance costs..... 1,393 1,045 657
Amortization of initial direct costs.................................... 1,077 - -
Provision for possible losses........................................... 4,617 1,927 653
Loss from operations of discontinued subsidiary......................... 7,687 2,800 -
Loss from disposal of discontinued subsidiary........................... 275 - -
Deferred income taxes................................................... (639) (4,317) (2,206)
Accretion of discount................................................... (18,965) (6,520) (4,124)
Collection of interest.................................................. 13,369 5,229 2,932
Extraordinary gain on debt extinguishment............................... (299) (239) -
Cumulative effect of change in accounting principle..................... 569 - -
Gain on asset dispositions.............................................. (9,969) (37,809) (11,375)
Property impairments and abandonments................................... (6) 260 38
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable and other assets............. (3,687) 1,107 (1,038)
(Decrease) increase in accounts payable and other liabilities........... (2,664) 4,513 8,921
------------ ----------- -----------
Net cash provided by (used in) operating activities of continuing operations 18,861 (2,475) 7,023
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash (paid) acquired in business acquisitions.......................... (34,204) 10,058 (1,226)
Proceeds from sale of subsidiary........................................... 4,017 - -
Cost of equipment acquired for lease....................................... (305,060) (92,648) (34,567)
Capital expenditures....................................................... (14,376) (3,129) (1,791)
Principal payments on notes receivable..................................... 28,422 76,988 9,031
Proceeds from sale of assets............................................... 106,105 275,698 34,264
Decrease (increase) in other assets........................................ 1,858 (13,279) (3,319)
Investments in real estate loans and ventures.............................. (97,594) (343,270) (69,857)
Increase in other liabilities.............................................. 160 2,026 -
Payments received in excess of revenue recognized on leases................ 113,274 3,516 1,394
----------- ----------- -----------
Net cash used in investing activities of continuing operations............. (197,398) (84,040) (66,071)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings................................................................. 244,578 16,147 129,320
Principal payments on borrowings........................................... (153,331) (31,630) (22,148)
Net change in warehouse borrowings......................................... 15,291 10,165 -
Securitization borrowings.................................................. 124,107 - -
Payments on securitization borrowings...................................... (83,766) - -
Dividends paid............................................................. (2,931) (2,297) (1,404)
Purchase of treasury stock................................................. (113) (4,435) -
Repayment of ESOP loan..................................................... 41 - -
Increase in other assets................................................... (1,571) (1,220) (5,376)
Proceeds from issuance of stock............................................ 1,075 119,611 23,781
----------- ----------- -----------
Net cash provided by financing activities of continuing operations......... 143,380 106,341 124,173
----------- ----------- -----------
Net cash provided by (used in) discontinued operations..................... 775 (12,080) -
----------- ------------ -----------
(Decrease) increase in cash and cash equivalents........................... (34,382) 7,746 65,125
Cash and cash equivalents at beginning of year............................. 77,025 69,279 4,154
----------- ----------- -----------
Cash and cash equivalents at end of year................................... $ 42,643 $ 77,025 $ 69,279
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
60
<PAGE>
RESOURCE AMERICA, INC.
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 through its subsidiary Resource Properties,
Inc. ("RPI") and its subsidiaries; (2) equipment leasing through its subsidiary,
Resource Leasing, Inc. ("RLI") and its subsidiary Fidelity Leasing, Inc.
("Fidelity Leasing") and its subsidiaries; and (3) energy operations, including
natural gas and oil production through its subsidiaries Atlas America, Inc.
("Atlas"), Resource Energy, Inc.; Viking Resources Corporation ("Viking
Resources"), and their subsidiaries.
The markets for the Company's business lines are as follows: in real
estate finance, the Company obtains commercial mortgage loans on properties
located throughout the United States from various financial institutions and
other organizations; in equipment leasing, the Company markets its equipment
leasing products throughout North America 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 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 ability to acquire commercial mortgage loans will be
further dependent on the availability of such loans on terms acceptable to the
Company. Such availability 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 anticipated values.
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 oil and gas partnerships in which the
Company has an interest. All material intercompany transactions have been
eliminated.
Reclassifications
As more fully described in Note 12, on February 4, 1999 Fidelity
Leasing acquired JLA Credit Corporation ("JLA"). In connection with the
acquisition of JLA, the Company obtained an asset backed commercial paper
borrowing facility ("ABS") to repay JLA bank debt and an additional ABS facility
to fund leases originated by JLA. The sale of leases by JLA to its special
purpose subsidiaries for securitization purposes are accounted for as
securitized financings and, accordingly, the leases are retained on JLA's
balance sheet as investments and the funds received on the securitizations are
shown as debt. In addition on April 1, 1999, the Company elected to alter the
structure of its future securitizations to be consistent with JLA and to retain
leases that it securitizes as investments on its balance sheet and the funds
received on the related securitizations as debt. As a result of the magnitude of
the above, the composition of the Company's consolidated balance sheet has
changed significantly. The Company believes that, consistent with the
presentation of other specialty finance companies, it is more appropriate to
present its consolidated balance sheet on a non-classified basis, which does not
segregate assets and liabilities into current and non-current categories.
61
<PAGE>
The consolidated balance sheet at September 30, 1998 has been
reclassified to conform with this new presentation. Certain other
reclassifications have also been made to the fiscal years 1998 and 1997
consolidated financial statements to conform with the fiscal 1999 presentation.
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.
Residual Values
Unguaranteed residual value represents the estimated amount to be
received at lease termination from lease extensions or disposition of the leased
equipment of Fidelity Leasing, the Company's small ticket equipmentleasing
subsidiary. Because of the relatively short time since Fidelity Leasing's
inception, its experience with regard to the realization of residuals is
limited. Accordingly, the estimates of residual values are to a substantial
degree based upon available industry data and senior management's prior
experience with respect to comparable equipment. The estimated residual values
are recorded as a component of investments in leases on a net present value
basis. Residual values are reviewed periodically to determine if the current
estimate of the equipment's fair market value appears to be below its recorded
estimate. If required, residual values are adjusted downward to reflect adjusted
estimates of fair market values. Generally accepted accounting principles do not
permit upward adjustments to residual values.
Allowance for Possible Losses
The Company maintains an allowance for possible losses for its
equipment leasing and commercial real estate operations. In connection with
payments due under leases held in the Company's portfolio, its retained interest
in leases securitized or sold and its recourse obligation for non-performing
leases sold, management's estimate of the allowance for uncollectable lease
contracts, is based on factors which include the Company's historical loss
experience, an analysis of contractual 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 in default and for which management has
determined the probability of collection to be remote. Recoveries on leases
previously charged off are restored to the allowance.
In establishing its allowance for possible losses, the Company's
commercial real estate operation considers the historic performance of the
Company's loan portfolio, characteristics of the loans in the portfolio and the
properties underlying those loans, 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 industry.
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.
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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 ("Resource Asset"), 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.
Comprehensive Income
Statement of Financial Accounting Standards No. 130 ("SFAS 130")
requires disclosure of comprehensive income and its components. Comprehensive
income includes net income and all other changes in the equity of a business
during a period from transactions and other events and circumstances from
non-owner sources. These changes, other than net income, are referred to as
"other comprehensive income" and for the Company include changes in the fair
value of marketable securities and foreign currency translation adjustments.
Operating Segments
Statement of Financial Accounting Standards No. 131 ("SFAS 131")
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the Company's chief operating decision
makers in deciding how to allocate resources and in assessing performance. This
requirement is effective for the fiscal year ended September 30, 1999 (see Note
17).
New Accounting Standard
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging." SFAS 133 will require the Company to recognize all
derivatives as either assets or liabilities in its consolidated balance sheet
and to measure those instruments at fair value. The Company is required to adopt
SFAS 133 effective October 1, 2000. The effect of adopting SFAS 133 on the
Company's consolidated financial position, results of operations and cash flows
will be dependent on the extent of future hedging activities and fluctuations in
interest rates.
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 and proved 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 proved
developed 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,
1999.
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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, 1999 and
1998 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.
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
the 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, 1999 and 1998 were:
<TABLE>
<CAPTION>
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Contracts acquired (including syndication network).................. $18,636 $11,383
Goodwill............................................................ 43,255 27,581
Deferred financing costs............................................ 5,842 4,312
Net assets of discontinued operations............................... 2,394 -
Net assets held for disposition..................................... 850 6,760
Other............................................................... 1,670 3,002
------- -------
$72,647 $53,038
======= =======
</TABLE>
Assets held for disposition at September 30, 1999 consists of a
building acquired in the Viking Resource's acquisition. Assets held for
disposition at September 30, 1998, consist of the assets held by a subsidiary of
The Atlas Group Inc. ("AGI") at the date of its acquisition by the Company. The
Company acquired AGI with the intent of disposing of the subsidiary, and
accordingly, valued these assets at their estimated realizable value at the date
of acquisition.
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 investments in real estate loans, because each loan is a unique
transaction involving a discrete property it is impractical to determine their
fair values. However, 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.
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<PAGE>
The following table provides information of other financial
instruments:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
-------- ----------
(in thousands)
<S> <C> <C>
Warehouse debt...................................................... $ 15,291 $ 15,291
Securitized term facilities......................................... 219,979 216,716
CP conduit facilities............................................... 93,213 92,013
Real estate finance................................................. 81,776 81,776
Energy.............................................................. 44,975 44,975
Senior debt......................................................... 101,400 85,176
Other debt.......................................................... 21,188 21,188
--------- ---------
$ 577,822 $ 557,135
========= =========
</TABLE>
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. At September 30, 1999, the Company had $10.0
million in deposits at Jefferson Bank, of which $9.1 million is over the FDIC
insurance limit. In addition, the Company had deposits of $33.3 million at 14
unaffiliated banks, of which $31.3 million are over the FDIC insurance limit. In
addition, the Company had cash equivalents of $1.8 million at two brokerage
firms which are uninsured. 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 and the portion retained based upon the fair value
of those respective portions on the date of sale. Gains on the financing of a
commercial mortgage loan only arise when the financing proceeds exceed the cost
of the mortgage loan financed. 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.
Prior to January 1, 1999, most of the Company's transactions involving
the sale of senior lien interests of its commercial mortgage loans were
structured to meet the criteria for sale under generally accepted accounting
principles. Effective January 1, 1999, the Company made a strategic decision to
structure future transactions so as to retain the entire commercial mortgage
loans originated on its balance sheet rather than selling senior lien interest
in such loans. Thus, for most of its transactions, as described above, that were
completed prior to such date, the Company recorded a gain on sale. The cash
flows available to the Company, which are generally based on the appraised value
and the cash flows of the property underlying the Company's commercial mortgage
loans, are unaffected by these modifications. The primary effect of this change
in structure is a shift from the recognition of an immediate gain on the sale of
a senior lien interest in a commercial mortgage loan receivable to the retention
of the full investment in the loan on the Company's books, the recognition of
interest income on that full value over the life of the loan and the recording
of debt for the proceeds from the senior lien interest and the recognition of
interest expense on that debt.
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<PAGE>
Equipment Leasing
Direct Financing Leases. The Company's lease transactions are
classified as direct financing leases (as distinguished from sales-type or
operating leases). Such 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 at 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 investments in leases consists of the sum of the total future
minimum lease payments receivable, and the estimated unguaranteed residual value
of leased equipment, less unearned lease 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. The Company discontinues
the recognition of revenue for leases for which payments are more than 180 days
past due. Initial direct costs incurred in consummating a lease are capitalized
as part of the investments in leases and amortized over the lease term as a
reduction in the yield.
Securitization of Leases. The Company sells a large percentage of the
leases it originates through securitization transactions and other structured
finance techniques. In a securitization transaction, the Company sells and
transfers a pool of leases to a bankruptcy remote entity (an "Intermediate
Purchaser"). Typically, the Intermediate Purchaser in turn simultaneously
transfers its interest in the leases to one or more investors in return for cash
equal to a percentage of the aggregate present value of the finance lease
receivables being sold. The Intermediate Purchaser typically retains a residual
interest in the pool of leases transferred to investors consisting of the excess
of collections on the leases and related equipment over the amount of
collections required by investors to recover the consideration paid for the
transfer plus an agreed upon rate of interest. The consideration received by the
Company for each pool of leases 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 June 1998, the Company established a new Commercial Paper ("CP") conduit
facility under which it began retaining the residual interests in the
securitized leases on its balance sheet for financial reporting purposes.
Currently, repayment of notes received by the Company from Intermediate
Purchasers in earlier sales 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 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 for securitizations accounted
for as sales are recorded at the date of sale in the amount by which the sales
price exceeds the carrying value of the underlying lease interests sold.
Subsequent to a sale, the Company has no remaining interest in the pool of the
leases or equipment except for residuals retained on post-March 1998 sales and
security interests retained in the lease pool sold when a note is received as
part of the sale proceeds. Under certain circumstances, the Company may have
recourse obligations to replace non-performing leases in the pool.
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<PAGE>
Energy Operations
The Company conducts certain energy 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. These Partnerships raise money from investors to drill oil and gas
wells. The Company retains a general partner interest and/or an overriding
royalty in the producing wells. The income from the Company's general partner
interest is recorded when the natural gas and oil are produced by the limited
partnership. The Company also contracts to drill the oil and gas wells owned by
the limited partnerships. The income from these drilling contracts is recorded
upon substantial completion of the well.
The Company is entitled to receive management fees and to share in the
Partnerships' revenue and costs and expenses according to the respective
Partnership agreements. Such fees are recognized as income and are included in
energy services.
The Company sells interests in oil and gas wells and retains therefrom
a working interest and/or overriding royalty in the producing wells. The income
from the working interests is recorded when the natural gas and oil are
produced.
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>
Years Ended September 30,
--------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest........................................................ $ 31,286 $ 17,677 $ 2,727
Income taxes.................................................... 11,334 12,762 2,094
Non-cash activities include the following:
Equity method investment in real estate venture received in
exchange for note receivable.................................... 16,331 - -
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(s)........................... 142,997 - 925
Stock issued in acquisition(s).................................... 12,437 32,034 315
Details of acquisitions:
Fair value of assets acquired................................... $ 363,755 $ 74,635 $ 2,466
Debt issued..................................................... (142,997) - (925)
Stock issued.................................................... (12,437) (29,534) (315)
Liabilities assumed............................................. (167,444) (45,968) -
Amounts due seller.............................................. (6,673) (9,191) -
------------ ------------ -----------
Net cash paid (acquired).......................................... $ 34,204 $ (10,058) $ 1,226
=========== ============ ===========
Disposal of business:
Net liabilities assumed by buyer.................................. $ 4,938 $ - $ -
=========== =========== ===========
</TABLE>
67
<PAGE>
Income Taxes
The Company records deferred tax assets and liabilities, as
appropriate, to account for, at currently enacted tax rates, the estimated
future tax effects attributable to temporary differences between the financial
statement and tax bases of assets and liabilities and 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
Basic earnings per share ("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.
The computations of basic and diluted earnings per share for each year
were as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Income from continuing operations before
extraordinary item and cumulative effect of a
change in accounting principle.................................. $ 26,692 $ 30,172 $ 10,951
Loss from discontinued operations................................. (7,962) (2,800) -
Extraordinary gain on early extinguishment of debt................ 299 239 -
Cumulative effect of a change in accounting principle............. (569) - -
------------ ----------- -----------
Net income........................................................ $ 18,460 $ 27,611 $ 10,951
=========== =========== ===========
Basic average shares of common stock outstanding.................. 22,108 16,703 10,434
Dilutive effective of stock option and award plans................ 695 565 2,640
----------- ----------- -----------
Dilutive average shares of common stockholders.................... 22,803 17,268 13,074
=========== =========== ===========
</TABLE>
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, Resource Asset and a law firm. 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 (excluding sales to Resource Asset) the Company has
sold senior or junior lien interests in commercial loans to purchasers
affiliated with officers of the Company. At September 30, 1999, loans held with
respect to related borrowers or acquired from related lenders constitute 25.8%
($65.0 million), by book value, of the Company's commercial loan portfolio,
while the participation interests sold to related purchasers constituted 0.5%
($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). 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 and
investments in real estate ventures 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.
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<PAGE>
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 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 one property which secures a loan held
by the Company and subleases space at one such property to Resource Asset.
Relationship with Resource Asset. The Company sponsored the formation
and the January 1998 initial public offering of common shares of beneficial
interest of Resource Asset. The Company acquired 15% of Resource Asset'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
Resource Asset's outstanding common shares. The spouse of the Chairman of the
Company is Chairman and Chief Executive Officer of Resource Asset. The Company
has the right to nominate one person for election to the Board of Trustees until
such time as its ownership of Resource Asset's outstanding common shares is less
than 5%. A Senior 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 and an officer of Resource Asset.
In connection with Resource Asset's initial offering, the Company sold
ten loans and senior lien interests in two other loans to Resource Asset 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
Resource Asset). One of the loans and one of the senior lien interests were
originated for Resource Asset 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 during the fiscal year ended September 30, 1998.
The Company has engaged in the following transactions with Resource
Asset subsequent to the sale of the initial investments:
Fiscal year ended September 30, 1999
o In June 1999, the Company acquired a first mortgage loan at face
value from Resource Asset for $2.5 million. The loan is secured by
property in which the Company has held a subordinate interest since
1991.
o In December 1998, the Company sold a senior lien interest in a loan
at a purchase price of $4.0 million and recognized a gain of $2.0
million.
o In December 1998, the Company purchased a junior lien interest in a
loan held by Resource Asset in the amount of $4.0 million. The junior
lien interest was repaid in June 1999 for $4.1 million and the
Company realized a gain of $135,000.
o The Company and Resource Asset jointly acquired a loan at a purchase
price of $77.0 million of which $10.0 million was contributed by
Resource Asset.
o A senior lien interest sold by the Company to Resource Asset in
fiscal 1998 was repaid in August 1999.
Fiscal year ended September 30, 1998
o The Company sold senior lien interests in three loans to Resource
Asset at an aggregate purchase price of $18.0 million and recognized
aggregate gains on sale of $5.1 million.
o The Company and Resource Asset jointly acquired a loan at a purchase
price of $85.5 million, $10.0 million of which was contributed by
Resource Asset.
69
<PAGE>
o The Company sold to Resource Asset two loans, both of which it had
originated for Resource Asset in connection with its sponsorship of
Resource Asset, 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 Resource Asset'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 Resource Asset (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.
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 $1.3 million, $1.2 million, and $803,000
during fiscal 1999, 1998, and 1997, 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.
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. The Chairman, Vice Chairman, and President of the Company hold a
99% interest in the limited partnership of the general partner of the borrower.
Pending transfer of the limited partnership interests, the aforementioned hold
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 purchased for $200,000 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 the
Company. 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.
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.
70
<PAGE>
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 was owned by two partnerships: the Building
Partnership, which owned the office building, and the Garage Partnership, which
owned the parking garage. Pursuant to a loan restructuring agreement entered
into in 1993, an affiliate of the holder of the loan was required to hold, as
additional security for the loan, general partnership interests in both the
Building Partnership and the Garage Partnership. The partnership interests in
the Building Partnership and Garage Partnership were assigned to limited
partnerships affiliated with the Company and certain of its officers. In June
1999, the loan was repaid pursuant to the terms of an existing loan
restructuring agreement. The Company received $29.6 million in cash, plus a 50%
interest in the Building and Garage Partnerships. The interest of the Company's
officers was terminated.
Relationships with Certain Lienholders. The Company holds a first
mortgage lien on a hotel property which in January 1999, was foreclosed upon by
another corporation ("Corporate Owner"). In August 1999, an officer of the
Company, the son of the Company's Chairman, became President of the Corporate
Owner, and the Chairman of the Company became Chairman and a minority
shareholder of the Corporate Owner. In addition, the Chairman of the Company is
a limited partner holding a two-thirds interest in a partnership which holds
convertible securities to acquire the common stock of the Corporate Owner.
Furthermore, the President of the Corporate Owner is the sole officer, director,
and shareholder of another corporation which is this partnership's general
partner. Upon conversion, the equitable interest of the Company's officer and
Chairman in the Corporate Owner is 19%.
The Company has sold three 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 $1.5 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 $1.9 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.
In fiscal 1999, the Company sold, at book value, an $875,000 senior
lien interest in industrial development revenue bonds it had acquired in a prior
year to a limited partnership in which the Chairman and Vice Chairman of the
Company beneficially owned a 22.0% limited partnership interest.
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.
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. The junior lien interest was paid off in May 1999.
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.
71
<PAGE>
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 $19.0 million, $6.5 million, and $4.1 million
during the years ended September 30, 1999, 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.
At September 30, 1999 and 1998, the Company held real estate loans
having aggregate face values of $747.1 million and $679.6 million, respectively,
which were being carried at aggregate costs of $250.2 million and $202.1
million, including cumulative accretion.
During fiscal 1999, the Company received, in exchange for its
investment in a mortgage loan, cash and a 50% interest in a partnership that
owns a building which secured the loan. The Company also foreclosed on one
commercial loan, taking title to the underlying property. The partnership
interest and property have been classified as investments in real estate
ventures. (see Note 3).
Amounts receivable, net of senior lien interests and deferred costs,
were $348.7 million and $344.3 million at September 30, 1999 and 1998,
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,
1999 and 1998.
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------
1999 1998
------------- -------------
(in thousands)
<S> <C> <C>
Balance, beginning of year (commercial mortgage loans only).................. $ 188,651 $ 88,816
New loans.................................................................... 88,869 337,087
Additions to existing loans.................................................. 8,558 6,181
Provisions for possible losses............................................... (500) (505)
Accretion of discount (net of collection of interest)........................ 18,965 6,520
Collections of principal..................................................... (20,646) (76,915)
Cost of loans sold........................................................... (17,335) (172,533)
Loans reclassified to investments in real estate ventures.................... (16,331) -
-------------- ------------
Balance, end of year
(commercial mortgage loans only)........................................... 250,231 188,651
Investments in residential mortgage loans
(less an allowance for possible losses of $286)............................ - 13,399
------------- ------------
Balance, end of year......................................................... $ 250,231 $ 202,050
============= ============
</TABLE>
A summary of activity in the Company's allowance for possible losses
related to real estate loans for the years ended September 30, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------
1999 1998
------------- ------------
(in thousands)
<S> <C> <C>
Balance, beginning of year................................................... $ 1,191 $ 400
Provision for possible losses................................................ 500 505
Write-offs................................................................... - -
(Reclassification of) provision for
possible losses-discontinued subsidiary.................................... (286) 286
------------- ------------
Balance, end of year......................................................... $ 1,405 $ 1,191
============= ============
</TABLE>
72
<PAGE>
NOTE 5 - INVESTMENT IN LEASES AND NOTES RECEIVABLE
Components of the investment in direct financing leases and notes
receivable as of September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------
1999 1998
-------------- -------------
(in thousands)
<S> <C> <C>
Total future minimum lease payments receivable............................... $ 438,323 $ 10,011
Initial direct costs, net of amortization.................................... 6,213 153
Unguaranteed residual........................................................ 31,207 6,338
Unearned lease income........................................................ (79,231) (4,061)
------------- ------------
Net investment in direct financing leases.................................... 396,512 12,441
Notes receivable............................................................. 14,966 14,138
Allowance for possible losses................................................ (10,017) (1,602)
------------- ------------
Investments in leases and notes receivable................................... $ 401,461 $ 24,977
============= ============
</TABLE>
The future minimum lease payments receivable for each of the five
succeeding fiscal years ended September 30, are as follows (in thousands): 2000
- - $159.3 million; 2001 - $124.7 million; 2002- $81.1 million; 2003 - $42.6
million; and 2004 - $20.2 million.
The amount of unguaranteed residual value actually realized at lease
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 lease 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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------
1999 1998
------------- ------------
(in thousands)
<S> <C> <C>
Balance, beginning of year................................................ $ 1,602 $ 248
Provision for possible losses............................................. 4,117 1,422
Allowance related to portfolio of acquired subsidiary at date of
acquisition............................................................. 7,200 -
Write-offs................................................................ (2,902) (68)
------------- ------------
Balance, end of year...................................................... $ 10,017 $ 1,602
============= ============
</TABLE>
NOTE 6 - SECURITIZATION PROGRAMS
Fidelity Leasing initially funds the origination of leases from working
capital and warehouse facilities from banks, and borrowings from the Company.
From time to time, depending on market conditions, Fidelity Leasing securitizes
the leases in its portfolio that meet pre-established eligibility criteria by
packaging them into a pool and selling the lease receivables, as described
below.
Sales by Assignment. In June and September of 1997, Fidelity Leasing
entered into sales transactions where it sold lease receivables and its
interests in the related equipment and residuals to an unaffiliated special
purpose entity, for an amount of cash equal to 100% of the present value of the
lease receivables and a note equal to 100% of the present value of the estimated
residual interests. These transactions were accounted for as sales for financial
reporting purposes. The special purpose entity resold the lease receivables to
Centre Square Funding Corporation ("Centre Square"), a commercial paper conduit
administered by CoreStates Bank, N.A. (now "First Union"). The Company provided
a guaranty to Centre Square for payment of a portion of the lease receivables
73
<PAGE>
due under the defaulted leases and for Fidelity Leasing's performance as
servicer. In December 1997, Centre Square sold the lease receivables to an
institutional investor.
CP Conduit Securitization. In December 1997, Fidelity Leasing sold
additional lease receivables and interests in the related equipment and
residuals to an unaffiliated entity on terms similar to those of the June and
September 1997 sales, except that it received cash equal to a substantial
portion of the present value of the lease receivables and a promissory note in
an amount equal to the remainder of the present value of the lease receivables
and 100% of the estimated present value of the residual interests. The
transaction was accounted for as a sale for financial reporting purposes. The
entity resold the receivables to a CP conduit administered by First Union
National Bank ("First Union").
In June 1998, Fidelity Leasing established a CP conduit facility for
$100.0 million ($125.0 million as amended) with Variable Funding Credit Corp.
("VFCC"), a First Union administered conduit. This facility may be terminated if
lease delinquencies or defaults in the securitized portfolio exceed specified
thresholds. This facility had a 364 day commitment period, which expired in June
1999. Because assets transferred under this facility were treated as sales for
financial reporting purposes, Fidelity Leasing did not renew this facility.
In December 1998, Fidelity Leasing entered into a $100.0 million
facility with a CP conduit administered by PNC Bank. The commitment period
expires in December 1999, but is subject to annual renewal. This facility
contains provisions which are substantially similar to the $125.0 million
facility. This facility was amended to permit Fidelity Leasing to treat future
transfers of leases made under it as financings for financial reporting
purposes.
In February 1999, Fidelity Leasing established a $143.0 million CP
conduit facility with First Union in order to finance the acquisition of JLA. In
connection with this facility, Fidelity Leasing sold a portfolio of JLA
originated lease receivables to a special purpose subsidiary, which pledged the
receivables to the CP conduit. Fidelity Leasing treated this transaction as a
financing for financial reporting purposes. As of September 30, 1999, this
facility was paid off with the proceeds of a term note securitization in June
1999.
In July 1999, Fidelity Leasing established a revolving multi-conduit
facility administered by First Union. As of September 30, 1999, one commercial
paper conduit lender had committed $300.0 million of funding. The commitment
period expires in July 2000, but is subject to annual renewal at the option of
the lenders. This facility contains default provisions substantially similar to
the $125.0 million and $100.0 million facilities. In addition, Fidelity Leasing
is required to maintain a specified level of tangible net worth and ratio of
earnings to interest expense. Fidelity Leasing must also maintain revolving
credit facilities aggregating at least $400.0 million. Only facilities whose
funding commitments have not terminated are considered in determining whether
the latter requirement is satisfied. Thus, for example, the $125.0 million
commercial paper conduit facility is not considered for purposes of satisfying
this requirement, but the $100.0 million commercial paper conduit facility
combined with the $300.0 million committed under this facility does satisfy the
requirement. Fidelity Leasing treats this facility as a financing for financial
reporting purposes.
Sales Facilities. In December 1998, Fidelity Leasing entered into
agreements with IBM Credit and IBM Canada that allowed Fidelity Leasing to
finance, on a monthly basis, all of the leases originated under Fidelity
Leasing's strategic marketing alliances with IBM Credit and IBM Canada. Fidelity
Leasing formed two special purpose subsidiaries for purposes of these sales, one
for lease originations in the U.S. and the other for lease originations in
Canada. Fidelity Leasing treated these transfers as sales for financial
reporting purposes.
Term Note Securitizations. In June 1997, JLA securitized leases in a
$75.0 million private placement of floating rate notes. This transaction has a
20% optional repurchase feature. In February 1998, JLA securitized leases in a
$125.0 million private placement of fixed and floating rate notes. This
transaction also has a repurchase option. Fidelity Leasing treated both the
securitizations as financings for financial reporting purposes.
In June 1999, Fidelity Leasing privately placed $158.8 million of fixed
rate notes of which proceeds were utilized to pay-off a $143.0 million CP
conduit facility with First Union. As servicer, Fidelity Leasing has the right
to prepay the outstanding notes when the remaining balance of the leases is
approximately $23.8 million. This term-note transaction was accounted for as a
financing for financial reporting purposes.
74
<PAGE>
Interest Rate Risk and Hedging. Fidelity Leasing's conduit facilities,
which are at variable rates of interest, require Fidelity Leasing to enter into
interest rate swap agreements for the benefit of the purchaser of the leases.
Because the cost of funding under the CP conduit facility is floating and the
rental stream is fixed, an interest rate swap is needed to hedge this risk.
Under an interest rate swap, the related special purpose entity agrees to pay a
fixed rate of interest and receive payment of a floating rate from a
counterparty. If short-term interest rates increase, then the fixed rate of
interest the special purpose entity is paying under the swap will be less than
the short-term rate it is receiving, resulting in a payment to the special
purpose entity. This payment will be used to offset the higher borrowing costs
under the commercial paper borrowings. The interest rate swap has the effect of
fixing the interest rate of the borrowings during the securitization period.
Fidelity Leasing terminates the interest rate swaps in their CP conduit
facilities when it removes assets from the conduit and places them into the term
note securitization.
Interest rate hedge agreements outstanding at September 30, 1999 for
Fidelity Leasing's CP conduit securitizations had an aggregate notional value of
approximately $248.1 million, required payments based on fixed rates ranging
from 5.3% to 11.0% and had a positive estimated fair market value of $1.2
million.
NOTE 7 - DEBT
Total debt consists of the following:
September 30,
-------------------------
1999 1998
-------- --------
(in thousands)
Warehouse debt
Equipment leasing ......................... $ 15,291 $ --
Residential mortgage lending .............. -- 5,166
-------- --------
Total warehouse debt ................ 15,291 5,166
Nonrecourse debt
Equipment leasing
Securitized term facilities ............. 219,979 --
CP conduit facilities ................... 93,213 --
Real estate finance
Loan facilities ......................... 58,901 --
Revolving credit facilities ............. 22,000 --
Other ................................... 875 --
Energy
Revolving and term banks loans .......... 44,975 31,975
-------- --------
Total non recourse debt ............. 439,943 31,975
Senior debt .................................. 101,400 104,400
Other debt
Equipment leasing
Term loans ............................ 7,587 --
Seller financing ...................... 7,725 --
Corporate ................................. 5,876 3,905
-------- --------
Total other debt .................... 21,188 3,905
-------- --------
$577,822 $145,446
======== ========
The Company classifies its indebtedness as either nonrecourse debt or
debt based on the structure of the debt instrument that defines the Company's
obligations. Nonrecourse debt includes amounts outstanding related to leases
included in securitized term facilities, CP conduit facilities, or individual or
groups of leases funded under nonrecourse funding arrangements with specific
financing sources, amounts outstanding related to mortgage loans receivable and
amounts outstanding secured by energy assets. Amounts outstanding in these
instances are classified as nonrecourse debt because the Company has no
obligation to ensure that investors or funding sources receive the full amount
of principal and interest which may be due to them under the funding
arrangement. In these instances, the investors or financing sources may only
look to specific leases, mortgage loans, energy assets and the associated cash
flows for the ultimate repayment of amounts due to them. In the event the cash
flow associated with specific leases and mortgage loans are insufficient to
fully repay amounts due, the investor or financing source bears the full risk of
loss.
75
<PAGE>
The Company primarily finances its:
o leasing operations with a warehouse line of credit,
securitized term facilities and commercial paper conduit
facilities
o real estate finance operations with bank or other financial
institution borrowings and senior debt
o energy operations with bank borrowings
Following is a description of borrowing arrangements in place at
September 30, 1999 and 1998.
Warehouse Debt. In September, 1998, Fidelity Leasing entered into a new
secured revolving credit and term loan agreement that provides for an aggregate
borrowing limit of up to $20.0 million. Revolving credit loans bear interest, at
the subsidiary's election, at (a) an adjusted LIBOR rate (5.4% at September 30,
1999) 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. Borrowings under this
facility are collateralized by the leases being financed and on the underlying
equipment being financed and the outstanding stock of a subsidiary and are
guaranteed by the Company. The agreement contains certain covenants pertaining
to the subsidiary and its affiliates including the maintenance of certain
financial ratios and restrictions on changes in the subsidiary's ownership and a
key management position. Outstanding borrowings under the facility were $15.3
million at September 30, 1999. The facility expires on March 31, 2000 but may be
renewed for additional 18 month periods by the lenders.
At September 30, 1997, the Company's residential mortgage subsidiary
established a $15.0 million warehouse credit facility which had an outstanding
balance of $5.2 million at September 30, 1998 and which expired and was repaid
in November, 1998.
Nonrecourse Debt-Equipment Leasing. Two securitized term facilities
were assumed by Fidelity Leasing when it acquired JLA. In addition, Fidelity
Leasing entered into a third securitized term facility in June 1999. These
facilities are expected to be paid as Fidelity Leasing receives payments on the
underlying securitized contract receivables. The contract receivables
collateralize the notes, and other creditors of Fidelity Leasing would be
subordinate to the note holders with respect to these securitized receivables.
The timing and amount of the repayment of the notes are dependent upon the
ultimate collection of the securitized lease receivables. As of September 30,
1999, interest rates on these asset backed borrowings range from 5.61% to 5.96%,
and the weighted average interest rate was 5.67%.
In December 1998, Fidelity Leasing established a $100.0 million CP
conduit with Market Street Funding ("Market Street"), administered by PNC Bank.
The facility bears interest at Market Street's commercial paper rate (5.2% at
September 30, 1999) plus .65% and $41.1 million was outstanding under this
facility at September 30, 1999.
In July 1999, Fidelity Leasing established a new CP conduit facility up
to a maximum of $300.0 million with VFCC. The commitment expires in July 2000
but may be renewed annually at the discretion of the lender. Fidelity Leasing
sold a portfolio of originated lease receivables to a special purpose subsidiary
which have been pledged as collateral. The facility contains events of default
triggered when lease delinquencies or defaults in the securitized portfolio
exceed certain thresholds. An event of default can occur if there is a change in
control of Fidelity Leasing, or a change in certain key management positions.
The agreement also requires certain financial covenants, including the
maintenance of certain financial ratios and net worth requirements.
At September 30, 1999, $52.1 million was outstanding under this facility.
Nonrecourse Debt-Real Estate Finance Loan Facilities. Two loans payable
to a financial institution secured by a mortgage loan. The senior loan is in the
amount of $49.5 million, bears interest, payable monthly at 30 day LIBOR plus
between 300 and 350 basis points. The junior loan is in the amount of $9.4
million, bears interest at 17.5% of which 15% is payable monthly with the
balance accruing. These loans were repaid in October 1999.
76
<PAGE>
Real Estate Finance-Revolving Credit Facilities. In March 1998, the
Company, through certain operating subsidiaries, established an $18.0 million
revolving credit facility with Jefferson Bank (now a division of Hudson United
Bank) for its commercial mortgage loan operations which was amended in August
1999. Credit availability is currently $7.0 million, all of which is outstanding
at September 30, 1999. The credit facility bears interest at the prime rate
reported in The Wall Street Journal (8.25% at September 30, 1999) 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.
In July 1999, the Company established a $15.0 million revolving line of
credit with Sovereign Bank. Interest is payable monthly at The Wall Street
Journal prime rate (8.25% at September 30, 1999) and principal is due upon
expiration in July 2001. Advances under this line are to be utilized to acquire
commercial real estate or interests therein, to fund or purchase loans secured
by commercial real estate or interests, or to reduce indebtedness on loans or
interests which the Company owns or holds. The advances are secured by the
properties related to these funded transactions. At September 30, 1999, $15.0
million was advanced under this line.
Nonrecourse Debt-Energy. The energy affiliates owned by RAI maintain a
$45.0 million credit facility at PNC Bank ("PNC"). The facility is cross
collateralized by the assets of all of the energy affiliates, and a breach of
the loan agreement by any of the energy affiliates constitutes a default. The
revolving credit facility has a term ending in November 2002 and bears 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
75 basis points, or (ii) the Eurodollar rate plus between 150 and 225 basis
points. The credit facility contains financial covenants and imposes the
following limits: (a) the energy affiliates exploration expense can be no more
than 20% of capital expenditures plus exploration expense, without PNC's
consent: (b) limitations on indebtedness, sales, leases or transfers of property
by the energy affiliates, without PNC's consent; and (c) the maintenance of
certain financial ratios. Borrowings under the credit facility are
collateralized by substantially all the oil and gas properties and pipelines of
the energy affiliates. At September 30, 1999, $45.0 million was outstanding
under this facility.
Prior to entering into this energy facility, the Company assumed a
credit facility, described below, of $40.0 million (with $27.0 million of
permitted draws) at PNC Bank. The credit facility was 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 imposes certain financial covenants and limitations on Atlas.
Senior Debt. In July 1997, the Company issued $115.0 million of 12%
Senior Notes (the "12% Notes") due August 2004 in a private placement. These
notes were exchanged in November 1997 with a like amount of 12% Senior Notes
which were registered under the Securities Act of 1933. Provisions of these
Notes limit dividend payments, mergers and indebtedness, place restrictions on
liens and guarantees and require the maintenance of certain financial ratios. At
September 30, 1999, the Company was in compliance with such provisions. At
September 30, 1999 and 1998, $101.4 million and $104.4 million, respectively,
was outstanding.
Other Debt. As part of the consideration of the acquisition of JLA (see
Note 12), Fidelity Leasing gave the seller a promissory note with an original
principal amount of $6.7 million (increased to $7.7 million at September 30,
1999), which bears interest at the U.S. Treasury Rate plus between 250 and 400
basis points. The note is payable in quarterly installments, matures in February
2004, and contains customary events of default.
77
<PAGE>
On September 30, 1999, a subsidiary of Fidelity Leasing obtained a $4.1
million term loan with Commerce Bank of which the Company has guaranteed.
Principal and interest is payable monthly. Payments of principal are based on
principal payments under the terms of a 6.18% receivable backed note in the
aggregate principal amount of $4.5 million. The note, secured by equipment
leases, has been pledged as collateral. Interest is payable at LIBOR (5.4% at
September 30, 1999) plus 450 basis points. In addition, as part of the JLA
acquisition, Fidelity Leasing acquired a small pool of automobile leases. To
finance this portfolio, Fidelity Leasing entered into a 36 month term loan with
First Union for $5.7 million, which bears interest at LIBOR plus 100 basis
points. At September 30, 1999, $3.5 million was outstanding.
Corporate debt includes an amount outstanding under a $5.0 million
revolving line of credit with Sovereign Bank which expires July 2001. Interest
accrues at The Wall Street Journal prime rate (8.25% at September 30, 1999) and
payment of accrued interest and principal is due upon the expiration date.
Advances under this line are recourse to the Company and are to be utilized to
repay bank debt to acquire commercial real estate or interests therein, to fund
or purchase loans secured by commercial real estate or interests, or to reduce
indebtedness on loans or interests which the Company owns or holds and for other
general corporate purposes. At September 30, 1999, $5.0 million was advanced
under this line.
Annual debt principal payments over the next five fiscal years ending
September 30 are as follows: (in thousands) 2000 - $149.0 million, 2001 - $127.0
million, 2002 - $111.0 million, 2003 - $67.0 million, and 2004 - $117.0 million.
NOTE 8 - INCOME TAXES
The following table details the components of the Company's income tax
expense for the fiscal years 1999, 1998 and 1997.
Years Ended September 30,
--------------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Provision for income tax
Current
Federal ................. $ 11,997 $ 16,202 $ 6,186
State ................... 1,070 345 --
Deferred .................. (220) (1,736) (2,206)
-------- -------- --------
$ 12,847 $ 14,811 $ 3,980
======== ======== ========
A reconciliation between the statutory federal income tax rate and the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate.................................................. 35% 35% 34%
Statutory depletion................................................. (1) - (2)
Non-conventional fuel and low-income housing credits................ (4) (2) (3)
Tax-exempt interest................................................. (1) (1) (2)
State income tax.................................................... 3 1 -
---- ----- ----
32% 33% 27%
==== ===== ====
</TABLE>
78
<PAGE>
The components of the net deferred tax (liability) asset are as
follows:
Years Ended September 30,
-------------------------
1999 1998
-------- --------
(in thousands)
Deferred tax assets related to:
Tax credit carryforwards ................... $ 669 $ 525
Alternative minimum tax credit carryforwards 1,189 1,555
Statutory depletion ........................ -- 187
Interest receivable ........................ 738 1,952
Unrealized losses on investments ........... 910 22
Accrued expenses ........................... 1,562 571
Net operating loss carryforwards ........... 591 1,506
Provision for losses ....................... 1,767 1,233
-------- --------
$ 7,426 $ 7,551
-------- --------
Deferred tax liabilities related to:
Property and equipment basis difference .... (20,084) (6,251)
ESOP benefits .............................. (101) (98)
Other ...................................... (310) (385)
-------- --------
(20,495) (6,734)
-------- --------
Net deferred tax (liability) asset ....... $(13,069) $ 817
======== ========
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. No valuation allowance was needed
at September 30, 1999 and 1998. Tax rules impose limitations on the use of tax
carryforwards following certain changes in ownership. Due to mergers (see Note
12), 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 9 - STOCKHOLDERS' EQUITY
On May 12, 1998, the Board of Directors authorized a three-for-one
stock split effected in the form of a 200% stock dividend. This stock dividend
resulted in the issuance of 13.5 million additional shares of Common stock.
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.
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 which was repaid in fiscal
1997. The Company realized proceeds of $3.7 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 $20.0
million, before offering expenses of $515,000, from the offering.
Earnings per share and weighted average shares outstanding reflect the
above transactions.
79
<PAGE>
NOTE 10 - 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 a prior year the ESOP borrowed funds to purchase
shares from the Company. The Company 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 stockholders' 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, 1999, there were 259,000 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 $156,400, $50,400 and $50,400 for the years ended September
30, 1999, 1998 and 1997, respectively.
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 (15% as of September 1, 1999
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
subject to certain limitations. Included in general and administrative expenses
are $427,700, $305,600, and $131,900 for the Company's contributions for the
years ended September 30, 1999, 1998 and 1997, respectively.
Stock Options. The Company has three existing employee stock option
plans, those of 1989, 1997 and 1999. No further grants may be made under the
1989 plan. Options under the 1989, 1997, and 1999 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 the date of grant.
The 1989 plan authorizes the granting of up to 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").
In April 1997, the stockholders approved the Resource America, Inc.,
1997 Key Employee Stock Option Plan. This plan, for which 825,000 shares were
reserved, provides for the issuance of ISO's, non-qualified stock options and
SAR's. In fiscal 1999, 1998 and 1997, options for 10,000, 669,115 and 75,000
shares were issued under this plan, respectively. On October 20, 1998, 744,115
of the 754,115 options granted under the 1997 Key Employee Stock Option Plan
were canceled. 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 vest
25% per year commencing October 20, 1999.
In March 1999, the stockholders approved the Resource America, Inc.
1999 Key Employee Stock Option Plan. This plan, for which 1,000,000 shares were
reserved, provides for the issuance of ISO's, non-qualified stock options and
SAR's. In fiscal 1999, options for 728,500 shares were issued under this plan.
80
<PAGE>
Transactions for the three stock option plans are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- -------------------------
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.. 1,321,366 $ 13.18 685,959 $ 3.85 1,044,948 $ 2.07
Granted....................... 1,482,615 $ 11.72 669,115 $ 22.21 75,000 $ 13.17
Exercised..................... (166,831) $ (2.82) (33,708) $ 2.73 (433,989) $ 1.17
Canceled...................... (744,115) $ (21.30) - - - -
Forfeited..................... (23,000) $ (8.40) - - - -
---------- ---------- ---------
Outstanding - end of year........ 1,870,035 $ 9.77 1,321,366 $ 13.18 685,959 $ 3.85
========= ========= ========== ========= ========= =======
Exercisable, at end of year...... 320,456 $ 2.59 292,629 $ 3.22 190,662 $ 2.35
========= ========= ========== ========= ========= =======
Available for grant.............. 342,385 80,885 750,000
========= ========== =========
Weighted average fair value per
share of options granted
during the year............... $ 10.46 $ 19.41 $ 11.98
========== ========= =======
</TABLE>
The following information applies to options outstanding as of September 30,
1999.
<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 3.55 $ .92 50,562 $ .92
$2.73-$3.00 359,858 2.66 $ 2.90 269,894 $ 2.90
$8.08 732,115 4.05 $ 8.08 - -
$15.50 727,500 9.64 $ 15.50 - -
--------- ----------
1,870,035 320,456
========= ==========
</TABLE>
In connection with the acquisition of Atlas (see Note 12), 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.
Fidelity Leasing has two stock option plans: the 1996-1 Key Employee
Stock Option Plan (the "1996-1 Plan"); and the 1996-2 Key Employee Stock Option
Plan (the "1996-2 Plan"). The 1996-1 Plan and 1996-2 Plan authorize the granting
of up to 701,241 and 350,620 shares, respectively, of Fidelity Leasing's common
stock in the form of ISO's, non-qualified stock options and SAR's. No further
grants may be made under the 1996-1 Plan. As of September 30, 1999, options for
344,309 shares had been issued under the 1996-2 Plan. All share amounts
referenced above have been adjusted to reflect Fidelity Leasing's reverse stock
split in fiscal 1999, whereby each share of Fidelity Leasing common stock was
split and adjusted into .7012408 of a share of Fidelity Leasing common stock.
A key employee of Fidelity Leasing has received options to purchase up
to 701,241 shares of the common stock of Fidelity Leasing under the 1996-1 Plan
at an aggregate price of $222,200 and, should Fidelity Leasing 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,
Fidelity Leasing issues stock to anyone other than the Company or the key
employee, the key employee is entitled to receive such additional options as
will allow him to maintain a 10% equity position in Fidelity Leasing upon
exercise of all options held by such employee (excluding shares issuable
pursuant to the 1996-2 Plan), at an exercise price equal to the price paid or
value received in the additional issuance. Fidelity Leasing does not anticipate
making any such issuance.
81
<PAGE>
The options issued to the Fidelity Leasing key employee vest 25% per
year and will be fully vested in March 2000; they will terminate in March 2006.
The options become fully vested and immediately exercisable in the event of a
change in control of Fidelity Leasing. The key employee has certain rights,
commencing after March 5, 2000, to require Fidelity Leasing to register his
option shares under the Securities Act of 1933. In the event Fidelity Leasing
does not become a public company by March 5, 2001, the key employee may require
that Fidelity Leasing thereafter buy, for cash, up to 25% of the Fidelity
Leasing shares subject to his options at a price equal to ten times Fidelity
Leasing'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. In the subsequent three years, the key employee has the right to require
Fidelity Leasing to purchase, on a cumulative basis, up to 50%, 75% and 100% of
the shares subject to his option. Fidelity Leasing is required to purchase up to
25% of such employee's shares in each year following such employee's exercise of
this right.
Transactions for both Fidelity Leasing stock option plans are as
follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------
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..... 992,957 $ 0.33 976,828 $ 0.32 953,687 $ 0.32
Granted.......................... 52,593 $ 3.81 16,129 $ 1.52 23,141 $ 0.32
Exercised........................ - - - - - -
Canceled......................... - - - - - -
---------- ---------- ----------
Outstanding - end of year........... 1,045,550 $ 0.51 992,957 $ .33 976,828 $ 0.32
========= ========== ==========
Exercisable, at end of year......... 730,868 $ 0.33 482,629 $ .33 238,422 $ 0.32
========= ========== ==========
Available for grant................. 6,311 58,904 75,033
========= ========== ==========
Weighted average fair value per
share of options granted
during the year.................. $ 5.24 $ 0.72 $ 0.16
======= ======== ========
</TABLE>
The following information applies to options outstanding as of
September 30, 1999.
Outstanding Exercisable
------------------------ -----------
Contractual
Exercise Prices Shares Life (Years) Shares
- --------------- ------ ------------ ------
$.32 976,828 6.51 726,836
$1.52 16,129 8.32 4,032
$3.81 52,593 9.13 -
--------- ---------
1,045,550 730,868
========= =========
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, 125%, 99% and 96% in 1999, 1998 and 1997,
respectively; risk free interest rate, 5.2%, 5.8% and 6.6% in 1999, 1998 and
1997, respectively; and no dividends during the expected term. The Fidelity
82
<PAGE>
Leasing calculations were also made using the Black-Scholes option pricing model
with the following weighted average assumptions: expected life, 5 or 10 years
following vesting; risk free interest rate, 4.8%, 6.6%, and 6.6% in 1999, 1998
and 1997, 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 $16.7 million ($.73 per share), $26.2 million ($1.52 per share)
and $10.5 million ($.80 per share) in fiscal 1999, 1998 and 1997, respectively.
In addition to the various stock option plans, in May 1997 the
stockholders approved the Resource America, Inc. Non-Employee Director Deferred
Stock and Deferred Compensation Plan (the "Non-Employee Director Plan") for
which a maximum of 75,000 shares were reserved for issuance. Under the
Non-Employee Director Plan, non-employee directors of the Company are awarded
units representing the right to receive one share of Company common stock for
each unit awarded. Units do not vest until the fifth anniversary of their grant,
except that units will vest sooner upon a change of control of the Company or
death or disability of a director, provided the director completed at least six
months of service. Upon termination of service by a director, all unvested units
are forfeited. In fiscal 1999, a total of 15,000 units were granted under the
Non-Employee Director Plan to the Company's five non-employee directors. The
fair value of the grants ($14.40 per unit, $216,000 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 $405,000 in fiscal 1998. Such benefits are reflected as additional
paid-in capital.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under leases with varying
expiration dates through 2005. Rental expense was $1.7 million, $749,800, and
$238,600 for the years ended September 30, 1999, 1998, and 1997, respectively.
At September 30, 1999, future minimum rental commitments for the next five
fiscal years were as follows: (in thousands)
2000........................... $ 1,666
2001........................... 1,322
2002........................... 1,164
2003........................... 1,029
2004........................... 936
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 1999, 1998 and
1997, operations were charged $556,000, $204,000 and $240,000, respectively,
with respect to these commitments.
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 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.
The Company, through it's energy subsidiaries, enters into a natural
gas futures contracts to hedge its exposure to changes in natural gas prices. At
any point in time, such contracts may include regulated NYMEX future contracts
and non-regulated over-the-counter future contracts with qualified counterparts.
83
<PAGE>
The futures contracts employed by the Company are commitments to purchase or
sell natural gas at future date and generally cover one month periods for up to
18 months in the future. Gains and losses on such contracts are deferred and
recognized in the month the gas is sold. The Company had no significant futures
contracts at September 30, 1999.
NOTE 12 - ACQUISITIONS
On August 31, 1999, the Company acquired all of the common stock of
Viking Resources in exchange for 1,243,684 shares of the Company's common stock
and the assumption of Viking Resources debt as described below. Viking Resources
is a company primarily involved in the energy finance business through the
syndication of oil and gas properties in the Appalachian Basin.
The Viking Resources acquisition was recorded under the purchase method
of accounting and, accordingly, the results of operations of Viking Resources
are included in the Company's consolidated financial statements commencing
September 1, 1999. The purchase price has been allocated to assets acquired and
liabilities assumed based on their fair market value, at the date of acquisition
as summarized below (in thousands).
Estimated fair value of assets acquired $ 48,289
Liabilities assumed ................... (19,910)
Common stock issued ................... (12,437)
--------
Net cash (paid) ....................... $(15,942)
========
This acquisition was immaterial to the results of operations of the
Company, and therefore pro forma information is excluded.
On February 4, 1999, the Company acquired all of the common stock of
JLA, in exchange for cash and assumption of JLA debt. The acquisition was
recorded as a purchase and accordingly the results of JLA's operations are
included in the Company's consolidated financial statements from the date of
acquisition. 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 $ 315,466
Debt issued ........................... (142,997)
Debt assumed .......................... (147,534)
Amounts due seller .................... (6,673)
---------
Net cash (paid) ....................... $ (18,262)
=========
84
<PAGE>
The following table reflects unaudited pro forma combined results of
operations of the Company and JLA presented as if the acquisition had taken
place on October 1, 1997:
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------
1999 1998
-------- --------
(unaudited)
(in thousands, except per share amounts)
<S> <C> <C>
Revenues ......................................... $158,199 $120,363
Net income before extraordinary item ............. 20,669 33,717
Net income ....................................... 20,399 33,956
Basic earnings per share:
Net income before extraordinary item.......... $ .93 $ 2.02
Net income ................................... $ .92 $ 2.03
Diluted earnings per share:
Net income before extraordinary item.......... $ .91 $ 1.95
Net income ................................... $ .89 $ 1.97
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments to: (i) depreciation and
amortization expense attributable to allocation of the purchase price; (ii)
interest expense for additional borrowings; (iii) equipment leasing revenue as a
result of the purchase price allocation; and (iv) provision for income taxes to
reflect the above adjustments at the Company's tax rate. 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, 1997 or of future results of
operations of the consolidated entities.
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
========
85
<PAGE>
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, 1997:
Year Ended
September 30,
1998
-------------
(unaudited)
(in thousands,
except per share amounts)
Revenues ................................... $ 119,315
Net income before extraordinary item ....... 26,584
Net income ................................. 26,823
Basic earnings per share:
Net income before extraordinary item ..... $ 1.42
Net income ............................... $ 1.43
Diluted earnings per share:
Net income before extraordinary item ..... $ 1.38
Net income ............................... $ 1.38
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, 1997, 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.
NOTE 13 - DISCONTINUED OPERATIONS
On September 28, 1999 the Company adopted a plan to discontinue its
residential mortgage lending business ("Fidelity Mortgage Funding, Inc."). The
Company anticipates that the business will be disposed of by September 30, 2000.
Accordingly, Fidelity Mortgage Funding is reported as a discontinued operation
for the years ended September 30, 1999 and 1998. Net assets of the discontinued
operation at September 30, 1999 consist primarily of mortgage note and loans
receivables.
86
<PAGE>
The estimated loss on the disposal of Fidelity Mortgage Funding is
$275,000 (net of taxes of $148,000), including anticipated operating losses
through the date of disposal. Summarized results of Fidelity Mortgage Funding
since inception are as follows:
Years Ended September 30,
-------------------------
1999 1998
------- -------
(in thousands)
Net revenues ..................................... $ 1,907 $ 7,022
======= =======
Loss from operations before income tax benefit ... $(9,877) $(4,243)
Income tax benefit ............................... 2,190 1,443
------- -------
Loss from operations ............................. (7,687) (2,800)
Loss on disposal before income tax benefit ....... (423) --
Income tax benefit ............................... 148 --
------- -------
Loss on disposal ................................. (275) --
------- -------
Total loss on discontinued operations ............ $(7,962) $(2,800)
======= =======
NOTE 14 - EXTRAORDINARY ITEM
During fiscal 1999 and 1998 the Company acquired $3.0 million and $10.6
million, respectively of its 12% Notes at a discount. These transactions
resulted in an extraordinary gain of $299,000 net of taxes of $142,000 in fiscal
1999 and $239,000, net of taxes of $112,000 in fiscal 1998.
NOTE 15 - CUMULATIVE EFFECT OF A CHANGE IN ACCOUNT PRINCIPLE
The Company elected early adoption of the provisions of SOP 98-5
effective October 1, 1998 and, accordingly, start-up costs of $569,000 (net of
income taxes of $271,000) which had been capitalized at September 30, 1998 were
charged to operations on October 1, 1998 and are reflected in the consolidated
statements of income for the year ended September 30, 1999 as a cumulative
effect of a change in accounting principle.
NOTE 16 - PUBLIC OFFERINGS OF COMMON STOCK AND UNITS BY SUBSIDIARIES
In September 1999, the Company filed an amended registration statement
on Form S-1 with the Securities and Exchange Commission with respect to an
initial public offering of 3.9 million new shares of Fidelity Leasing of its
common stock. There is no assurance as to the timing or completion of the
offering.
In December 1999, the Company filed an amended registration statement
on Form S-1 with the Securities and Exchange Commission with respect to a
proposed offering related to the Company's pipeline operations. The Company's
natural gas pipeline and gathering operations have formed a master limited
partnership and are offering 2.5 million new common units representing limited
partnership interests of intrastate natural gas pipeline gathering systems in
Eastern Ohio, Western Pennsylvania and Western New York. There is no assurance
as to the timing or completion of the offering.
87
<PAGE>
NOTE 17 - OPERATING 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, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------
1999 1998 1997
----------- ------------ ------------
(in thousands)
<S> <C> <C> <C>
Revenues:
Real estate finance............................................... $ 45,907 $ 55,834 $ 19,144
Equipment leasing................................................. 41,129 13,561 7,162
Energy............................................................ 54,493 6,734 5,608
Corporate......................................................... 8,311 5,710 1,031
----------- ----------- -----------
$ 149,840 $ 81,839 $ 32,945
=========== =========== ===========
Depreciation, Depletion and Amortization:
Real estate finance............................................... $ 136 $ 50 $ 36
Equipment leasing................................................. 1,995 610 398
Energy............................................................ 5,512 1,273 1,202
Corporate......................................................... - (15) (22)
----------- ------------ ------------
$ 7,643 $ 1,918 $ 1,614
=========== =========== ===========
Operating Profit (Loss):
Real estate finance............................................... $ 35,306 $ 43,710 $ 16,546
Equipment leasing................................................. 4,016 5,224 2,457
Energy............................................................ 8,780 1,659 1,699
Corporate......................................................... (8,563) (5,610) (5,771)
------------ ------------ ------------
$ 39,539 $ 44,983 $ 14,931
=========== =========== ===========
Identifiable Assets:
Real estate finance............................................... $ 273,922 $ 211,251 $ 92,287
Equipment leasing................................................. 431,464 29,608 10,647
Energy............................................................ 139,098 88,552 15,016
Corporate......................................................... 56,903 94,941 77,169
----------- ----------- -----------
$ 901,387 $ 424,352 $ 195,119
=========== =========== ===========
Capital Expenditures (excluding assets acquired in business acquisitions):
Real estate finance............................................... $ 100 $ 143 $ 59
Equipment leasing................................................. 2,820 891 585
Energy............................................................ 11,456 2,095 640
Corporate......................................................... - - 507
----------- ----------- -----------
$ 14,376 $ 3,129 $ 1,791
=========== =========== ===========
</TABLE>
Operating profit (loss) represents total revenues less costs
attributable thereto, including interest and provision for possible losses, and
less depreciation, depletion and amortization, excluding general corporate
expenses. The information presented above does not eliminate intercompany
transactions of $4.8 million and $697,000 in the years ended September 30, 1999
and 1998, respectively.
The Company's natural gas is sold under contract to various purchasers.
For the years ended September 30, 1999, 1998 and 1997, gas sales to two
purchasers accounted for 26% and 14%, 35% and 14%, 29% and 12% 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.
88
<PAGE>
NOTE 18 - SUPPLEMENTAL OIL AND GAS INFORMATION
Results of operations for oil and gas producing activities:
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Revenues............................................................ $ 11,633 $ 4,682 $ 3,936
Production costs.................................................... (5,025) (2,022) (1,636)
Exploration expenses................................................ (560) (503) (187)
Depreciation, depletion, and amortization........................... (2,897) (809) (712)
Income taxes........................................................ (503) (263) (197)
----------- ----------- -----------
Results of operations producing activities.......................... $ 2,648 $ 1,085 $ 1,204
=========== =========== ===========
</TABLE>
Capitalized Costs Related to Oil and Gas Producing Activities. The
components of capitalized costs related to the Company's oil and gas producing
activities (less impairment reserve of $10,000 in fiscal 1999, $20,000 in fiscal
1998, and $28,000 in fiscal 1997), are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Proved properties................................................... $ 77,207 $ 42,458 $ 23,254
Unproved properties................................................. 847 1,164 846
Pipelines, equipment and other interests............................ 18,931 7,645 2,445
----------- ----------- -----------
Total........................................................... 96,985 51,267 26,545
Accumulated depreciation, depletion and amortization................ (19,019) (15,611) (15,145)
------------ ------------ ------------
Net capitalized costs........................................... $ 77,966 $ 35,656 $ 11,400
=========== =========== ===========
</TABLE>
Costs Incurred in Oil and Gas Producing Activities. The costs incurred
by the Company in its oil and gas activities during fiscal years 1999, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Property acquisition costs:
Unproved properties............................................... $ 17 $ 378 $ 321
Proved properties................................................. 37,454 19,436 782
Exploration costs................................................. 658 816 238
Development costs................................................. 9,008 416 144
</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 1999 and 1998 and by E.E. Templeton &
Associates, Inc. in fiscal 1997. Both are petroleum engineering firms. The
Company did not estimate the value of its proven undeveloped reserves in fiscal
1997.
The Company's oil and gas reserves are located within the United
States. There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future net revenues and the timing of
development expenditures. The reserve data presented represent estimates only
and should not be construed as being exact. In addition, the standardized
measures of discounted future net cash flows may not represent the fair market
value of the Company's oil and gas reserves or the present value of future cash
flows of equivalent reserves, due to anticipated future changes in oil and gas
prices and in production and development costs and other factors for which
effects have not been provided.
89
<PAGE>
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, 1996 ...... 12,852,274 310,020
Purchase of reserves in-place ...... 1,903,853 45,150
Current additions .................. 15,984 --
Sales of reserves in-place ......... (1,393) --
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
Current additions .................. 29,705,025 --
Purchase of reserves in place ...... 18,786,968 1,187,326
Transfer of limited partnership .... (18,221,632) --
Revisions .......................... (7,639,494) 10,196
Production ......................... (4,342,430) (85,045)
------------ ------------
Balance September 30, 1999 ......... 108,172,010 1,684,991
============ ============
Proved developed reserves at
September 30, 1999 ............... 66,215,748 1,684,991
September 30, 1998 ............... 49,868,113 572,514
September 30, 1997 ............... 15,157,535 358,013
</TABLE>
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>
Years Ended September 30,
--------------------------------------------------
1999 1998 1997
--------------- -------------- ---------------
(in thousands)
<S> <C> <C> <C>
Future cash inflows.......................................... $ 349,953 $ 240,922 $ 42,634
Future production and development costs.................... (156,853) (102,557) (21,585)
Future income tax expense.................................. (46,232) (14,278) (2,740)
--------------- -------------- ---------------
Future net cash flows........................................ 146,868 124,087 18,309
Less 10% annual discount for estimated
timing of cash flows..................................... (88,093) (80,313) (8,186)
--------------- -------------- ---------------
Standardized measure of discounted
future net cash flows...................................... $ 58,775 $ 43,774 $ 10,123
============== ============= ==============
</TABLE>
90
<PAGE>
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>
Years Ended September 30,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year.............................................. $ 43,774 $ 10,123 $ 8,349
Increase (decrease) in discounted future net cash flows:
Sales and transfers of oil and gas net of related costs.............. (6,608) (2,822) (2,411)
Net changes in prices and production costs........................... 6,173 171 512
Revisions of previous quantity estimates............................. (6,197) 597 2,483
Extensions, discoveries, and improved
recovery less related costs........................................ - 194 10
Purchases of reserves in-place....................................... 37,282 34,935 1,474
Sales of reserves in-place, net of tax effect........................ - (30) (1)
Accretion of discount................................................ 4,915 1,012 997
Net change in future income taxes.................................... (15,814) (3,770) (14)
Other................................................................ (4,750) 3,364 (1,276)
----------- ----------- -----------
Balance, end of year.................................................... $ 58,775 $ 43,774 $ 10,123
=========== =========== ===========
</TABLE>
91
<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 2000 annual meeting of
stockholders, to be filed on or before January 29, 2000 (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 Comprehensive Income
Consolidated Statements of Changes in Stockholders'
Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule IV - Mortgage Loans on Real Estate
92
<PAGE>
3. Exhibits
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger, dated as of July 13,
1998, among the Company, Atlas America, Inc., The Atlas
Group, Inc. and certain shareholders of The Atlas
Group, Inc. (1)
2.1(a) Amendment No. 1 to Agreement of Plan of Merger, dated
as of September 29, 1998 (2)
2.2 Stock Purchase Agreement, dated as of December 15,
1998, between Japan Leasing (U.S.A.), Inc. and Fidelity
Leasing, Inc. (2)
2.2(a) Amendment No. 1 to Stock Purchase Agreement, dated as
of December 31, 1998 (2)
2.2(b) Amendment No. 2 to Stock Purchase Agreement, dated as
of January 12, 1998 (2)
2.2(c) Amendment No. 3 to Stock Purchase Agreement, dated as
of February 2, 1999 (2)
2.2(d) Amendment No. 4 to Stock Purchase Agreement, dated as
of January 3, 1999 (2)
3.1 Restated Certificate of Incorporation of the
Company (3)
3.2 Bylaws of the Company, as amended (3)
4.1 Indenture, dated as of July 22, 1997, between
Registrant and The Bank of New York, as trustee, with
respect to Registrant's 12% Senior Notes due 2004 (4)
10.1 The Company's 1989 Key Employee Stock Option Plan, as
amended (5)
10.2 The Company's 1997 Key Employee Stock Option Plan (6)
10.3 The Company's 1997 Non-Employee Director Deferred Stock
and Deferred Compensation Plan (6)
10.4 The Company's 1999 Key Employee Stock Option Plan (7)
10.5 Employment Agreement between Edward E. Cohen and the
Company (8)
10.6 Employment Agreement between Fidelity Mortgage Funding,
Inc. and Daniel G. Cohen (8)
10.4 Employment Agreement, dated March 5, 1996, between
Fidelity Leasing, Inc. and Abraham Bernstein (3)
10.9(a) Amendment No. 1 to Employment Agreement, dated as of
March 4, 1999(2)
10.10 Contribution Agreement, dated March 5, 1996, between
Resource Leasing, Inc. and Abraham Bernstein (3)
10.10(a) Amendment No. 1 to Contribution Agreement, dated June
30, 1999 (2)
10.11 Amended and Restated Loan and Security Agreement, dated
September 30, 1998, between Fidelity Leasing, Inc. and
First Union National Bank, as agent (9)
93
<PAGE>
10.11(a) Joinder and Amendment to Amended and Restated Loan and
Security Agreement, dated March 26, 1999, among First
Union National Bank, European American Bank, Fidelity
Leasing, Inc., JLA Credit Corporation, Registrant,
Resource Leasing, Inc., FL Partnership Management, Inc.
and FL Financial Services, Inc. (2)
10.11(b) Amendment to Amended and Restated Loan and Security
Agreement, dated May 18, 1999, among First Union
National Bank, as agent, Fidelity Leasing, Inc., JLA
Credit Corporation, Registrant, Resource Leasing, Inc.,
FL Partnership Management, Inc. and FL Financial
Services, Inc. (2) 10.12 Purchase and Sale Agreement
dated December 18, 1997, between Fidelity Leasing, Inc.
and SW Leasing Portfolio IV, Inc. (2)
10.13 Receivables Purchase Agreement, dated December 18,
1997, between Fidelity Leasing, Inc. and SW Leasing
Portfolio IV, Inc. (2)
10.13(a) Amendment No. 4 to Receivables Purchase Agreement,
dated as of June 30, 1999 (2)
10.14 Purchase and Sale Agreement, dated June 24, 1998
between Fidelity Leasing, Inc. and Fidelity Leasing SPC
I, Inc. (2)
10.15 Receivables Purchase Agreement, dated June 24, 1998,
among Fidelity Leasing SPC I, Inc., Fidelity Leasing,
Inc., Variable Funding Capital Corporation, First Union
Capital Markets Corp., First Union National Bank,
Harris Trust and Savings Bank and others (2)
10.15(a) Amendment No. 1 to Receivables Purchase Agreement,
dated as of March 25, 1999 (2)
10.15(b) Amendment No. 2 to Receivables Purchase Agreement,
dated as of June 30, 1999 (2)
10.15(c) Third Amendment to Receivables Purchase Agreement,
dated as of July 14, 1999 (2)
10.16 Amended and Restated Purchase and Sale Agreement dated
February 5, 1999, between Fidelity Leasing, Inc.,
JLA Credit Corporation and Fidelity Leasing
SPC II, Inc. (2)
10.17 Receivables Purchase Agreement, dated December 29,
1998, among Fidelity Leasing SPC II, Inc., Fidelity
Leasing, Inc., Market Street Funding Corporation, PNC
Bank, National Association and Harris Trust and Savings
Bank (conformed as amended on February 5, 1999 and
March 8, 1999) (2)
10.17(a) Third Amendment to Receivables Purchase Agreement,
dated as of June 28, 1999 (2)
10.18 Indenture, dated August 15, 1997, among JLA Credit
Funding Corporation II, JLA Credit Corporation and LTCB
Trust Company (2)
10.19 Sales and Servicing Agreement, dated August 15, 1997,
between JLA Credit Corporation and JLA Credit Funding
Corporation II (2)
10.20 Indenture, dated March 30, 1998, among JLA Credit
Funding Corporation III, JLA Credit Corporation and
LTCB Trust Company (2)
10.21 Sale and Servicing Agreement, dated March 30, 1998,
among JLA Credit Corporation, JLA Credit Corporation
III (2)
94
<PAGE>
10.22 Transfer and Sale Agreement, dated as of June 2, 1999,
between Fidelity Leasing, Inc. and Fidelity Equipment
Lease Depositor I, LLC (2)
10.23 Indenture, dated June 2, 1999, between Fidelity
Equipment Lease Trust-1 and Harris Trust and Savings
Bank (2)
10.24 Sales and Servicing Agreement, dated as of June 2,
1999, among Fidelity Equipment Lease Depositor I, LLC,
Fidelity Leasing, Inc. and Harris Trust and Savings
Bank (2)
10.25 Receivables Funding Agreement, dated as of July 14,
1999, among Fidelity Leasing SPC IV, Inc., Fidelity
Leasing, Inc., Variable Funding Capital Corporation,
First Union Capital Markets Corp. and others (2)
10.25(a) Amendment No. 1 to Receivables Funding Agreement, dated
as of August 23, 1999
10.26(a) Amendment No. 1 to Purchase and Sale Agreement, dated
as of August 23, 1999
10.27 Ninth Amended and Restated Loan Agreement, dated as of
September 23, 1998, 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., A&D Investments,
Inc., A&D Investments, Inc., PNC Bank, National
Association, as Agent and others (9)
10.28 Loan Agreement, dated as of September 28, 1999, among
Atlas America, Inc., Resource Energy, Inc., Viking
Resources Corporation, PNC Bank, National Association,
as Issuing Bank and Agent, First Union National Bank,
as Syndication Agent, and others
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
- --------
95
<PAGE>
(1) Filed previously as an exhibit to the Company's Current Report on Form
8-K for September 29, 1998 and by this reference incorporated herein.
(2) Previously filed as an exhibit to Fidelity Leasing, Inc., Registration
Statement on Form S-1 (Registration No. 333-82237) and by this reference
incorporated herein.
(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
S-1 (Registration No. 333-03099) and by this reference incorporated
herein.
(6) 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.
(7) Filed previously as an exhibit to the Company's Definitive Proxy
Statement for the 1999 annual meeting of stockholders 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, 1998 and by this reference
incorporated herein.
96
<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 29, 1999 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 ___, 1999.
/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
- -------------------------
SCOTT F. SCHAEFFER
/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. Schreiber Director
- -------------------------
ALAN D. SCHREIBER
/s/ John S. White Director
- -------------------------
JOHN S. WHITE
/s/ Steven J. Kessler Senior Vice President and Chief Financial
- ------------------------- Officer
STEVEN J. KESSLER
/s/ Nancy J. McGurk Vice President-Finance and Chief Accounting
- ------------------------- Officer
NANCY J. McGURK
97
<PAGE>
SCHEDULE IV
RESOURCE AMERICA, INC. & SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
September 30, 1999
<TABLE>
<CAPTION>
Final Periodic
Maturity Payment
Description Interest Rate Date Terms
----------- ------------- ---- -----
<S> <C> <C> <C>
FIRST MORTGAGES
Hotel/Commercial Office, GA Fixed interest rate of 14% 12/31/15 (a)
Hotel, NE Fixed interest rate of 14.5% 09/30/02 (a)
Condominium units, NC Fixed interest rate of 8% 03/31/02 (a)
Apartment bldg. PA Fixed interest rate of 14% 10/01/02 (a)
Office bldg., PA Interest at 85% of prime 09/30/14 (a)
Apartment bldg., IL (3 loans) Fixed interest rate of 7.5% 09/30/02 (a)
Apartment bldg., CT Fixed interest rate of 13% 09/30/11 (a)
JUNIOR LIEN LOANS
Apartment bldg., FL Fixed interest rate of 13% 07/01/00 (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% and prime plus 1% 09/01/05 (a)
Apartment bldg., CT Fixed interest rate of 15% 01/01/14 (a)
Apartment bldg., PA Fixed interest rate of 14.5% 12/31/02 (a)
Apartment bldg., NJ Fixed interest rate of 9% 01/01/03 (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% 04/30/03 (a)
Office bldg. MD Federal funds rate plus 2.875% 10/01/03 (a)
Office bldg., PA (3 loans) Fixed rates ranging from 6.85% to 12% 08/01/08 (a)
Office bldg., PA Fixed interest rate of 10.6% 02/07/01 (a)
Office bldg., DC Interest rate of prime plus 3% 06/01/00 (a)
Office bldg., NJ (3 loans) Fixed interest rate of 9.75% 02/07/01 (a)
Office bldg., PA (3 loans) Rate ranging from 12% to 85% of the rate for 09/30/03 (a)
$100,000 CD's
Apartment bldg. CT Fixed interest rate of 7.5% 07/01/03 (a)
Apartment bldg., MD Fixed interest rate of 10% 06/30/08 (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% 07/01/16 (a)
Apartment bldg., PA 85% of 30 day $100,000 rate CD plus 2.75% 05/03/29 (a)
Apartment bldg., PA Fixed interest rate of 9.28% 11/01/22 (a)
Condominium Units, NC Fixed interest rate of 10% 03/23/09 (a)
COMMERCIAL
Office bldg., Washington, DC (2 loans) Fixed interest rate of 12% and two thirds of the 30 11/30/98 (a)
day treasury rate
Office bldg., PA Fixed interest rate of 9% 09/25/02 (a)
Industrial bldg., Pasadena, CA 2.75% over the average cost of funds to FSLIC- 05/01/01 (a)
insured savings and loan institutions
Office bldg., Washington, DC Fixed interest rate of 15% 08/01/08 (a)
Retail bldg., VA (2 loans) Fixed rates of 9.25% and 14.8% 12/01/02 (a)
Retail bldg., VA Fixed interest rate of 9% 02/01/21 (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% 12/01/00 (a)
Office/Retail bldg., PA Interest rate of 5% plus 90% of prime 07/01/02 (a)
Retail bldg., CA Fixed interest rate of 8.5% 12/31/00 (a)
Office bldg., MD Fixed interest rate of 10.635% 04/01/04 (a)
- ----------
(a) All net cash flows from the property
</TABLE>
98
<PAGE>
SCHEDULE IV - (Continued)
RESOURCE AMERICA, INC. & SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Face Carrying Subject
Prior Amount of Amount of Delinquent
Description Liens Mortgages Mortgages Interest
----------- ----- --------- --------- --------
<S> <C> <C> <C> <C>
FIRST MORTGAGES
Hotel/Commercial Office, GA $ - $ 5,800 $ 7,092 $ -
Hotel, NE - 6,005 4,850 -
Condominium units, NC - 1,670 446 -
Apartment bldg., PA - 400 413 -
Office bldg., PA - 6,000 3,816 -
Apartment bldg., IL (3 loans) - 17,460 18,432 -
Apartment bldg., CT - 1,600 1,600 -
JUNIOR LIEN LOANS
Apartment bldg., FL 2,096 4,100 1,235
Office bldg., NC 1,750 3,500 1,799 -
Apartment bldg., NJ (2 loans) 5,962 11,615 4,966 -
Apartment bldg., CT 9,375 2,973 1,889 -
Apartment bldg., PA 2,570 4,500 5,208 -
Apartment bldg., NJ 625 1,798 725 139
Apartment bldg., NJ (2 loans) 2,136 3,375 1,362 -
Apartment bldg., IL 10,000 24,083 7,243 -
Office bldg., MD 60,000 31,000 36,350 -
Office bldg., PA (3 loans) 43,925 44,000 18,069 -
Office bldg., PA 840 5,400 837 -
Office bldg., DC 685 900 791 -
Office bldg., NJ (3 loans) 2,387 4,800 2,266 -
Office bldg., PA (3 loans) 2,213 3,116 1,520 -
Apartment bldg., CT 11,942 14,500 7,225 -
Apartment bldg., MD 16,000 1,300 1,460 -
Apartment bldg., PA (2 loans) 1,000 1,454 963 -
Apartment bldg., PA 2,997 5,000 1,904 -
Apartment bldg., PA (31 loans) 2,860 - 874 -
Apartment bldg., PA 3,435 2,435 969 -
Apartment bldg., PA 2,478 3,155 801 -
Condominium Units, NC 3,000 2,064 2,134 -
COMMERCIAL
Office bldg., Washington, DC (2 loans) 6,548 13,283 7,104 -
Office bldg., PA 1,750 1,150 783 -
Industrial bldg., Pasadena, CA 2,000 3,000 402 -
Office bldg., Washington, DC 80,684 100,971 21,019 -
Retail bldg., VA (2 loans) 34,960 45,000 8,831 -
Retail bldg., VA 1,413 3,961 886 -
Retail bldg., MN 2,088 1,776 659 -
Retail bldg., WVA 994 1,400 523 -
Retail bldg., CA 1,969 2,271 968 -
Office/Retail bldg., PA 2,611 3,400 1,390 -
Retail bldg., CA 2,400 6,398 559 -
Office bldg., MD 10,000 92,000 71,273 -
----------- ----------- -------- ---------
Balance at September 30, 1999 $ 335,693 $ 488,613 $251,636 $ 139
=========== =========== ======== =========
</TABLE>
99
<PAGE>
Reconciliation of the total carrying amount of real estate loans for the fiscal
years 1999 and 1998 follows:
Years Ended September 30,
1999 1998
--------- ---------
(in thousands)
Balance at October 1 ................. $ 189,556 $ 89,216
Additions during the period:
New mortgage loans ................. 88,869 337,087
Amortization of discount ........... 18,965 6,520
Additions of existing loans ........ 8,558 6,181
--------- ---------
116,392 349,788
--------- ---------
Deductions during the period:
Collections of principal ........... (20,646) (76,915)
Cost of mortgage sold .............. (17,335) (172,533)
Loans reclassified to investments in
real estate ventures ............ (16,331) --
--------- ---------
(54,312) (249,448)
--------- ---------
Balance at September 30 .............. $ 251,636 $ 189,556
========= =========
Aggregate cost for federal income tax purposes at September 30, 1999 is
$278,465.
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.
100
<PAGE>
Exhibit Index
Exhibit No. Description
----------- -----------
10.25(a) Amendment No. 1 to Receivables Funding Agreement, dated
as of August 23, 1999
10.26(a) Amendment No. 1 to Purchase and Sale Agreement, dated
as of August 23, 1999
10.28 Loan Agreement, dated as of September 28, 1999, among
Atlas America, Inc., Resource Energy, Inc., Viking
Resources Corporation, PNC Bank, National Association,
as Issuing Bank and Agent, First Union National Bank,
as Syndication Agent, and others
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
<PAGE>
AMENDMENT NO. 1 TO
RECEIVABLES FUNDING AGREEMENT
THIS AMENDMENT NO. 1 TO RECEIVABLES FUNDING AGREEMENT, dated as of
August 23, 1999 (this "Amendment"), is entered into by and among FIDELITY
LEASING SPC IV, INC., as the Borrower, FIDELITY LEASING, INC., as the Servicer
and Originator, certain Liquidity Lenders named therein, VARIABLE FUNDING
CAPITAL CORPORATION, as a CP Lender, FIRST UNION CAPITAL MARKETS CORP., as the
Administrative Agent and the VFCC Managing Agent and HARRIS TRUST AND SAVINGS
BANK, as the Backup Servicer and the Collateral Custodian. Capitalized terms
used and not otherwise defined herein are used as defined in the Agreement (as
defined below).
WHEREAS, the parties hereto entered into that certain Receivables
Funding Agreement, dated as of July 14, 1999, as amended (the "Agreement"); and
WHEREAS, the parties hereto desire to amend the Agreement in certain
respects as provided herein;
NOW THEREFORE, in consideration of the premises and the other mutual
covenants contained herein, the parties hereto agree as follows:
SECTION 1. Amendments.
(a) Section 1.1 of the Agreement is hereby amended by adding the
following definition in alphabetical order thereto:
IPO: As defined in Section 6.15(k)(i).
(b) Section 6.15(k) of the Agreement is hereby amended in its entirety
to read as follows:
(k) If Fidelity is the Servicer,
(i) the Tangible Net Worth of the Servicer shall (A)
prior to an initial public offering by the Servicer (an
"IPO"), on any day be less than $30,000,000, which amount
shall be increased each calendar quarter, beginning July 1,
1999 for the quarter ended June 30, 1999, by an amount equal
to (1) 75% of the immediately preceding quarter's net income
(with no downward adjustment for losses) and (2) 100% of any
proceeds from any new equity or (B) subsequent to an IPO, on
any day be less than the sum of (1) total shareholder's equity
immediately prior to such IPO, calculated in accordance with
GAAP (2) the net proceeds of such IPO and (3) the amount of
Subordinated Debt that RLI converts into equity immediately
<PAGE>
before such IPO minus the sum of (x) intangibles calculated in
accordance with GAAP and (y) $2,000,000; provided, however
that the amount of Subordinated Debt that RLI converts into
equity pursuant to clause (B)(3) above shall be at least
$30,000,000; provided, further that the amount under this
clause (B) shall be increased each calendar quarter after such
IPO by an amount equal to 75% of net income (with no downward
adjustment for losses);
(ii) at any time prior to the closing of the IPO,
either (A) the Servicer shall make any payment on the
Subordinated Debt prior to the Collection Date or (B) the sum
of the balances outstanding under the 1996 Note and the 1998
Note shall be less than $5,000,000 and/or the balance
outstanding under the 1999 Note shall be less than
$38,000,000;
(iii) the Servicer shall amend, modify, restate,
supplement or otherwise modify the RLI Agreements without the
prior written consent of the Administrative Agent;
(iv) the Servicer shall cease to maintain Committed
Facilities of $400,000,000 (which amount shall include the
Facility Amount) and such failure continues to be unremedied
for a period of 30 days after the earlier to occur of (1) the
date on which written notice of such failure requiring the
same to be remedied shall have been given to the Servicer by
the Buyer or any Agent and (2) the date on which the Servicer
becomes aware thereof;
(v) the ratio of EBIT to Interest Expense of the
Servicer and its Subsidiaries shall be less than 1:15 at any
time; or
SECTION 2. Agreement in Full Force and Effect as Amended. Except as
specifically amended hereby, the Agreement shall remain in full force and
effect. All references to the Agreement shall be deemed to mean the Agreement as
modified hereby. This Amendment shall not constitute a novation of the
Agreement, but shall constitute an amendment thereof. The parties hereto agree
to be bound by the terms and conditions of the Agreement, as amended by this
Amendment, as though such terms and conditions were set forth herein.
SECTION 3. Miscellaneous.
(a) This Amendment may be executed in any number of counterparts, and
by the different parties hereto on the same or separate counterparts, each of
which shall be deemed to be an original instrument but all of which together
shall constitute one and the same agreement. Delivery of an executed counterpart
of a signature page by facsimile shall be effective as delivery of a manually
executed counterpart of this Amendment.
(b) The descriptive headings of the various sections of this Amendment
are inserted for convenience of reference only and shall not be deemed to affect
the meaning or construction of any of the provisions hereof.
-2-
<PAGE>
(c) This Amendment may not be amended or otherwise modified except as
provided in the Agreement.
(d) THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER
THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
[remainder of page intentionally left blank]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
THE BORROWER: FIDELITY LEASING SPC IV, INC.
By:______________________________
Name:____________________________
Title:___________________________
1255 Wright's Lane
West Chester, Pennsylvania 19380
Attention:
Facsimile No.:
Confirmation No.:
THE SERVICER: FIDELITY LEASING, INC.
By:_______________________________
Name:_____________________________
Title:____________________________
1255 Wright's Lane
West Chester, Pennsylvania 19380
Attention: ________________________
Facsimile No.:_____________________
Confirmation No.: 610-719-4515
VFCC
LIQUIDITY LENDERS: FIRST UNION NATIONAL BANK
By:
Name:
Title:
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Bill A. Shirley, Jr.
Facsimile No.: ____________________
Confirmation No.: _________________
<PAGE>
VFCC: VARIABLE FUNDING CAPITAL
CORPORATION
By: First Union Capital Markets Corp.,
as attorney-in-fact
By:_________________________________
Name:_______________________________
Title:______________________________
Variable Funding Capital Corporation
c/o First Union Capital Markets Corp.
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: CP Lender Administration
Facsimile No.: (704) 383-6036
Confirmation No.: (704) 383-9343
THE ADMINISTRATIVE AGENT FIRST UNION CAPITAL MARKETS CORP.
AND VFCC MANAGING AGENT:
By:_______________________________
Name:_____________________________
Title:____________________________
First Union Capital Markets Corp.
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: CP Lender Administration
Facsimile No.: (704) 383-6036
Telephone No.: (704) 383-9343
THE COLLATERAL CUSTODIAN: HARRIS TRUST AND SAVINGS BANK
AND BACKUP SERVICER: as Collateral Custodian and Backup Servicer
By ______________________________
Title:
Harris Trust and Savings Bank
311 West Monroe Street, 12th Floor
Chicago, Illinois 60606
Attention:
Facsimile: (312) 461-3525
Telephone: (312) 461-2532
<PAGE>
AMENDMENT NO. 1 TO
PURCHASE AND SALE AGREEMENT
THIS AMENDMENT NO. 1 TO PURCHASE AND SALE AGREEMENT, dated as of August
23, 1999 (this "Amendment"), is entered into by and between FIDELITY LEASING SPC
IV, INC., as the Buyer and FIDELITY LEASING, INC., as the Seller. Capitalized
terms used and not otherwise defined herein are used as defined in the Agreement
(as defined below).
WHEREAS, the parties hereto entered into that certain Purchase and Sale
Agreement, dated as of July 14, 1999, as amended (the "Agreement"); and
WHEREAS, the parties hereto desire to amend the Agreement in certain
respects as provided herein;
NOW THEREFORE, in consideration of the premises and the other mutual
covenants contained herein, the parties hereto agree as follows:
SECTION 1. Amendments.
(a) Section 5.1(m) of the Agreement is hereby amended in its
entirety to read as follows:
(m) RLI Debt. Immediately before an IPO, the Seller
and RLI shall convert $30,000,000 from Subordinated Debt to
equity in the Seller; provided, however, the Seller shall
obtain the prior written consent of the Administrative Agent
(which consent shall not be unreasonably withheld) with
respect to any terms concerning the Subordinated Debt that is
not converted into equity pursuant to this clause (m).
(b) Section 7.1(b) of the Agreement is hereby amended in its entirety
to read as follows:
(b) the Tangible Net Worth of the Servicer shall (i)
prior to an IPO, on any day be less than $30,000,000, which
amount shall be increased each calendar quarter, beginning
July 1, 1999 for the quarter ended June 30, 1999, by an amount
equal to (A) 75% of the immediately preceding quarter's net
income (with no downward adjustment for losses) and (B) 100%
of any proceeds from any new equity or (ii) subsequent to an
IPO, on any day be less than the sum of (A) total
shareholder's equity immediately prior to such IPO, calculated
in accordance with GAAP (B) the net proceeds of such IPO and
(C) the amount of Subordinated Debt that RLI converts into
equity immediately before such IPO minus the sum of (x)
intangibles calculated in accordance with GAAP and (y)
$2,000,000; provided,
<PAGE>
however that the amount of Subordinated Debt that RLI converts
into equity pursuant to clause (ii)(C) above shall be at least
$30,000,000; provided, further that the amount under this
clause (ii) shall be increased each calendar quarter after
such IPO by an amount equal to 75% of net income (with no
downward adjustment for losses);
(c) Section 7.1(c) is hereby deleted in its entirety.
(d) Section 7.1(d) of the Agreement is hereby amended in its entirety
to read as follows:
(d) at any time prior to the closing of an IPO,
either (A) the Seller shall make any payment on the
Subordinated Debt prior to the Collection Date or (B) the sum
of the balances outstanding under the 1996 Note and the 1998
Note shall be less than $5,000,000 and/or the balance
outstanding under the 1999 Note shall be less than
$38,000,000;
(e) Section 7.1(f) is hereby amended in its entirety to read as
follows:
(e) the Servicer shall cease to maintain Committed Facilities of
$400,000,000 (which amount shall include the Facility Amount)
and failure continues to be unremedied for a period of 30 days
after the earlier to occur of (1) the date on which written
notice of such failure requiring the same to be remedied shall
have been give to the Servicer by the Buyer or any Agent and
(2) the date on which the Servicer becomes aware there;
(f) After making the amendments described in paragraphs (a)
through (e) above, the remainder of Section 7.1 shall be relettered accordingly.
SECTION 2. Consent of the Agents. By executing a signature page hereto,
the Agents hereby acknowledge and give their consent to this Amendment and waive
the requirement of prior written notice and prior written consent hereto in
accordance with Section 9.1 of the Agreement.
SECTION 3. Agreement in Full Force and Effect as Amended. Except as
specifically amended hereby, the Agreement shall remain in full force and
effect. All references to the Agreement shall be deemed to mean the Agreement as
modified hereby. This Amendment shall not constitute a novation of the
Agreement, but shall constitute an amendment thereof. The parties hereto agree
to be bound by the terms and conditions of the Agreement, as amended by this
Amendment, as though such terms and conditions were set forth herein.
SECTION 4. Miscellaneous.
(a) This Amendment may be executed in any number of counterparts, and
by the different parties hereto on the same or separate counterparts, each of
which shall be deemed to be an original instrument but all of which together
shall constitute one and the same agreement.
-2-
<PAGE>
Delivery of an executed counterpart of a signature page by facsimile shall be
effective as delivery of a manually executed counterpart of this Amendment.
(b) The descriptive headings of the various sections of this Amendment
are inserted for convenience of reference only and shall not be deemed to affect
the meaning or construction of any of the provisions hereof.
(c) This Amendment may not be amended or otherwise modified except as
provided in the Agreement.
(d) THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER
THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
[signature pages to follow]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
FIDELITY LEASING SPC IV, INC.
By: ________________________________________
Name:
Title:
1255 Wright's Lane
West Chester, PA 19380
Attention:
Fax:
Phone:
FIDELITY LEASING, INC.
By: ________________________________________
Name:
Title:
1255 Wright's Lane
West Chester, PA 19380
Attention:
Fax:
Phone:
<PAGE>
Acknowledged and accepted
this __th day of August 1999
FIRST UNION CAPITAL MARKETS CORP.,
as Administrative Agent and VFCC Managing Agent
By:__________________________________________
Name:________________________________________
Title:_______________________________________
First Union Capital Markets Corp.
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: CP Lender Administration
Facsimile No.: (704) 383-6036
Telephone No.: (704) 383-9343
<PAGE>
LOAN AGREEMENT
Dated as of September 28, 1999
By and Among
ATLAS AMERICA, INC.,
RESOURCE ENERGY, INC.
and
VIKING RESOURCES CORPORATION
as the Borrowers,
PNC BANK, NATIONAL ASSOCIATION,
as the Issuing Bank,
PNC BANK, NATIONAL ASSOCIATION,
as Agent,
FIRST UNION NATIONAL BANK,
as Syndication Agent,
and
THE BANKS PARTY HERETO
<PAGE>
LOAN AGREEMENT
TABLE OF CONTENTS
Page
----
SECTION 1. DEFINITIONS........................................................1
1.1 Definitions; Construction..........................................1
SECTION 2. LOANS ............................................................12
2.1 Revolving Credit Loans............................................12
2.2 Borrowing Limits; Collateral Value................................15
(i) Annual Determination........................................15
(ii) Special Determinations......................................16
(iii) Scheduled Reductions of Individual Collateral Values........16
2.3 Discounted Future Net Income......................................16
2.4 Mandatory Prepayments.............................................18
2.5 Interest Rate Options, Interest Payments and
Certain Related Payments Pertaining to the Loans..................18
2.6 Capital Adequacy Requirements.....................................23
2.7 Time, Place and Manner of Payments................................24
2.8 Loan Account......................................................24
2.9 Letter of Credit Subfacility......................................24
SECTION 3. REPRESENTATIONS AND WARRANTIES....................................29
3.1 Existence and Authority...........................................29
3.2 Capitalization and Subsidiaries...................................30
3.3 Rights, Titles and Interests......................................30
3.4 Financial Statements and Projections..............................30
3.5 Litigation........................................................32
3.6 Validity; Binding Effect; Enforceability; No Conflicts............32
3.7 Permits ..........................................................33
3.8 Operation of Wells and the Pipeline...............................33
3.9 Public Utility Holding Company....................................33
3.10 ERISA.............................................................33
3.11 Regulation U, T and X.............................................33
3.12 Compliance with Law...............................................33
3.13 Taxes.............................................................33
3.14 Relationship of Borrowers.........................................34
3.15 Status as Producers of Gas........................................34
3.16 Year 2000.........................................................34
3.17 Environmental Matters.............................................34
3.18 Investment Company Act............................................34
3.19 Disclosure........................................................34
3.20 Delivery of Acquisition Agreement.................................35
3.21 Updates to Schedules..............................................35
3.22 Solvency .........................................................35
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<PAGE>
Page
----
SECTION 4. SECURITY..........................................................35
4.1 Security Documents................................................35
4.2 Set-Off...........................................................36
4.3 Additional Security - Generally...................................36
4.4 Certain Additional Security.......................................37
4.5 Operating Accounts................................................37
4.6 Guaranties........................................................37
4.7 Subordination of Indebtedness and Liens...........................37
SECTION 5. AFFIRMATIVE COVENANTS.............................................37
5.1 First Lien Undertakings...........................................38
5.2 Protection of Rights, Titles and Interests........................38
5.3 Operation and Maintenance.........................................38
5.4 Permits ..........................................................38
5.5 Compliance with Law...............................................38
5.6 Corporate Reorganization..........................................38
5.7 Existence and Ownership...........................................39
5.8 Reports, Certifications and Other Information.....................39
5.9 Records and Access................................................40
5.10 Payment of Taxes and Mechanics' Claims............................40
5.11 Insurance.........................................................40
5.12 Duty to Plug......................................................41
5.13 Expenses, Fees and Disbursements..................................41
5.14 Assigned Payments.................................................41
5.15 Notification......................................................42
5.16 Current Ratio.....................................................42
5.17 Debt to EBITDA....................................................42
5.18 Fixed Charge Coverage Ratio.......................................42
5.19 Minimum Consolidated Tangible Net Worth...........................43
5.20 Additional Documents..............................................43
5.21 Environmental Matters.............................................43
SECTION 6. NEGATIVE COVENANTS................................................45
6.1 Alienation........................................................45
6.2 Encumbrances......................................................45
6.3 Guaranty .........................................................46
6.4 Debt..............................................................46
6.5 Loans; Investments................................................46
6.6 Business Activities...............................................47
6.7 Consolidation or Merger; Change of Control........................47
6.8 Acquisitions......................................................47
6.9 Redemption........................................................47
6.10 Distributions.....................................................47
6.11 Leases............................................................48
6.12 Capital Expenditures..............................................48
6.13 Negative Pledges..................................................48
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<PAGE>
Page
----
SECTION 7. BORROWING REQUIREMENTS............................................48
7.1 Conditions to Borrowing...........................................48
SECTION 8. DISBURSEMENT......................................................50
8.1 Procedure.........................................................50
8.2 Use of Proceeds...................................................51
8.3 Charging Account..................................................51
SECTION 9. DEFAULTS..........................................................51
SECTION 10. REMEDIES..........................................................54
SECTION 11. MISCELLANEOUS.....................................................54
11.1 Waiver and Modification...........................................54
11.2 Notices ..........................................................55
11.3 Certain Taxes.....................................................56
11.4 Right to Cure.....................................................56
11.5 Venue and Jurisdiction; Waiver of Jury Trial......................56
11.6 Applicable Law....................................................57
11.7 Severability......................................................57
11.8 Successors and Assigns............................................57
11.9 Nature and Survival of Representations............................58
11.10 Certain Matters Regarding the Prior Loan Agreement................58
11.11 Number and Gender.................................................58
11.12 Joint and Several Liability; Insolvency Laws......................58
11.13 Tax Withholding...................................................59
11.14 Headings .........................................................59
11.15 Confidentiality...................................................59
SECTION 12. AGREEMENT AMONG BANKS.............................................60
12.1 Appointment and Grant of Authority................................60
12.2 Reliance by Agent on Banks for Funding............................60
12.3 Non-Reliance on Agent.............................................61
12.4 Responsibility of Agent and Other Matters.........................61
12.5 Action on Instructions............................................62
12.6 Required Banks....................................................62
12.7 Action Upon Occurrence of an Event of Default.....................62
12.8 Indemnification...................................................62
12.9 Agent's Rights as a Bank..........................................62
12.10 Payment to Banks..................................................63
12.11 Pro Rata Sharing..................................................63
12.12 Successor Agent...................................................63
12.13 Amendments and Waivers............................................63
12.14 Agent's Fees......................................................64
12.15 Funding by Branch, Subsidiary or Affiliate........................64
-iii-
<PAGE>
LIST OF EXHIBITS
EXHIBIT A - Form of Revolving Credit Note
EXHIBIT B - Form of Request for/Confirmation of Loan
EXHIBIT C - Guaranty Agreement
EXHIBIT D - Mortgages
EXHIBIT E-1 - Security Agreement (Partnerships, Accounts, Inventory)
EXHIBIT E-2 - Security Agreement (Note)
EXHIBIT F - Pledge Agreement
EXHIBIT G - Compliance Certificate
EXHIBIT H - Assignment and Assumption Agreement
LIST OF SCHEDULES
SCHEDULE 2.9. - Existing Letters of Credit
SCHEDULE 3.2. - Ownership/Subsidiaries
SCHEDULE 3.5. - Litigation
ANNEX I - Interest Rate Margins
-iv-
<PAGE>
LOAN AGREEMENT
This Loan Agreement dated as of this 28th day of September, 1999 (as
more fully defined below, the "Agreement"), and made and entered into by and
among ATLAS AMERICA, INC., a Pennsylvania Corporation ("Atlas"), RESOURCE
ENERGY, INC., a Delaware corporation ("REI") and VIKING RESOURCES CORPORATION, a
Pennsylvania corporation ("Viking"; Atlas, REI and Viking, each, individually a
"Borrower" and collectively the "Borrowers"), the financial institutions listed
on the signature pages hereto, (together with each other financial institution
which hereafter becomes a party hereunder in accordance with Section 11.8 below
(collectively, the "Banks", and each individually, a "Bank"), PNC BANK, NATIONAL
ASSOCIATION as the issuer of the Letters of Credit (in such capacity, the
"Issuing Bank") and PNC BANK, NATIONAL ASSOCIATION, in its capacity as agent for
the Banks (in such capacity, the "Agent") and FIRST UNION NATIONAL BANK, in its
capacity as Syndication Agent.
WITNESSETH:
WHEREAS, the Borrowers desire to obtain a commitment from each of
the Banks pursuant to which Loans, in a maximum aggregate principal amount at
any one time outstanding not to exceed $45,000,000, will be made to the
Borrowers from time to time prior to the Termination Date (as defined below);
and
WHEREAS, the Borrowers also desire to provide for the issuance, for
the account of the Borrowers, of Letters of Credit with an aggregate stated
amount not to exceed a sublimit of $14,000,000; and
WHEREAS, the Banks are willing, on the terms and subject to the
conditions hereinafter set forth, to extend such commitment and make such Loans
to the Borrowers.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and with the intent to be legally bound hereby, the parties hereto
hereby agree as follows:
SECTION 1. DEFINITIONS
1.1 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
8.1.
"Acquisition" shall mean the acquisition by Viking (then known
prior to a name change as "Viking America, Inc.") of all of the issued and
outstanding stock of Viking Resources Corporation, an Ohio corporation, and the
merger of such corporation with and into Viking, and all actions and
transactions contemplated to occur in connection therewith or as a condition
thereto, including without limitation, the acquisition by Viking Resources
Corporation of the stock of certain corporations and of certain oil and gas well
interests, all as more specifically set forth in the Acquisition Agreement.
<PAGE>
"Acquisition Agreement" shall mean the Agreement and Plan of
Merger, including all exhibits and schedules thereto, dated as of August 20,
1999 among Resource America, Inc., Viking (then known prior to a name change as
"Viking America, Inc."), the former Viking Resources Corporation and the
shareholders of the former Viking Resources Corporation.
"Adjusted Base Rate" means the interest rate relating to the
Base Rate Option as described in item (i) of Subsection 2.5(b).
"Adjusted Euro-Rate" means the interest rate relating to the
Euro-Rate Option as described in item (ii) of Subsection 2.5(b).
"Agent" shall mean PNC Bank, National Association, and its
successors and assigns.
"Aggregate Collateral Value" shall have the meaning ascribed
to it in Section 2.2(c).
"Agreement" means this Loan Agreement dated as of September
_____, 1999, by and among Atlas, REI and Viking, as borrowers, the banks a party
hereto, from time to time, PNC Bank, National Association, as agent for the
Banks, and First Union National Bank, as syndication agent, together with all
extensions, renewals, amendments, substitutions and replacements hereof.
"Aggregate Outstandings" shall have the meaning ascribed to it
in Section 2.2(a).
"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.
"Atlas" shall mean Atlas America, Inc., a Pennsylvania
corporation.
"Authority" shall have the meaning ascribed to it in Section
5.20.
"Bank" shall have the meaning ascribed to it in the preamble
to this Agreement, and shall be deemed to include within its meaning the Issuing
Bank for the purposes of obtaining the benefit of any security, indemnification
or reimbursement provision contained herein or in any other Loan Document in
favor of the Banks.
"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.
"Base Rate Option" means the interest rate option described in
item (i) of Subsection 2.5(b).
-2-
<PAGE>
"Base Rate Portion" means a Loan or a portion thereof which
bears, or is to bear, interest at the Adjusted Base Rate.
"Borrower" and "Borrowers" shall have the meaning ascribed to
it in the preamble of this Agreement.
"Borrower's Proceeds" shall mean, with respect to any
Borrower, (i) such Borrower's or any of such Borrower's Restricted Subsidiary'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 such Borrower or such Restricted Subsidiary
including but not limited to such Borrower's or Restricted Subsidiary'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 such Borrower's or Restricted
Subsidiary's 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
such Borrower or such Restricted Subsidiary 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 such
Borrower or such Restricted Subsidiary 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.
"Change in Control" shall have the meaning ascribed to it in
Subsection 6.7(b).
"Closing Fee" shall have the meaning ascribed to it in
Subsection 2.1(e).
"Combined" shall mean the combination in accordance with GAAP
of the items as to which such term applies with respect to Atlas, REI, Viking
and their respective Subsidiaries.
"Commitment Fee" shall have the meaning ascribed to it in
Subsection 2.1(d).
"Commitment Fee Rate" shall have the meaning ascribed to it in
Subsection 2.1(d).
"Commitment Percentage" shall have the meaning ascribed to it
in Subsection 2.1(a).
"Deficiency Amount" shall have the meaning ascribed to it in
Section 2.5.
-3-
<PAGE>
"Designated Borrower" shall have the meaning ascribed to it in
Subsection 2.2(b).
"Discounted Future Net Income" shall have the meaning ascribed
to it in Section 2.3.
"Dollar(s)" or "$" means the legal tender of the United States
of America.
"Draw" shall mean a payment of funds by the Issuing Bank or
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.
"Drawing Date" shall have the meaning ascribed to it in
Subsection 2.9(b).
"EBITDA" shall have the meaning ascribed to it in Section
5.17.
"Engineering Report(s)" shall have the meaning ascribed to it
in Section 2.3.
"ERISA" shall have the meaning ascribed to it in Section 3.10.
"Euro-Rate" means, with respect to Portions of the Loans to
which the Euro-Rate Option applies for any Euro-Rate Interest Period, the
interest rate per annum determined by the Agent by dividing (the resulting
quotient rounded upwards, if necessary, to the nearest 1/100th of 1% per annum)
(i) the rate of interest determined by the Agent in accordance with its usual
procedures (which determination shall be conclusive, absent manifest error) to
be the average of the London interbank offered rates for U.S. Dollars quoted by
the British Bankers' Association as set forth on Dow Jones Markets Service
(formerly known as Telerate) display page 3750 (or appropriate successor or, if
British Bankers' Association or its successor ceases to provide such quotes, a
comparable replacement determined by the Agent), two (2) Business Days prior to
the first day of such Euro-Rate Interest Period for an amount comparable to such
Loan 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:
Average of London interbank offered rates on
Dow Jones Markets Service display page 3750
Euro-Rate = as quoted by BBA 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 Borrowers
commencing on the borrowing, conversion date or renewal date of a Euro-Rate
Portion to which such period shall apply.
-4-
<PAGE>
"Euro-Rate Option" means the interest rate option described in
item (ii) of Subsection 2.5(b).
"Euro-Rate Portion(s)" means a Loan or portion thereof which
bears, or is to bear, interest at the Adjusted 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 Letters of Credit" shall mean those Letters of
Credit issued under the Prior Loan Agreement and outstanding on the date hereof
as shown on Schedule 2.9 attached hereto and made a part hereof.
"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 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).
"Fee" shall mean any fee payable by the Borrowers to the
Agent, the Banks or the Issuing Bank hereunder, or under any of the other Loan
Documents, including without limitation the Closing Fee, the Commitment Fee, and
the Letter of Credit Fee.
"Financing Statements" shall mean any Uniform Commercial Code
financing statements executed and delivered in connection with any Security
Document.
"Future Net Income" shall have the meaning ascribed to it in
Section 2.3.
"GAAP" shall mean generally accepted accounting principles in
the United States of America in effect from time to time.
"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.
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"Governmental Rule" means any law, statute, rule, regulation,
ordinance, order, judgment, guideline or decision of any Governmental Person.
"Guarantor" shall mean each Restricted Subsidiary of a
Borrower in existence on the date hereof and each person which becomes a
Restricted Subsidiary of a Borrower on and after the date hereof.
"Guaranty Agreement" shall mean any Guaranty Agreement in the
form of Exhibit "C" hereto, together with all extensions, renewals, amendments,
supplements, substitutions and replacements thereof and thereto.
"Hazardous Substances" shall have the meaning ascribed to it
in Section 3.17.
"Indebtedness" shall mean, collectively, (i) all unpaid
principal of, and accrued and unpaid interest on, the Loans, (ii) all accrued
and unpaid Fees, (iii) any other amounts due hereunder or under any of the other
Loan Documents, including any and all reimbursements, indemnities, Fees, costs,
expenses, prepayment premiums, break-funding costs and other obligations of the
Borrowers to the Agent, the Banks, or the Issuing Bank, or any indemnified party
hereunder and thereunder, and (iv) all reasonable out-of-pocket costs and
expenses incurred by the Agent and the Banks, to the extent permitted herein, in
connection with this Agreement and the other Loan Documents, including but not
limited to the reasonable fees and expenses of the Agent's counsel, which the
Borrowers are responsible to pay pursuant to the terms of this Agreement and the
other Loan Documents.
"Individual Collateral Value" shall have the meaning ascribed
to it in Subsection 2.2(c).
"Individual Collateral Value Reduction Amount" shall have the
meaning ascribed to it in Subsection 2.2(d)(iii).
"Individual Outstandings" shall have the meaning ascribed to
it in Subsection 2.2(a).
"Issuing Bank" shall mean PNC Bank, National Association, in
its capacity as the issuer of Letters of Credit hereunder.
"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 Issuing Bank in accordance
with Section 2.9 hereof and the Existing Letters of Credit.
"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 when made and shall not have been converted into a Loan
under Section 2.9.
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"Letter of Credit Fee" shall mean that fee described in
Subsection 2.9(i) hereof.
"Lien" shall mean any encumbrance, mortgage, lien, charge,
pledge, security interest, priority payment, conditional sales agreement right,
or other title retention agreement right including but not limited to any right
under a capitalized lease, in, upon or against any asset of the affected Person.
"Limits" shall mean the individual and aggregate limitations
on Loans and Letters of Credit hereunder set forth in Section 2.2.
"Loan" and "Loans" shall have the meanings ascribed to each in
Subsection 2.1(a).
"Loan Account" shall have the meaning ascribed to it in
Section 2.8.
"Loan Documents" shall mean any of this Agreement, the Notes,
each application for Letter of Credit, the Guaranty Agreements, the Security
Documents and all other agreements, documents and instruments executed and
delivered from time to time to govern, evidence or secure the Indebtedness or
any of the foregoing documents and instruments, and the statements, reports,
certificates and other documents required by, or related to, any of the
foregoing, together with all extensions, renewals, amendments, substitutions and
replacements to and of any of the foregoing.
"Loan Party" shall mean each Borrower and each Guarantor.
"Mortgage" shall mean the open-end mortgage and security
agreement in the form of Exhibit "D" hereto, together with all extensions,
renewals, amendments, supplements, substitutions and replacements thereto and
thereof.
"Note" and "Notes" shall have the meanings ascribed to each in
Subsection 2.1(a).
"Option(s)" means any one or more of the Base Rate Option or
the Euro-Rate Option.
"Original Borrowers" shall mean Atlas America, 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.
"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 2.9.
"Partnership" and "Partnerships" shall have the meaning
ascribed to each in Section 2.3.
"Partnership Wells" shall have the meaning ascribed to it in
Section 3.7.
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"PBGC" shall have the meaning ascribed to it in Section 3.10.
"Permitted Liens" shall mean with respect to any asset:
(a) Liens securing the Indebtedness in favor of Banks;
(b) Minor defects in title which do not secure the payment of
money and otherwise have no material adverse effect on the value or operation of
oil and gas properties, and for the purposes of this Agreement, a minor defect
in title shall include (i) those instances where record title to an oil and gas
lease is in a predecessor in title to any Borrower or any of its Subsidiaries,
but where any Borrower or any of its Subsidiaries, by reason of a farmout or
other instrument is presently entitled to receive an assignment of its interests
or other evidence of title and the appropriate Person is proceeding diligently
to obtain the assignment, and (ii) easements, rights-of-way, servitudes,
permits, surface leases and other similar rights in respect of surface
operations, and easements for pipelines, streets, alleys, highways, telephone
liens, power lines, railways, and other easements and rights-of-way, on, over or
in respect of any of the properties of Borrower (or its Subsidiaries, as
applicable) that are customarily granted in the oil and gas industry; so long
as, with respect to any of the minor defects in title, the same are minor
defects which are customary and usual in the oil and gas industry and which are
customarily accepted by a reasonably prudent operator dealing with its
properties;
(c) Inchoate statutory or operators' liens which are not
delinquent securing obligations for labor, services, materials, and supplies
furnished to oil and gas properties;
(d) Production sales, contracts, gas balancing agreements, and
joint operating agreements entered into in the ordinary course of business and
which do not involve any advance payments for production to be produced at a
later date;
(e) All rights to consent by, required notices to, filings
with, or other actions by, Governmental Persons in connection with the sale or
conveyance of oil and gas leases or interests therein if any Borrower (or its
Subsidiaries, if applicable) is entitled to such consent, the same are
customarily obtained subsequent to the sale or conveyance, and the appropriate
Person is proceeding diligently to obtain the consent, notice or filing; and
(f) Now existing oil and gas lease burdens payable to third
parties which are deducted in the calculation of discounted present value in the
Engineering Reports including, without limitation, any royalty, overriding
royalty, net profits interest, production payment, carried interest, or
reversionary working interest customarily and usually found in the oil and gas
industry.
"Permitted Merger" shall have the meaning ascribed to it in
Section 6.7.
"Person" shall mean any individual, partnership, corporation,
trust, joint venture, unincorporated organization, association, limited
liability company, entity or Governmental Person.
"Pipeline" shall have the meaning ascribed to it in Section
2.3.
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"Plan" shall have the meaning ascribed to it in Section 3.10.
"Pledge Agreement" shall mean any Pledge Agreement in the form
of Exhibit "F" hereto, together with all extensions, renewals, amendments,
supplements, substitutions, and replacements thereof and thereto.
"Portion(s)" means any Base Rate Portion or Euro-Rate Portion,
as the case may be or both 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.
"Prior Loan Agreement" shall mean that certain Ninth Amended
and Restated Loan Agreement dated as of September 28, 1998, as amended, by and
among Agent, PNC Bank, National Association (as the sole Bank) and the Original
Borrowers.
"Prior Notes" shall have the meaning ascribed to it in
Subsection 2.1(f).
"Pro Forma Balance Sheets" shall have the meaning ascribed to
it in Subsection 3.4(b).
"Projections" shall have the meaning ascribed to it in
Subsection 3.4(b).
"Property" shall mean collectively, the real and personal
property (tangible and intangible) in which any Borrower or Restricted
Subsidiary has granted to or will in the future grant to or for the benefit of
the Agent (for the benefit of the Banks) a security interest and lien to secure
the payment of the Indebtedness, and shall further include the real and personal
property (tangible or intangible) of any Partnership, including the Partnership
Wells.
"Quarterly Reports" shall have the meaning ascribed to it in
Section 5.8.
"Ratable Share" shall have the meaning ascribed to it in
Subsection 2.1(a).
"REI" shall mean Resource Energy, Inc., a Delaware
corporation.
"Reimbursement Obligation" shall have the meaning ascribed to
it in Subsection 2.9(b).
"Required Banks" shall have the meaning ascribed to it in
Section 12.6.
"Restricted Subsidiary" shall mean (i) each Subsidiary of a
Borrower designated on Schedule 3.2 as a Restricted Subsidiary and (ii) each
other Subsidiary of a Borrower designated as a Restricted Subsidiary by such
Borrower.
"Revolving Credit" shall have the meaning ascribed to it in
Subsection 2.1(a).
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"Revolving Credit Period" shall have the meaning ascribed to
it in Subsection 2.1(a).
"Security Agreement" shall mean any Security Agreement in the
form of either Exhibit "E-1" or "E-2" hereto, together with all extensions,
renewals, amendments, supplements, substitutions and replacements thereof and
thereto.
"Security Documents" shall mean any or all of the Mortgages,
the Security Agreements, the Pledge Agreements, the Financing Statements and all
additional documents and instruments entered into from time to time for the
purpose of securing the Indebtedness and any and all ancillary documents and
instruments related to any of the foregoing.
"Solvent" shall mean, with respect to any Person on a
particular date, that on such date (i) the fair value of the property of such
Person is greater than the total amount of liabilities, including, without
limitation, contingent liabilities, of such Person, (ii) the present fair
salable value of the assets of such Person is not less than the amount that will
be required to pay the probable liability of such Person on its debts as they
become absolute and matured, (iii) such Person is able to realize upon its
assets and pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (iv) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature, and (v) such Person is not engaged in business or a transactions, and is
not about to engage in business or a transaction, for which such Person's
property would constitute unreasonably small capital after giving due
consideration to the prevailing practice in the industry in which such Person is
engaged. In computing the amount of contingent liabilities at any time, it is
intended that such liabilities will be computed at the amount which, in light of
all the facts and circumstances existing at such time, represents the amount
that can reasonably be expected to become an actual or matured liability.
"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.
"Subsidiary" shall mean either any corporation or limited
liability company more than 25% of the outstanding voting securities of which
shall at the time be owned or controlled, directly or indirectly, by a Borrower
or one or more Subsidiaries of a Borrower, or by a Borrower and one or more
Subsidiaries.
"Tangible Net Worth" shall mean with respect to any Borrower,
at a particular date, (i) the aggregate amount of all assets of such Borrower as
may be properly classified as such in accordance with GAAP consistently applied
excluding such other assets as are properly classified as intangible assets
under GAAP, less (ii) the aggregate amount of all liabilities of such Borrower.
"Termination Date" shall mean November 30, 2002, or, if such
day is not a Business Day, the Business Day next preceding such date.
"Total Indebtedness" shall have the meaning ascribed to it in
Section 5.17.
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"UCC" shall mean the Uniform Commercial Code as adopted and in
effect from time to time in the Commonwealth of Pennsylvania, except when the
provisions of the UCC as adopted in another jurisdiction are applicable due to
the location of any collateral in such other jurisdiction.
"Unrestricted Subsidiary" shall mean each Subsidiary of a
Borrower which is not a Restricted Subsidiary.
"Utilization Rate" means, at the time of determination by
Agent, the quotient (expressed as a percentage) determined by dividing (i) the
then current Aggregate Outstandings by (ii) the then current Aggregate
Collateral Value.
"Viking" shall mean Viking Resources Corporation, a
Pennsylvania corporation, formerly known prior to a name change as "Viking
America, Inc."
"Wells" shall have the meaning ascribed to it in Section 2.3.
(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 a 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.
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(c) Accounting Principles. Except as otherwise provided in this
Agreement, all computations and determinations as to accounting or financial
matters and all financial statements 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 LOANS.
2.1 Revolving Credit Loans.
(a) Credit. Subject to the terms and conditions hereof
(including but not limited to the conditions contained in Section 8.1 hereof),
and relying on the representations and warranties herein contained, the Banks
agree to, and shall be obligated to, lend to Borrowers, from time to time and
upon request of Borrowers as provided in Section 8.1, during the period (the
"Revolving Credit Period") commencing on the date hereof and ending on the
Termination Date, an amount or amounts (the "Revolving Credit") not exceeding in
the aggregate at any one time outstanding Forty-Five Million Dollars
($45,000,000), subject to the limits set forth in Section 2.2 below.
Each Bank agrees, for itself only, and subject to the terms
and conditions of this Agreement, to make loans under the Revolving Credit to
the Borrowers 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, subject to the Limits set forth in Section 2.2 below. 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 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 joint and several obligations of the Borrowers to repay
the aggregate unpaid principal amount of the advances to the Borrowers under the
Revolving Credit (each such advance under the Revolving Credit, a "Loan" and
collectively the "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 "Note" and collectively, the
"Notes"). Notwithstanding the aggregate principal amount of the Notes as stated
on the faces thereof in the amount of Forty-Five Million ($45,000,000) Dollars,
the actual principal amount due from the Borrowers to each Bank on account of
such Bank's 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 2.8 hereof.
Subject to the Limits sets forth in Section 2.2 below, during
the Revolving Credit Period, the Borrowers 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 Notes exceed Forty-Five
Million ($45,000,000) Dollars less the sum of (x) the aggregate Stated Amounts
of outstanding Letters of Credit and (y) the aggregate amount of unreimbursed
Draws under the Letters of Credit. The amount of any borrowing and reborrowing
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under the Revolving Credit at the Base Rate Option shall be in the minimum
aggregate principal amount of One Hundred Thousand ($100,000) Dollars or an
integral multiple thereof. The amount of any borrowing or reborrowing under the
Revolving Credit of the Euro-Rate Option shall be subject to the limitations set
forth in Subsection 2.5(c) below. The Borrowers may from time to time repay the
Loans outstanding upon compliance with the terms of this Subsection 2.1(a) and
Subsection 2.5(f) hereof. The Borrowers shall not be permitted to repay any
Euro-Rate Portion of the 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 2.5(f). Except as set forth in the preceding sentence
and so long as each repayment is in a minimum amount of One Hundred Thousand
($100,000) Dollars or the outstanding principal balances of, and unpaid and
accrued interest on, the Notes, whichever is less, the Borrowers, upon proper
notice as provided in Subsection 2.5(f), may repay, without premium or penalty,
(i) any Base Rate Portion of the Loans at any time, and (ii) any Euro-Rate
Portion of the Loans at the end of the Euro-Rate Interest Period therefor.
(b) Interest. The principal balance outstanding under each 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 2.5. The Borrower shall pay accrued interest on
the unpaid principal balance of each 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
commencing September 30, 1999, (B) at maturity, whether by acceleration or
otherwise, of such 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 Note, and (C) after maturity, on demand until paid in full.
(c) Repayment. All Indebtedness, including the entire principal
balance outstanding under the 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, the Borrowers 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-Five Million ($45,000,000) Dollars and (y) the then current Aggregate
Collateral Value and (ii) the sum of (w) the aggregate principal balances
outstanding under the 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. The Commitment Fee shall be due and payable quarter-annually
beginning on the last Business Day of September, 1999 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 annum equal to (i) thirty-seven and five-tenths
(37.5) basis points (.375%) if the then current Utilization Rate is less than
50%, and (ii) fifty (50) basis points (.5%) if the then current Utilization Rate
is equal to or greater than 50%.
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To the extent that the Borrowers have availability under the
Revolving Credit, as it may be reduced pursuant to Subsection 2.1(a), the
Borrowers 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 Borrowers desire to reduce permanently all or a portion of the
Revolving Credit available to them [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 the Borrowers 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.
(e) Closing Fee. Upon the execution hereof, the Borrowers shall
pay to the Agent, for the benefit of the Banks, a fee (the "Closing Fee") of
$180,000, which Closing Fee is to be allocated among the Banks pro rata in
accordance with each Bank's Commitment Percentage.
(f) No Novation; Assignment of Interest Under Prior Loan
Agreement.
(i) No Novation. The principal balances outstanding under (x)
that certain Revolving Credit Note in the face amount of $40,000,000 dated
September 28, 1998 and made by the Original Borrowers in favor of PNC Bank,
National Association and (y) that certain Term Note in the face amount of
$7,000,000 dated September 28, 1998 and made by the Original Borrowers in favor
of PNC Bank, National Association (collectively, the "Prior Notes") evidencing
the indebtedness under the Prior Loan Agreement are to be converted and recast
into a Loan under the Revolving Credit. The converted and recast loan shall be
evidenced by the Notes executed in connection herewith and allocated among each
Bank's Note in amounts proportionate with such Bank's Commitment Percentage of
the Revolving Credit. The indebtedness evidenced by the Prior Notes (including
without limitation thereto any accrued and unpaid interest evidenced by the
Prior Notes) will continue to be evidenced by the Notes, no advances have been
made, or are being made, by the Banks to satisfy the indebtedness evidenced by
the Prior Notes and the Notes are not a novation of the indebtedness evidenced
by the Prior Notes. Nothing contained herein or in any other Loan Document shall
be construed to release, cancel, terminate or otherwise impair the status or
priority of the liens or security for the Prior Notes or any other Loan
Document, which are hereby assigned to the Banks proportionate with each Bank's
Commitment Percentage of the Revolving Credit.
(ii) Assignment of Interest Under Prior Loan Agreement.
Effective upon the advance by each Bank of its Ratable Share of the initial
Loans hereunder, PNC Bank, National Association, as sole Bank under the Prior
Loan Agreement, hereby agrees to sell without recourse, and the Banks each
hereby agree to purchase without recourse, such an interest (with respect to the
Prior Loan Agreement) in the outstanding "Loans" (as such term is defined in the
Prior Loan Agreement) and the Existing Letters of Credit as is required
(together with its commitment to lend set forth in Subsection 2.1(a) above) to
give each Bank (x) its Ratable Share of the initial Loans to be outstanding
under this Agreement and of the risk participation interest in the Stated Amount
of the Existing Letters of Credit and (y) its Commitment Percentage of the
Revolving Credit set forth opposite its name of the signature page hereto signed
by such Bank.
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2.2 Borrowing Limits; Collateral Value.
(a) Borrowing Limits. Notwithstanding any term or provision
contained herein to the contrary, (i) with respect to each Borrower, the sum of
(x) the aggregate unpaid principal balance of Loans designated to such Borrower
in the manner provided herein plus (y) the aggregate Stated Amounts of
outstanding Letters of Credit designated to such Borrower in the manner provided
herein plus (z) the aggregate amount of unreimbursed Draws under the Letters of
Credit designated to such Borrower in the manner provided herein (such amount
with respect to any Borrower, its "Individual Outstandings;" and collectively,
for all Borrowers, the "Aggregate Outstandings") at any one time shall not
exceed such Borrower's Individual Collateral Value, as such term is defined in
Subsection 2.2 (c) below, and (ii) with respect to all Borrowers, the Aggregate
Outstandings at any one time shall not exceed the Aggregate Collateral Value, as
such term is defined in Subsection 2.2(c) below.
(b) Designation of Loans and Letters of Credit. Each request for
an advance of a Loan under the Revolving Credit pursuant to Section 8.1 and each
request for the issuance of a Letter of Credit pursuant to Section 2.9 shall
designate one of the Borrowers as the "Designated Borrower" with respect thereto
in accordance with the next sentence. The Designated Borrower, with respect to
any Loan made or Letter of Credit issued hereunder, shall be that Borrower who
is to receive the proceeds of such Loan, or who is to be the account party for
such Letter of Credit. If no Designated Borrower is identified in such request,
then the requesting Borrower shall be deemed to be the Designated Borrower with
respect to such Loan or Letter of Credit, as the case may be. Atlas shall be the
Designated Borrower with respect to the Existing Letters of Credit. The
Borrowers shall give notice to the Agent in connection with all prepayments of
Loans of the Designated Borrower or Borrowers to whom such prepayment should be
allocated. In the absence of such notice, the Borrowers hereby authorize the
Agent to allocate such prepayment among the Borrowers on a basis in accordance
with the direction of the Required Banks and such allocation to be deemed
conclusive. No designation of Loans or Letters of Credit to any Borrower
pursuant to this provision shall in any way affect the joint and several nature
of the Borrowers' obligations hereunder.
(c) "Individual Collateral Value" Definition. For the purposes of
this Agreement, the term "Individual Collateral Value" shall mean, with respect
to each Borrower, the amount of indebtedness for borrowed money that the Banks
shall determine in accordance with Subsection 2.2(d) below can be supported by
the Discounted Future Net Income of such Borrower and its Restricted
Subsidiaries, as such amount is determined pursuant to Section 2.3 below:
provided, that from the date hereof until the next determination of the
Individual Collateral Values pursuant to Subsection 2.2(d) below, (x) the
Individual Collateral Value for Atlas shall be Twenty Two Million ($22,000,000)
Dollars, (y) the Individual Collateral Value for Viking shall be Eighteen
Million ($18,000,000) Dollars, and (z) the Individual Collateral Value for REI
shall be Five Million ($5,000,000) Dollars. For the purposes of this Agreement,
the term "Aggregate Collateral Value" shall mean the sum of the Individual
Collateral Values of Atlas, Viking and REI as of the date of determination.
(d) "Individual Collateral Value" Determinations.
(i) Annual Determinations. Within thirty (30) days of the
delivery by the Borrowers of the information required in Section 2.3 below, the
Agent, in its reasonable judgment and in accordance with its customary
standards, will determine the proposed Individual Collateral Value and any
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proposed change in the Individual Collateral Value Reduction Amount (as such
term is defined in clause below) for each Borrower and its Restricted
Subsidiaries and notify each of the Banks of such determinations. Unless each
Bank notifies the Agent that it approves such proposed Individual Collateral
Values and Individual Collateral Value Reduction Amounts within thirty (30) days
of receipt of notice from the Agent as aforesaid, the Individual Collateral
Values and Individual Collateral Value Reduction Amounts as proposed shall be
assumed disapproved. If affirmatively approved by each of the Banks, the
Individual Collateral Values and Individual Collateral Value Reduction Amounts
shall become effective on such thirtieth (30th) day, and shall remain in effect
until the next determination thereof in accordance herewith. If such proposed
Individual Collateral Values and Individual Collateral Value Reduction Amounts
are so disapproved, then the Banks shall consult with one another to determine
Individual Collateral Values and Individual Collateral Value Reduction Amounts
which are acceptable to all of the Banks. The Individual Collateral Values and
Individual Collateral Value Reduction Amounts so determined by the Banks shall
be promptly notified in writing by the Agent to the Borrowers, and upon such
notification shall be binding on all parties.
(ii) Special Determinations. In addition to the periodic
determinations of Individual Collateral Values and Individual Collateral Value
Reduction Amounts pursuant to paragraph (i) above, the Agent shall also
redetermine the Individual Collateral Values and Individual Collateral Value
Reduction Amounts (w) upon the request of the Borrowers one additional time per
year, (x) upon the request of the Required Banks one additional time per year,
(y) upon the request of the Required Banks at any time after the occurrence of a
default under Section 9 hereof, and (z) at any time that any Loan Party sells or
otherwise disposes of any material part of the Property (which sale or other
disposition is subject to the prior written consent of the Banks, which consent
shall be in the Banks' sole and absolute discretion). Each of the foregoing
special redeterminations shall be made in accordance with Subsections 2.2(c) and
2.3 based upon such Engineering Reports and other information provided by the
Borrowers as requested by the Agent, and must be approved by the Banks.
(iii) Scheduled Reductions of Individual Collateral Values.
Commencing December 31, 1999, and continuing quarterly on the last day of each
March, June, September and December until the Termination Date, the Borrowers'
Individual Collateral Values shall be reduced by the following amounts: (x)
Atlas: $416,666; (y) Viking: $333,333; and (z) REI: $83,333 (the "Individual
Collateral Value Reduction Amounts"). In the Banks' sole discretion, the
Individual Collateral Value Reduction Amounts may be increased or decreased at
each periodic and special redetermination of the Individual Collateral Values.
2.3 Discounted Future Net Income.
By October 30 of each year during the term hereof, the
Borrowers shall furnish to the Agent and each of the Banks such information as
the Agent and the Banks may request in order to enable the Agent to cause to be
prepared, at Borrowers' sole cost and expense, reports in form and substance
satisfactory to the Agent and the Banks and meeting the requirements of this
Section 2.3, which reports ("Engineering Reports") shall be dated as of
September 30 of such year and shall set forth (i) the remaining proved developed
producing, proved developed non-producing and proved undeveloped gas and oil
reserves attributable to each of the wells (the "Wells") in which a Borrower or
any Restricted Subsidiary then has an interest, whether directly or indirectly,
as an owner of a working interest, royalty or overriding royalty, as a general
or limited partner of a partnership, as a 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 such
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Borrower or Restricted Subsidiary with respect thereto for a thirty (30) year
period ("Future Net Income") and (ii) projected fees, revenues and proceeds
payable to a Borrower or Restricted Subsidiary and derived from, in connection
with and/or relating to (x) the transportation, compression and/or sale of gas
transported through pipeline in which a Borrower or Restricted Subsidiary then
has an interest, (y) the operation by a Borrower or Restricted Subsidiary of gas
and oil wells and (z) the management and administration by a Borrower or
Restricted Subsidiary of any partnerships, in each case as of such dates. In
addition, at any time and from time to time upon request of the Agent, the
Borrowers 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 the Agent after the occurrence of a
default under Section 9 hereof, interim reports in form and substance
satisfactory to the Agent and meeting the requirements of this Section 2.3,
which reports shall be dated as of the last day of the month preceding the month
in which the Agent makes the request and shall set forth the remaining proved
developed producing, proved developed non-producing and proved undeveloped 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 report(s) [the
"Engineering Report(s)"], the Agent shall make a determination, as set forth in
the following paragraph, of the Discounted Future Net Income for each Borrower
and its Restricted Subsidiaries as of such dates.
For the purposes 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 Banks have valid and perfected
first liens and security interests free and clear of all other encumbrances and
impairments, as set forth in the Engineering Reports and determined by Agent
(after consultation with the Banks) in accordance with its usual and customary
engineering practices and methods and economic parameters plus (ii) an amount
determined by Agent (after consultation with the Banks) in its sole discretion
and based upon the actual and/or expected fees, revenues and proceeds in which
the Agent for the benefit of the Banks have valid and perfected first liens and
security interests, paid and payable to a Borrower or Restricted Subsidiary 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 a
Mortgage, (y) the operation by a Borrower or Restricted Subsidiary of gas and
oil wells and (z) the management and administration by a Borrower or Restricted
Subsidiaries of any Partnerships. The Agent shall determine (after consultation
with the Banks) in its sole discretion whether any oil and gas reserves,
revenues and proceeds are encumbered or impaired in favor of others and the
Agent (after consultation with the Banks) may conclude that oil and gas reserves
in which no Borrower or Restricted Subsidiary has 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 a
Borrower or Restricted Subsidiary 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.
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The Engineering Reports contemplated by this Section 2.3 shall
be prepared on the basis of price and other economic assumptions specified by
the Agent (after consultation with the Banks) to the Borrowers not less than
sixty (60) days prior to the date the related report is due and in accordance
with their customary oil and gas lending practices for Persons engaged in the
same or similar businesses and similarly situated as the Borrowers, provided
that the natural gas price assumptions shall take into account the Borrowers'
end product sales value for natural gas as most recently furnished by the
Borrowers in writing to the Banks (together with a description of the applicable
period of sales data from which such end product sales value was derived) and
derived from the financial statements furnished to the Banks.
2.4 Mandatory Prepayments. In the event that at any time the
Aggregate Outstandings exceed the maximum amount available under the Revolving
Credit, the Borrowers shall immediately repay to the Banks an amount equal to
such excess. In the event that the Aggregate Outstandings shall, at any time, be
in excess of the then current Aggregate Collateral Value, or, the Individual
Outstandings for any Borrower shall, at any time, be in excess of the then
current Individual Collateral Value for such Borrower (the difference between
such amounts in either such case shall be referred to herein as a "Deficiency
Amount"), whether as a result of a scheduled automatic reduction of the
Aggregate Collateral Value or the Individual Collateral Values or otherwise, the
Borrowers shall (x) within ninety (90) days after such occurrence, make a
payment on the 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 any amounts due under Subsections 2.5(e) or (h) arising as a result
of such payment) and (y) within one hundred eighty (180) days after such
occurrence, make a payment on the 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 and any amounts due under Subsections 2.5(e) or (h)
arising as a result of such payment) such that, after giving effect to such
payments, the Aggregate Outstandings shall not exceed the Aggregate Collateral
Value, and the Individual Outstandings of each Borrower shall not exceed the
Individual Collateral Value for such Borrower.
2.5 Interest Rate Options, Interest Payments and Certain Related
Payments Pertaining to the Loans.
(a) Interest. Each of the Notes 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 2.5. The Borrowers 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 Borrowers shall pay accrued
interest on the unpaid principal balance of each Note in arrears as set forth in
Subsection 2.1(b). If at any time the designated rate applicable to the Loans
made by any Bank exceeds such Bank's highest lawful rate, the rate of interest
on the such Loans shall be limited to such Bank's highest lawful rate.
(b) Interest Rate Options. The unpaid principal amount of the
Loans 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 Borrowers from
among the Options set forth below subject to the provisions of Subsections
2.5(c) and 2.5(d) below; it being understood that, subject to the provisions of
this Agreement, the Borrowers may select different Options, subject to the
provisions of Subsections 2.5(c) and 2.5(d) below, to apply simultaneously to
different
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Portions of the Loans, and may select different Euro-Rate Interest Periods to
apply simultaneously to different Portions of the Euro-Rate Portions of the
Loans.
(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 the sum of (I) the Base Rate, plus (II) the Applicable Base Rate
Margin, with respect to the Loans outstanding. The foregoing rate shall be
adjusted automatically from time to time upon each change in the Base Rate and
each change in the Applicable Base Rate Margin.
(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 the
sum of (I) the Euro-Rate, plus (II) the Applicable Euro-Rate Margin, with
respect to the Loans outstanding. The foregoing note shall be adjusted
automatically, with respect to any Euro-Rate Portion, from time to time upon
each change in the Applicable Euro-Rate Margin.
(c) Euro-Rate Interest Periods; Limitations on Elections. At any
time when the Borrowers shall select, convert to or renew the Euro-Rate Option
to apply to all or any Portion of the outstanding Loans, it shall fix one or
more periods during which such Option shall apply, such periods to be one (1),
two (2), three (3), or six (6) months, 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
(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 Borrowers 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 $250,000 or an integral multiple thereof;
(ii) No Euro-Rate Interest Period may be elected with regard
to amounts outstanding under the Note which Euro-Rate Interest
Period would end after the Termination Date;
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(iii) Upon the occurrence of any automatic default set forth
in Section 9 hereof, or upon the declaration of any optional default
pursuant to Section 9 hereof, the ability of the Borrowers to elect
the Euro-Rate Option shall cease; and
(iv) 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 Borrowers, subject to Subsection 2.5(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 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 three (3) 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 Borrowers and the Banks of any such automatic
conversion.
(e) Repayments and Prepayments. The Borrowers, upon (i) one (1)
Business Day's oral or written notice to the Agent, in the case of Loans bearing
interest at the Adjusted Base Rate or (ii) three (3) Business Days' oral or
written notice to the Agent, in the case of Loans bearing interest at the
Adjusted Euro-Rate, followed immediately thereafter by the Borrowers' written
confirmation to the Agent of any oral notice, may repay, or prepay, as the case
may be, the outstanding amount of the Loans 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 Borrowers may repay, or prepay, as the case may be, a Portion of
the Loans bearing interest at the Adjusted Base Rate without premium or penalty.
If the Borrowers shall repay, or prepay, as the case may be, a Portion of the
Loans bearing interest at the Adjusted Euro-Rate prior to the end of the
Euro-Rate Interest Period relating to such Euro-Rate, the Borrowers shall pay
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(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 Borrowers by such Bank
and, absent manifest error in computation, shall be binding and conclusive on
the Borrowers.
Such losses and costs shall be specified in writing (setting
forth the manner of calculation) to the Borrowers by the affected Bank and,
absent manifest error in computation, shall be binding and conclusive on the
Borrowers.
(f) 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
Borrowers 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, reduce the income receivable by such Bank or
impose any expense upon such Bank, with regard to all or any portion of the
Loans bearing interest at 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 Borrowers
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 Borrowers
shall pay such amount to such Bank, as additional consideration hereunder,
within ten (10) days of the Borrowers' receipt of such notice.
(g) 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
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(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 Loans 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 Loans 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 Loans 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 Borrowers 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
Borrowers 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 to allow the Borrowers 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 Borrowers 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 2.5(g) and the Borrowers have previously notified the Agent of the
Borrowers' 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 Loans. On the date of the
occurrence of any event described in item (i) of part (b), the Loans bearing
interest at the Adjusted Euro-Rate then outstanding shall be automatically
converted to the Base Rate Option and the Borrowers shall pay to the Banks the
accrued and unpaid interest on the Loans to (but not including) the date of such
conversion.
The Borrowers 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 Loans so converted. The affected Bank shall furnish to the
Borrower a certificate as to the amount necessary to compensate such Bank for
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such costs (which certificate shall set forth the calculation in reasonable
detail, and, absent manifest error in computation, shall be conclusive), and the
Borrowers shall pay such amount to such Bank, as additional consideration
hereunder, within ten (10) days of the Borrowers' receipt of such certificate.
(h) Indemnity. The Borrowers 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 Loans subject to the Euro-Rate Option) which any Bank sustains
or incurs as a consequence of any
(a) payment, prepayment, conversion or renewal of the Loans
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 Borrowers 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 Loans or any voluntary prepayments of
the Loans, or
(c) default by the Borrowers in the payment of any principal
of, or interest on, the Loans 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 Borrowers 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 Borrowers to such Bank ten (10) Business Days after
such notice is given. In no event shall the indemnity payment provided for in
this Subsection 2.5(h) require any payment to any Bank for a specific liability,
loss or expense incurred by such Bank by the Borrowers which duplicates the
reimbursement of such Bank for any loss suffered by such Bank upon a voluntary
prepayment of the Loans for which the Borrowers have paid the prepayment premium
required by Subsection 2.5(e) hereof.
(i) Interest After Default; Maturity. Upon the occurrence of and
during the continuance of a default under Section 9 hereof, and after the
principal amount of all or any part of the Loans shall have become due and
payable, whether by acceleration or otherwise, the Loans 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.
2.6 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
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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 Loans 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 Borrowers of such events.
After such Bank notifies the Borrowers of such events, such Bank shall promptly
deliver to the Borrowers 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 Loans 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 Borrowers of the amount so
determined and such amount shall be due and payable by the Borrowers to such
Bank thirty (30) days after such notice is given; provided, however, that if the
Borrowers pay the Loans in full (including principal and interest), cancel any
outstanding Letters of Credit, and terminate the Revolving Credit and the
commitment hereunder to issue Letters of Credit, within such thirty (30) day
period, the Borrowers shall not be liable to such Bank to pay such amount
determined pursuant to this Section 2.6. All amounts determined in accordance
with this Section 2.6 shall be effective from the date on which such Bank first
gave notice to the Borrowers of a reduction in such Bank's rate of return.
2.7 Time, Place and Manner of Payments. All payments and
prepayments to be made by the Borrowers 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.
2.8 Loan Account. Each Bank shall open and maintain on its books a
loan account (each, a "Loan Account") in the name of the Borrowers, 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 Note. Such Loan Account, absent manifest error, shall be
conclusive and binding on the Borrowers as to the amount at any time due to such
Bank from the Borrowers.
2.9 Letter of Credit Subfacility.
(a) Terms of Letter of Credit. The Issuing Bank shall issue,
subject to the terms and conditions hereof (including but not limited to the
conditions contained in Section 8.1 hereof) and at the request of any Borrower,
Letters of Credit for the account of such Borrower or a Restricted Subsidiary of
such Borrower, all as more fully set forth in this Section 2.9.
(i) No Letter of Credit shall be issued hereunder which has an
expiry date 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.
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(ii) Each Letter of Credit, whether now outstanding or
hereafter issued by the Issuing Bank upon written request received by the
Issuing Bank not less than five (5) Business Days prior to the proposed date of
issuance pursuant to this Section 2.9, has been or shall be issued in accordance
with the Issuing Bank's then current practices relating to the issuance by the
Issuing Bank of Letters of Credit, including but not limited to the execution
and delivery by the Borrowers of an application for and/or confirmation of
standby letter of credit and the payment by the Borrowers 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 the
Borrowers 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 9 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.
(iii) In no event shall the aggregate undrawn face amount of
the Letters of Credit plus any unreimbursed Draws exceed, at any one time,
Fourteen Million ($14,000,000) Dollars. 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
for Loans under the Revolving Credit as set forth in Subsection 2.1(a) hereof.
No Letters of Credit may be issued hereunder to the extent that such issuance
would either (x) cause the Aggregate Outstandings to exceed the lesser of (a)
the then current Aggregate Collateral Value or (b) Forty-Five Million
($45,000,000) Dollars or (y) cause any Borrower's Individual Outstandings to
exceed such Borrower's then current Individual Collateral Value.
(iv) Each Borrower agrees that it shall be bound by the terms
of this Agreement and each related application for letter of credit or
reimbursement agreement with respect to the Existing Letters of Credit as if the
Existing Letters of Credit were issued hereunder for the account of the
Borrowers, including without limitation any and all reimbursement obligations,
liability for fees or costs and indemnifications (all such obligations to be
joint and several with the related account party, if such Person is not a
Borrower hereunder). The Existing Letter of Credit shall be deemed, for all
purposes, to be issued under this Agreement, including, without limitation, for
the purpose of calculating the aggregate Stated Amount of Letters of Credit
permitted to be issued hereunder.
(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 Issuing Bank 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 Issuing Bank will promptly
notify the Borrowers and the Agent and the Borrowers shall reimburse (such
obligation to reimburse the Issuing Bank shall sometimes be referred to as a
"Reimbursement Obligation") the Issuing Bank prior to 12:00 noon, Pittsburgh
time on each date that an amount is paid by the Issuing Bank under any Letter of
Credit (each such date, a "Drawing Date") in an amount equal to the amount so
paid by the Issuing Bank. In the event the Borrowers fail to reimburse the
Issuing Bank for the full amount of any drawing under any Letter of Credit by
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12:00 noon, Pittsburgh time, on the Drawing Date, the Issuing Bank will promptly
notify the Agent and each Bank thereof, and the Borrowers shall be deemed to
have requested that 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 8 below, other than any notice requirements. Any
notice given by the Issuing Bank 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 for the account of the Issuing Bank 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 Loan under the Base Rate Option to the
Borrowers in that amount. If any Bank so notified fails to make available to the
Agent for the account of the Issuing Bank 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 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 Issuing Bank will promptly give notice of the
occurrence of the Drawing Date, but failure of the Issuing Bank 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.
(iv) With respect to any unreimbursed Draw that is not
converted into a Loan under the Base Rate Option to the Borrowers in whole or in
part as contemplated by paragraph (ii) above, the Borrowers shall be deemed to
have incurred from the Issuing Bank 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 Loans under the Base Rate Option. Each Bank's payment to the
Issuing Bank 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 2.9.
(c) Repayment of Participation Advances.
(i) Upon (and only upon) receipt by the Issuing Bank for its
account of immediately available funds from the Borrowers (x) in reimbursement
of any payment made by the Issuing Bank under the Letter of Credit with respect
to which any Bank has made a Participation Advance to the Issuing Bank, or (y)
in payment of interest on such a payment made by the Issuing Bank under such a
Letter of Credit, the Issuing Bank will pay to each Bank, in the same funds as
those received by the Issuing Bank, the amount of such Bank's Ratable Share of
such funds, except the Issuing Bank 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 Issuing Bank.
(ii) If the Issuing Bank is required at any time to return to
the Borrowers, or to a trustee, receiver, liquidator, custodian, or any official
in any insolvency or similar proceeding, any portion of the payments made by the
Borrowers to the Issuing Bank pursuant to paragraph (i) immediately above in
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reimbursement of a payment made under the Letter of Credit or interest or fee
thereon, each Bank shall, on demand of the Issuing Bank, forthwith return to the
Issuing Bank the amount of its Ratable Share of any amounts so returned by the
Issuing Bank plus interest thereon from the date such demand is made to the date
such amounts are returned by such Bank to the Issuing Bank, at a rate per annum
equal to the Federal Funds Rate in effect from time to time.
(d) Documentation.
The Borrowers agree to be bound by the terms of the Issuing
Bank's application and agreement for letters of credit and the Issuing Bank's
written regulations and customary practices relating to letters of credit,
though such interpretation may be different from the Borrowers' 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 Issuing Bank shall not be
liable for any error, negligence and/or mistakes, whether of omission or
commission, in following the Borrowers' 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 Issuing Bank 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.
(f) Nature of Participation and Reimbursement Obligations.
Each Bank's obligation in accordance with this Agreement to
make the Loans or Participation Advances, as contemplated by Subsection 2.9(b),
as a result of a drawing under a Letter of Credit, and the obligations of the
Borrowers to reimburse the Issuing Bank 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 2.9 under all
circumstances, including the following circumstances:
(i) any set-off, counterclaim, recoupment, defense or other
right which such Bank may have against the Issuing Bank, any Borrower or any
other Person for any reason whatsoever;
(ii) the failure of any Borrower or any other Person to
comply, in connection with a Letter of Credit Borrowing, with the conditions set
forth in Section 8.1 or as otherwise set forth in this Agreement for the making
of a 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 Subsection 2.9(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 any 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, the Issuing Bank or any Bank or any other
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Person or, whether in connection with this Agreement, the transactions
contemplated herein or any unrelated transaction (including any underlying
transaction between a 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 Issuing Bank has been notified thereof;
(vi) payment by the Issuing Bank 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, provided that such
payment shall not have constituted gross negligence or willful misconduct of the
Issuing Bank;
(vii) any adverse change in the business, operations,
properties, assets, condition (financial or otherwise) or prospects of any
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 any Borrower;
(x) the fact that a default or event of default under Section
9 hereof shall have occurred and be continuing;
(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, not resulting from gross negligence or
willful misconduct of the Issuing Bank.
(g) Liability for Acts and Omissions.
As between the Borrowers and the Issuing Bank, the Borrowers
assume 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 Issuing Bank 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 Issuing Bank 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 any
Borrower against any beneficiary of such Letter of Credit, or any such
transferee, or any dispute between or among any Borrower and any beneficiary of
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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 Issuing Bank, including any action of any
Governmental Person, and none of the above shall affect or impair, or prevent
the vesting of, any of the Issuing Bank's rights or powers hereunder. Nothing in
the preceding sentence shall relieve the Issuing Bank from liability for the
Issuing Bank'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 Issuing
Bank 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 Issuing Bank under any resulting liability to the
Borrowers or any Bank.
(h) Reimbursement for Charges and Fees. The Borrowers agree to pay
or cause to be paid to the Issuing Bank on demand, all normal and customary
transaction charges that the Issuing Bank 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 Issuing Bank on the
day of such drawing, transfer or amendment.
(i) Letter of Credit Fees. The Borrowers 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 9 hereof, the foregoing fee shall automatically be
increased by two hundred (200) basis points (2%) per annum above the rate
otherwise in effect.
SECTION 3. 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, the Borrowers represent and warrant to the Banks that:
3.1 Existence and Authority. Each Loan Party is a corporation or
limited liability company duly organized, validly existing and in good standing
under the laws of the state of its formation, and is duly qualified to do
business, and is in good standing as a foreign corporation, in all jurisdictions
wherein its ownership of property or the nature of its business requires such
qualification and has the right, power and authority to own, and hold under
lease, its properties and to carry on its business as now being conducted.
Each of the Partnerships is a limited partnership duly
organized, validly existing and in good standing under the laws of the state of
its formation, and has the right, power and authority to own, and hold under
lease, its property and to carry on its business as now being conducted.
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3.2 Capitalization and Subsidiaries. (a) The authorized securities
of Atlas America, Inc. consist of One Thousand (1,000) shares of common stock
and all issued and outstanding shares of such stock have been validly issued and
are fully paid and nonassessable and are owned by and issued to Resource
America, Inc.
(b) The authorized securities of Resource Energy, Inc. consist of
One Hundred (100) shares of common stock and all issued and outstanding shares
of such stock have been validly issued and are fully paid and nonassessable and
are owned by and issued to Resource America, Inc.
(c) The authorized securities of Viking Resources Corporation
consist of One Thousand (1,000) shares of common stock and all issued and
outstanding shares of such stock have been validly issued and are fully paid and
nonassessable and are owned by and issued to Resource America, Inc.
(d) Except for the Subsidiaries and other investments in other
Persons set forth on Schedule 3.2, no Borrower or Subsidiary of a Borrower owns
directly or indirectly any capital stock of any other Person. Each Borrower, and
each Subsidiary of a Borrower, has good and marketable title to all the
securities of the Subsidiaries issued to it, free and 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 3.2 attached hereto and made a
part hereof.
3.3 Rights, Titles and Interests. The Borrowers, the Subsidiaries
and the Partnerships have, and will have, good and marketable rights, titles and
interests in and to all of their properties including all the Property free and
clear of all Liens, except for Permitted Liens and any other Liens permitted
under Section 6.2 below. Each Borrower warrants that, at its expense it will,
and will cause the Subsidiaries and the Partnerships 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,
Borrowers, the Subsidiaries and the Partnerships 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.
3.4 Financial Statements and Projections.
(a) Financial Statements. The financial statements described below
in this Section 3.4, 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 Borrowers 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 clauses (ii), (iv) and (vi) below:
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(i) With respect to The Atlas Group, Inc. (predecessor to
Atlas America, Inc.) and its Subsidiaries, the balance
sheet as of June 30, 1998 and the related statements of
income, changes in stockholder's equity and changes in
financial position for the eleven (11) month period
ended on such date, prepared and certified by McLaughlin
& Courson, independent certified public accountants; and
(ii) With respect to Atlas America, Inc. and its
Subsidiaries, the balance sheets as of July 31, 1998,
for The Atlas Group, Inc., predecessor to Atlas America,
Inc., September 30, 1998 and June 30, 1999 and the
related statements of income, changes in stockholder's
equity and changes in financial position for the twelve
(12) month, two (2) month and nine (9) month periods,
respectively, ended on such dates, prepared by the chief
financial officer of Atlas America, Inc.
(iii) With respect to Resource Energy, Inc. and its
Subsidiaries, the balance sheet as of September 30, 1998
and the related statements of income, changes in
stockholder's equity and changes in financial position
for the fiscal year ended on such date, prepared by the
chief financial officer of Resource Energy, Inc.; and
(iv) With respect to Resource Energy, Inc. and its
Subsidiaries, the balance sheet as of June 30, 1999 and
the related statements of income, changes in
stockholder's equity and changes in financial position
for the nine (9) month period ended on such date,
prepared by the chief financial officer of Resource
Energy, Inc.
(v) With respect to Viking Resources Corporation and its
Subsidiaries, the balance sheet as of December 31, 1998
and the related statements of income, changes in
stockholder's equity and changes in financial position
for the fiscal year ended on such date, prepared and
certified by Ernst & Young, independent certified public
accountants; and
(vi) With respect to Viking Resources Corporation and its
Subsidiaries, the balance sheet as of June 30, 1999 and
the related statements of income, changes in
stockholder's equity and changes in financial position
for the six (6) month period ended on such date,
prepared by the chief financial officer of Viking
Resources Corporation.
Except as reflected or referred to in the above described
financial statements, neither any 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 the last date shown above
for the balance sheets of each Borrower, there has been no change in the
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condition, business or prospects, financial or otherwise, of such Borrower or
its Subsidiaries as shown on the balance sheet as of such date and no change in
the aggregate value of the property owned by such Borrower and its Subsidiaries,
including the Property, except changes in the ordinary course of business.
(b) Financial Projections and Pro Forma Balance Sheets. The
Borrowers have delivered to the Agent (i) five year income and cash flow
projections of the Borrowers prepared on a Combined basis (the "Projections")
and (ii) a pro forma balance sheet of the Borrowers prepared on a Combined basis
and dated as of June 30, 1999, as adjusted through the date hereof on a pro
forma basis (the "Pro Forma Balance Sheets"). Such Projections and Pro Forma
Balance Sheets set forth in the Borrowers' judgment a reasonable range of
possible results in light of the history of the businesses the Borrowers are
currently engaged in or are acquiring, present and reasonably foreseeable
conditions and the intentions of the Borrowers' management. Such Projections and
Pro Forma Balance Sheets accurately reflect the liabilities of the Borrowers
upon consummation of the transactions contemplated hereby as of the date hereof.
To the Borrowers' knowledge, no material events have occurred since the
preparation of the Projections and Pro Forma Balance Sheets which would cause
such projections and pro forma balance sheet taken as a whole, not to be
reasonably attainable.
3.5 Litigation. Except as set forth on Schedule 3.5 attached
hereto, there is no material litigation or proceeding of any kind whatsoever
pending, nor to the knowledge of Borrowers threatened, nor any judgment, order,
writ, injunction, decree or award outstanding, which could adversely affect the
Borrowers or the Subsidiaries or the operation of any of their businesses, or
their properties including the Property, nor do the Borrowers know or have
reasonable grounds to know of any basis for any such action or any governmental
investigation or any claim relating to the Borrowers or the Subsidiaries or the
operation of any of their businesses, or their properties including the
Property. Except as set forth on Schedule 3.5 attached hereto, the Borrowers 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.
3.6 Validity; Binding Effect; Enforceability; No Conflicts. The
execution and delivery of the Loan Documents to be executed and/or delivered by
any Loan Party, the borrowings under the Loan Documents, the performance by each
Loan Party of its obligations under the Loan Documents and the assignment of,
and the grant of the liens on and security interests in, the Loan Parties'
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 any Loan Party, or of any
agreement, instrument or other document or of any judicial, arbitration or
local, state or federal governmental requirement or restriction to which any
Loan Party 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 any Loan
Party 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 any Loan Party
enforceable in accordance with their respective terms. Each Loan Party is duly
authorized to execute and deliver this Agreement and the other Loan Documents to
which it is a party; all action necessary and proper to authorize the execution
and delivery of the Loan Documents has occurred; and each Loan Party 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
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make the assignment and grant the liens and security interests pursuant to the
Loan Documents as well as to borrow under the Loan Documents to which it is a
party and to perform all of the other terms and conditions of the Loan
Documents.
3.7 Permits. The Borrowers have 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 Borrowers and the Restricted Subsidiaries (including the
Property) and the gas and oil wells (the "Partnership Wells") in which the
Partnerships have ownership interests, and the conduct of their businesses, all
of which are in full force and effect.
3.8 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 31, 1999 heretofore
furnished by the Borrowers to the Agent are accurate; since January 31, 1999
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.
3.9 Public Utility Holding Company. No Borrower, nor any
Subsidiary of a 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.
3.10 ERISA. No Borrower or Subsidiary has received notice that the
Pension Benefit Guaranty Corporation ("PBGC") has made a determination that,
with respect to any Plan (as hereinafter defined) of any Borrower, or any
Subsidiary or other affiliate of any 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
any Borrower, or any Subsidiary or other affiliate of any Borrower, covered by
ERISA.
3.11 Regulation U, T and X. No 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 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.
3.12 Compliance with Law. Each Loan Party has complied with, and is
in compliance with, all applicable local, state and federal laws, rules and
regulations relating to all of its activities including, but not limited to, the
operation of the Wells and the Pipeline and the offer and sale of securities.
3.13 Taxes. All tax returns and reports of the Borrowers and the
Subsidiaries required by law to be filed have been duly filed, and all taxes,
assessments, fees and other governmental charges upon the Borrowers and the
Subsidiaries or upon any of the property of the Borrowers and the Subsidiaries
including the Property and upon any of the other assets, income or franchises of
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the Borrowers 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 5.10 hereof unless required to be paid as
set forth in such Section and subject to the reserve requirements set forth in
Section 5.10 hereof.
3.14 Relationship of Borrowers. The Borrowers are engaged in
related businesses operated as part of one consolidated business entity and each
Borrower is directly and indirectly dependent upon each other Borrower for and
in connection with their business activities and their financial resources; and
each Borrower has determined, reasonably and in good faith, that such Borrower
will receive substantial direct and indirect economic and financial benefits
from the borrowings made under this Agreement, and such borrowings are in the
best interests of such Borrower, having regard to all relevant facts and
circumstances.
3.15 Status as Producers of Gas. Atlas Energy Group, Inc., Atlas
Energy Corporation, Atlas Resources, Inc., Resource Energy, Inc., Viking
Resources Corporation, DAC Acquisition Corporation, St. Julien III Corporation
and REI-NY, Inc. are producers of oil and/or natural gas; none of the other Loan
Parties is a producer of oil and/or natural gas.
3.16 Year 2000. The Borrowers and their 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 Borrowers or their
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"). Any Year 2000 Problem of the Loan Parties is not reasonably expected
to result in any material adverse change in the business, properties, assets,
financial condition, results of operations or prospects of any such Loan Party,
or impair materially the ability of any such Loan Party to duly and punctually
pay or perform the Indebtedness.
3.17 Environmental Matters. To the best of each 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.
3.18 Investment Company Act. No Borrower or any Subsidiary is 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."
3.19 Disclosure. No representation or warrant made by any Borrower
in this Agreement or in the Acquisition Agreement, or in any financial
statement, report, certificate or any other document furnished in connection
herewith or therewith contains any untrue statement of fact or omits to state
any fact necessary to make the statements herein or therein not misleading.
There is no fact known to Borrowers or which reasonably should be known to
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Borrowers which Borrowers have not disclosed to Agent in writing with respect to
the transactions contemplated by the Acquisition Agreement, or this Agreement
which could reasonably be expected to have a material adverse effect on any
Borrower or any Subsidiary.
3.20 Delivery of Acquisition Agreement. Agent has received complete
copies of the Acquisition Agreement (including all exhibits, schedules and
disclosure letters referred to therein or delivered pursuant thereto, if any)
and all amendments thereto, waivers relating thereto and other side letters or
agreements affecting the terms thereof. None of such documents and agreements
has been amended or supplemented, nor have any of the provisions thereon been
waived, except pursuant to a written agreement or instrument which has
heretofore been delivered to Agent.
3.21 Updates to Schedules. Should any of the information or
disclosures provided on any of the schedules attached hereto or to any other
Loan Document become outdated or incorrect in any material respect, the affected
Loan Party shall promptly provide the Agent in writing with such revisions or
updates to such schedules as may be necessary or appropriate to update or
correct same; provided, however, that no schedule shall be deemed to have been
amended, modified or superseded by any such correction or update, nor shall any
breach of warrant or representation resulting from the inaccuracy or
incompleteness of any such schedule be deemed to have been cured thereby, unless
and until the Required Banks, in their sole and absolute discretion, shall have
accepted in writing such revisions or updates to such schedule.
3.22 Solvency. On the date hereof, and as of the date of each
advance of a Loan and issuance or renewal of any Letter of Credit, as the case
may be, and after giving effect to such advance or the issuance or renewal of a
Letter of Credit, and after giving effect to the consummation of the
transactions contemplated by this Agreement and the Acquisition Agreement, each
Borrower is, and will be, Solvent.
SECTION 4. SECURITY.
To secure the payment of principal of, and interest on, the Note,
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 the Loan
Parties under the Loan Documents and all other Indebtedness and other
obligations of the Loan Parties to the Agent and the Banks under the Loan
Documents and the performance of the terms of the Loan Documents and all other
instruments and documents executed by any Loan Party in favor of, or for the
benefit of, the Agent and the Banks with respect thereto:
4.1 Security Documents. The Borrowers hereby agree 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, 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 the Borrowers and
the Restricted Subsidiaries described in the Mortgages including the Wells, the
Pipeline and the premises known as 311 Rouser Road, Coraopolis, Pennsylvania.
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B. One or more security agreements substantially in the form of
Exhibits "E-1" and "E-2" attached hereto and made a part hereof, as one or more
may be amended, modified or supplemented from time to time, which shall assign
to Agent, and grant to Agent, on behalf of the Banks, a security interest in,
all the property of the Borrower and the Restricted Subsidiaries described in
the Security Agreements including all rights, titles and interests of the
Borrowers and the Restricted Subsidiaries in and to the Partnerships, accounts,
general intangibles and inventory and in any notes evidencing intercompany loans
or advances.
C. One or more pledge 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, which assign to Agent, and
grant to Agent, on behalf of the Banks, a lien on and security interest in, all
the property of the Borrowers and the Restricted Subsidiaries described in the
Pledge Agreement including all of the Borrowers' rights, titles and interest in
and to the stock of the Restricted Subsidiaries, together with undated stock
powers executed in blank.
D. All Financing Statements and all amendments and modifications
thereof and all supplements thereto and all notification and control agreements
required by Agent in connection with the liens and security interests granted
pursuant to the Mortgage, the Security Agreements and the Pledge Agreement.
E. A pledge and collateral assignment of escrow account rights,
as amended, modified or supplemented from time to time, which shall assign to
Agent, and grant to Agent on behalf of the Banks, a security interest in and to
the proceeds owed to Resource America, Inc. of the escrow account established
and maintained pursuant to the terms of the Acquisition Agreement.
4.2 Set-Off. Each Borrower hereby gives to each Bank a lien on,
and security interest in, any and all property, credits, securities, monies and
claims of such Borrower which may at any time be delivered to, or be in the
possession of, or owed to such Borrower by, such Bank in any capacity whatsoever
including the balances of any and all accounts maintained by such Borrower with
such Bank. Each Borrower authorizes each Bank in case of a default under Section
9 hereof, at such Bank's 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 4.2 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 a 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 such 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.
4.3 Additional Security - Generally. In the event that any
Borrower or Restricted Subsidiary 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. The Borrowers shall execute and deliver, or cause to be executed and
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delivered 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).
4.4 Certain Additional Security. The Borrowers hereby agree to
deliver, or cause to be delivered, to the Agent, within thirty (30) days of the
date hereof, and within thirty (30) days of the acquisition of any new oil and
gas properties or interests, such new or amended Mortgage(s) and/or Security
Agreement(s) necessary to grant to the Agent for the benefit of the Banks a lien
on and security interest in substantially all of the interests of the Borrowers
and the Restricted Subsidiaries in producing oil and gas wells and associated
reserves, related pipeline and related contract rights and other property, and
further agrees to take such other action as required by Section 4.3 in
accordance therewith.
4.5 Operating Accounts. Each Borrower agrees to maintain, or cause
to be maintained, all of the principal operating accounts of the Borrowers and
each Restricted Subsidiary at the Agent and agrees to deposit, or cause to be
deposited, in such accounts substantially all of its and their respective funds.
4.6 Guaranties. The Borrowers hereby agree to cause to be
delivered to the Agent for the benefit of the Banks, one or more Guaranty
Agreements executed by each Restricted Subsidiary of any Borrower, each
substantially in the form of Exhibit "C" attached hereto and made a part hereof,
whereby the Guarantors shall guarantee, and be surety for, the prompt and
punctual payment of the Indebtedness and the prompt and punctual performance of
the other obligations of the Borrowers under the Loan Documents. The Borrowers
shall cause each Subsidiary which becomes a Restricted Subsidiary after the date
hereof to execute and deliver to the Agent, for the benefit of the Banks, a
Guaranty Agreement. Such execution and delivery shall occur within fifteen (15)
days of such Subsidiary becoming a Restricted Subsidiary.
4.7 Subordination of Indebtedness and Liens. Any intercompany
loans or advances of any Borrower now or hereafter owed to or held by any other
Borrower are hereby subordinated to the Indebtedness of such other Borrower to
the Banks, and any document or instrument evidencing such loans or advances
shall contain a legend giving notice of such subordination. Any intercompany
loans or advances of any other Borrower due to such Borrower, if the Agent so
requests, shall be collected, enforced and received by such Borrower as trustee
for the Banks and be paid over to the Agent for the account of the Banks on
account of the Indebtedness but without affecting in any manner the liability of
such Borrower under the other provisions of this Agreement or any other Loan
Document. Any Lien, claim, right or other encumbrance on any property of any
Loan Party in favor of any Borrower is hereby subordinated in all respects to
the Liens granted to the Agent for the benefit of the Banks.
SECTION 5. AFFIRMATIVE COVENANTS.
For so long as any Indebtedness remains unpaid, unless the Agent
(with the approval of the Required Banks) otherwise consents in writing, each
Borrower agrees that:
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5.1 First Lien Undertakings. The Borrowers shall obtain and
deliver, or cause to be obtained and delivered, to the Agent and the Banks 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 the Agent and the Banks from time to time, and shall take, or
cause to be taken, all steps, to satisfy all requirements of the Agent and the
Banks that the Borrowers 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 4 hereof are valid and
perfected first liens and security interests, free and clear of all liens and
encumbrances except Permitted Liens.
5.2 Protection of Rights, Titles and Interests. Each Borrower will
take, or cause to be taken, all steps necessary and proper (i) to protect and
enforce its, the Subsidiaries' and the Partnerships' rights, titles and
interests in and to all their respective properties (including the Property) and
in connection with their respective businesses and (ii) to comply with all
duties, terms and conditions undertaken or assumed by the Borrowers, the
Subsidiaries and the Partnerships in connection with their properties (including
the Property) and their businesses.
5.3 Operation and Maintenance. Each 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.
5.4 Permits. Each 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.
5.5 Compliance with Law. Each 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.
5.6 Corporate Reorganization. The Borrowers shall, on or before
March 31, 2000, restructure and reorganize their capital structure such that
Viking and REI shall either merge with and into, or become wholly-owned
subsidiaries of, Atlas.
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5.7 Existence and Ownership. Each 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 or limited liability companies,
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. Each Loan Party 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.
5.8 Reports, Certifications and Other Information. Upon request of
Agent and the Banks, the Borrowers shall deliver, or cause to be delivered, to
Agent and the Banks, within sixty (60) days after the end of each fiscal quarter
(and if a default as set forth in Section 9 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 the Borrowers or
any Subsidiary during such month together with statements setting forth the
quantity of gas and oil produced from the Wells and the quantity of oil and gas
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
Borrowers' Proceeds (showing in detail the computation whereby the Borrowers'
Proceeds are determined) and such other information as the Agent and the Banks
may request which may include but not be limited to a report prepared by the
Borrowers showing the performance of each Well and Partnership 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 fifty-five (55) days after the end of each fiscal
quarter of each fiscal year of the Borrowers and the Subsidiaries, the Borrowers
shall furnish to Agent and each Bank such unaudited financial statements of the
Borrowers and the Subsidiaries ("Quarterly Reports") as Agent and the Banks
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 Borrowers' and the Subsidiaries' financial conditions at the
close of such fiscal quarter and the results of their operations for the period
then ended (in each case prepared on a Combined and a consolidating basis) and
shall be prepared by the chief financial officers of the Borrowers and the
Subsidiaries in accordance with GAAP consistently applied and certified by such
officer, subject only to ordinary and usual year end audit adjustments.
Within one hundred one hundred (100) days after the end of
each fiscal year of the Borrowers and the Subsidiaries, the Borrowers shall
furnish to Agent and the Banks a copy of the annual audited financial statements
of the Borrowers and the Subsidiaries prepared on a Combined and a consolidating
basis in conformity with GAAP consistently applied by certified public
accountants satisfactory to Agent and the Banks and certified without
qualification as to scope.
The Borrowers shall deliver to the Agent and the Banks,
together with each delivery of financial statements required by this Section
5.8, a certificate substantially in the form of Exhibit "G" 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
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Borrowers and the Subsidiaries 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 9 hereunder with respect to the covenants
set forth in Sections 5.16, 5.17, 5.18, 5.19, and 6.12 hereof, or which, after
notice or lapse of time or both, would constitute a default with respect to the
covenants set forth in Sections 5.16, 5.17, 5.18, 5.19 and 6.12 hereof, or, if
any such condition or event existed or exists, specifying the nature and period
of existence thereof and what action the Borrowers have taken or are taking or
propose 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 5.16, 5.17, 5.18, 5.19 and 6.12 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.
The Borrowers shall give to the Agent and the Banks prompt
notice in writing of the occurrence or existence of any default under Section 9
hereof, or of any event which, with the giving of notice or lapse of time or
both would become such a default.
At any time and from time to time, the Borrowers will submit,
or cause to be submitted, to the Agent and the Banks promptly, in such form as
Agent and the Banks shall require, such other information relating to the
financial affairs of the Borrowers and the Subsidiaries, to the properties of
the Borrowers and the Subsidiaries including the Property, to the businesses of
the Borrowers and the Subsidiaries or otherwise as Agent and the Banks shall
reasonably request.
5.9 Records and Access. Each 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
Borrowers' and the Subsidiaries' properties including the Property and their
books, contracts and records.
5.10 Payment of Taxes and Mechanics' Claims. Each 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 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
such 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 any Borrower or any of the Subsidiaries to any of their
properties including the Property.
5.11 Insurance. Each 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
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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 Borrowers 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.
5.12 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 any Borrower,
Subsidiary or Partnership or any other person, corporation or other entity is
required to do so under any agreement or law, the Borrowers 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. Each Borrower further
consents and agrees that it will save harmless Agent, the Banks, their
respective officers, directors and employees, and their 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.
5.13 Expenses, Fees and Disbursements. The Borrowers shall pay, or
cause to be paid, all reasonable 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
reasonable 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. Upon and after the occurrence
of any default under Section 9 hereof, the Borrowers shall also pay, or cause to
be paid, all reasonable fees, expenses and disbursements of the Banks and their
counsel and others (including but not limited to, geologists and engineers)
engaged by the Banks in connection with the enforcement, amendment, waiver or
restrictive of this Agreement and the other Loan Documents.
5.14 Assigned Payments. In connection with any amounts due to any
Loan Party 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 duly authorized agents are,
hereby authorized by each Borrower to endorse for and on such Borrower's behalf
and deposit all drafts and checks payable to such 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 a Loan Party, the Agent shall
promptly deliver such amounts or parts thereof to such persons, corporations or
entities, or at the option of Agent to the Borrowers, upon being furnished with
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evidence satisfactory to the Agent of such amounts or parts thereof and the
identity of such persons, corporations or other entities.
5.15 Notification. Within ten (10) days after any Borrower, any
Subsidiary or any Partnership receives notice of any litigation or any judicial
or administrative proceeding pending or threatened against it which might result
in such Borrower, Subsidiary or Partnership 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, the Borrowers shall notify the Agent and the Banks,
or cause the Agent and the Banks to be notified, in writing of such litigation
or proceeding.
5.16 Current Ratio. The current assets of the Borrowers on a
Combined basis (determined in accordance with GAAP) divided by the positive
difference between (i) the current liabilities of the Borrowers on a Combined
basis (determined in accordance with GAAP) and (ii) the product of (x) the
advance payments received by the Borrowers for the drilling and completion of
oil and gas wells which are classified as current liabilities times (y) fifteen
percent (15%), shall at all times exceed the ratio of .85 to 1.00.
For the purposes of this Section 5.16 alone, (i) the principal
balances outstanding under the 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.
5.17 Debt to EBITDA. The Total Indebtedness of the Borrowers on a
Combined basis divided by the EBITDA of the Borrowers on a Combined 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 Periods Ending: Maximum Ratio:
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9/30/99 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 5.17 and of Section 5.18, (i)
the term "Total Indebtedness" shall mean total indebtedness of the Borrowers,
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 commodity, 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 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 Borrowers'
Combined net income plus interest expense plus tax expense plus depreciation
plus amortization plus other noncash charges to income minus noncash credits to
income (determined in accordance with GAAP).
5.18 Fixed Charge Coverage Ratio. The EBITDA of the Borrowers on a
Combined basis (calculated for the four most recently completed fiscal quarters)
divided by the sum of (i) the interest expense of Borrowers on a Combined basis
(calculated for the four most recently completed fiscal quarters) plus (ii)
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Current Maturities of Long Term Debt of Borrowers on a Combined basis plus (iii)
the aggregate amount of cash payments of contingent consideration made by or on
behalf of Viking pursuant to Section 3.3c of the Acquisition Agreement during
the four most recently completed fiscal quarters, must not be less than the
following ratios for the fiscal periods ending on the following dates
(inclusive):
Fiscal Periods Ending: Minimum Ratio:
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9/30/99 through 6/30/00 1.50 to 1.00
9/30/01 through 12/31/01 2.00 to 1.00
3/31/02 and each fiscal 2.50 to 1.00
period ending thereafter
For the purposes of this Section 4.18, the term "Current
Maturities of Long Term Debt" 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.
5.19 Minimum Combined Tangible Net Worth. The Combined Tangible Net
Worth of the Borrowers shall at all times exceed the sum of (i) eighty-five
(85%) percent of the Combined Tangible Net Worth of the Borrowers as of
September 30, 1999 (provided that the Combined Tangible Net Worth of the
Borrowers on such date shall not be less than $27,000,000), plus (ii) an amount
equal to fifty percent (50%) of the cumulative positive Combined net income of
the Borrowers earned after September 30, 1999.
5.20 Additional Documents. From time to time, at the Agent's and
the Required Banks' request, whether before or after any borrowings hereunder,
the Borrowers at their 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 and the Required Banks
reasonably may require in connection with the transactions contemplated hereby
including the enforcement of the Loan Documents.
5.21 Environmental Matters. (a) The Borrowers will ensure that the
Property remains in compliance, in all material respects, with all local, state
and federal environmental laws, rules and regulations, and 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 any
Borrower or Subsidiary to prosecution or liability in connection therewith.
(b) The Borrowers will employ, or cause to be employed, in
connection with the use of the Property, appropriate technology as the Borrowers
determine 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 any Borrower or any Subsidiary 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
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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 any Borrower or any Subsidiary being liable
for the payment or performance of 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 Borrowers 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 Borrowers are 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) The Borrowers shall promptly forward to the Agent and the
Banks 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 and the Banks copies of correspondence between
any Borrower or any Subsidiary and the Authority regarding such claims until the
claims are settled. The Borrowers shall promptly forward to the Agent and the
Banks copies of all documents and reports concerning Hazardous Substances at the
Property that any Borrower or any Subsidiary is required to file under any
environmental law, rule or regulation. Such information is to be provided to
allow the Agent and the Banks 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 any Borrower or any Subsidiary 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 Borrowers, 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 Notes then outstanding, shall be paid upon demand by the Borrowers.
(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 Borrowers shall provide, or cause to be provided and
addressed, to Agent for the benefit of the Banks, at the Borrowers' 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
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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 ($50,000) Dollars, the Agent shall have the right to
require the Borrowers to post a bond, letter of credit or other security
reasonably satisfactory to the Agent to secure payment of these costs and
expenses.
(g) The Borrowers shall defend and indemnify the Agent and each
Bank, their respective directors, officers and employees and each legal entity,
if any, who controls the Agent or any Bank (the "Indemnified Parties") and hold
each Indemnified Party harmless from and against all loss, liability, damage and
expense, claims, costs, fines and penalties, including attorney's fees, suffered
or incurred by any Indemnified Party, whether as a mortgagee in possession, or
as successor-in-interest to any Borrower or any Subsidiary, 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 such Indemnified Party. The Borrowers' obligations under this
Section 5.21 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
Borrowers' obligations 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 6. NEGATIVE COVENANTS.
For so long as any Indebtedness remains unpaid, each Borrower agrees
that it will not, without the prior written consent of the Agent (with the
approval of the Required Banks):
6.1 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 or any Partnership, except (i) the current sale in the ordinary
course of business of gas and oil transported through the Pipeline and gas and
oil as and when produced from the Wells, (ii) the sale, lease, transfer or other
disposition or alienation for fair consideration in the ordinary course of
business of its, the Subsidiaries' and the Partnerships' properties other than
the Property, (iii) 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 in any twelve
(12) month period, and (iv) the sale, lease, transfer or other disposition or
alienation for fair consideration of the Property having a fair market value not
to exceed Two Hundred Fifty Thousand ($250,000) Dollars in the aggregate in any
twelve month period; provided, that no Property may be sold, leased, transferred
or otherwise disposed of or alienated after the occurrence and during the
continuance of any default under Section 9 below.
6.2 Encumbrances. Permit, create, assume or incur any mortgage,
pledge, charge, security interest, lien or encumbrance of any kind upon any of
its, any Subsidiaries' or any Partnerships' properties (whether now owned or
hereafter acquired) including the Property, or commit any act or make any
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election which will require it or any of the Subsidiaries or any of the
Partnerships to reassign any of their properties including the Property, except
encumbrances (i) created and granted in this Agreement or any other Loan
Document or otherwise created or granted in favor of the Agent for the benefit
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 5.10 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 Borrowers and the
Subsidiaries in connection with obtaining surety bonds, (iv) imposed in the
normal course of business of the Borrowers and the Subsidiaries, other than in
favor of the Agent for the benefit of the Banks, on properties of the Borrowers
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 on a nonrecourse
basis and (v) the Permitted Liens.
6.3 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, (i)
except in favor of the Banks in connection with the payment and/or performance
of any such indebtedness, obligation or undertaking, (ii) except by the
endorsement of negotiable instruments for deposit or collection in the ordinary
course of business, (iii) except (a) guarantees by a 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
(b) the obligations of any Borrower or any Subsidiary arising in the ordinary
course of business in such party's capacity as a general partner of any
Partnership; provided that the obligations guaranteed pursuant to Subsection
6.3(iii)(b) shall not exceed Two Million ($2,000,000) Dollars at any one time,
and provided further that the aggregate amount of the outstanding obligations
guaranteed pursuant to Subsections 6.3(iii)(a) and 6.3(iii)(b) shall not exceed
Five Million ($5,000,000) Dollars at any one time, and (iv) except as permitted
in accordance with Section 6.6 hereof.
6.4 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, any Borrower or any
Subsidiary, or otherwise, except (i) the borrowings under the Loan Documents and
any other indebtedness or obligation of any Borrower or any Subsidiary to the
Banks thereunder, (ii) indebtedness with respect to the intercompany advances
described in Subsection 6.5(vi) hereof, and (iii) 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.
6.5 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
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settlement of debts (created in the ordinary course of business) owing to any
Borrower or any such Subsidiary; (v) loans from Transatco Corporation to TOPICO,
a partnership, not exceeding $850,000 Dollars in the aggregate at any one time
outstanding; (vi) loans from a Borrower or Restricted Subsidiary to another
Borrower or Restricted Subsidiary, so long as the Banks shall have been granted
a first perfected lien in such indebtedness, (vii) the stock held by a Borrower
on the date hereof as described in Section 3.2 hereof and (viii) other loans not
exceeding $2,000,000 in the aggregate at any one time outstanding.
6.6 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, Atlas America, Inc., AIC, Inc., AED Investments, Inc. and ARD
Investments, Inc. shall not be permitted to engage in any business or conduct
any activity except (i) make the advances permitted in Subsection 6.5(vi)
hereof, (ii) hold the stock held by such Borrower on the date hereof as
described in Section 3.2 hereof, (iii) the ownership, maintenance and management
of intangible investments (which includes, without limitation, investments in
the types of assets listed in Subsection 6.5 (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 Atlas America, Inc. only, perform certain
administrative and management services on behalf of the other Borrowers in
exchange for a fee.
6.7 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 any Borrower or any Subsidiary,
except for the merger of any Borrower or any Subsidiary of any other Borrower or
any Subsidiary of any Borrower (each, a "Permitted Merger").
(b) Permit any Change in Control. 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 or any Subsidiary of any Borrower other
than pursuant to a Permitted Merger or the recapitalization required by Section
5.6 above.
6.8 Acquisitions. Except as otherwise permitted or required in
this Agreement, 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, other than pursuant to a Permitted Merger or the
recapitalization required by Section 5.6 above.
6.9 Redemption. Directly or indirectly, purchase or redeem any of
the stock issued by any Borrower or permit any Subsidiary to purchase or redeem
any of the stock issued by such Subsidiary.
6.10 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 such Borrower.
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6.11 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 businesses so long as the aggregate
payments to be made by the Borrowers and the Subsidiaries in connection with
such other leases in any fiscal year of the Borrowers do not exceed One Million
($1,000,000) Dollars.
6.12 Capital Expenditures. Make or permit during any fiscal year
the aggregate amount of the Borrowers' and Subsidiaries' exploration expenses to
exceed an amount equal to twenty (20%) percent of the Borrowers' and
Subsidiaries' 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 the Borrowers' and Subsidiaries' total
capital expenditures.
6.13 Negative Pledges. Directly or indirectly enter into or assume,
or permit any Subsidiary to enter into or assume, any agreement (other than this
Agreement) prohibiting the creation or assumption of any lien or encumbrance
upon any of the Borrowers' or Subsidiaries' properties (including, without
limitation, the Property), whether now owned or hereafter created or acquired,
or otherwise prohibiting or restricting any transaction contemplated hereby.
SECTION 7. BORROWING REQUIREMENTS.
7.1 Conditions to Borrowing. Unless otherwise agreed to by the
Agent and the Banks and subject to the performance by the Loan Parties of their
other obligations under the Loan Documents, the Banks shall have no obligation
to advance any funds to the Borrowers or to issue or renew any Letter of Credit
until all legal matters incident to the transactions contemplated by the Loan
Documents are resolved in a manner satisfactory to Agent and the Banks and until
the Borrowers shall have provided Agent with the following:
A. This Agreement, the Notes, Mortgage, Guaranty Agreements,
Security Agreements, Pledge Agreement, Financing Statements and other Loan
Documents duly executed by the appropriate Loan Parties and all in form and
substance satisfactory to Agent and the Banks.
B. Evidence satisfactory to Agent and the Banks authorizing the
execution and delivery by each Loan Party of this Agreement, the Notes, the
Mortgage, the Guaranty Agreements, the Security Agreement, the Pledge Agreement,
the Financing Statements and the other Loan Documents.
C. Opinions of counsel for the Loan Parties, addressed to Agent
and the Banks, satisfactory to Agent's counsel, relating to such matters as the
Agent may reasonably require.
D. Certificates executed by the Borrowers 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 any
Borrower or Subsidiary has any rights, titles or interests in connection with
the Property.
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E. Evidence satisfactory to Agent and the Banks that there has
been recorded in the appropriate offices documents and instruments establishing
that the Borrowers and the Partnerships have good and marketable rights, titles
and interests in and to the Property and the Partnership Wells and delivery to
the Banks of copies of all the documents and instruments pursuant to which, or
establishing that, the Borrowers and the Partnerships acquired such rights,
titles and interests.
F. Evidence satisfactory to Agent and the Banks of the
recordation and filing of the Mortgage, the Financing Statements and any other
Loan Document as soon as possible after the date hereof, but in any event no
later than ten (10) days after the date hereof.
G. Delivery to the Agent of all original stock certificates of
all Restricted Subsidiaries of the Borrowers, together with duly executed
undated stock powers in blank.
H. Delivery to the Agent of all original executed intercompany
notes, if any, to be pledged in accordance with Section 6.5(vi) hereof.
I. A current certificate of good standing of each Loan Party and
a certificate of incumbency for each, together with certified resolutions of
each Loan Party's board of directors authorizing the execution of the Loan
Documents to which it is a party, and the performance by such Loan Party
pursuant thereto, and certified copies of each Loan Party's articles or
certificate of incorporation, by-laws, and all amendments thereto.
J. Payment of the Fees provided for herein to be paid upon the
execution hereof.
K. Lien searches covering the Borrowers, the Restricted
Subsidiaries and the Property and satisfactory to Agent and the Banks.
L. Payoff letters from each existing creditor to the Borrowers
and Subsidiaries whose loans are being repaid with proceeds of the Loans, in
form satisfactory to Agent and the Banks.
M. All UCC-3 termination statements, mortgage satisfaction
pieces, and other documents deemed reasonably necessary by the Agent and the
Banks in order to release the security interests and other Liens in or upon the
Borrowers' and the Subsidiaries' properties and assets held by any and all
creditors, executed and in recordable form where necessary.
N. Evidence satisfactory to the Agent and the Banks that all
conditions precedent to the consummation of the Acquisition have been satisfied
or provided for and that all other consideration required in connection with the
Acquisition has been paid or delivered (as appropriate), on terms and conditions
acceptable to the Banks, for a total effective purchase price of no more than
$42,000,000 consisting of $18,000,000 in cash, $18,000,000 in stock of Resource
America, Inc., and $6,000,000 in deferred consideration (consisting of
$3,000,000 in cash and $3,000,000 in stock), and receipt by the Banks of (A) a
fully-executed copy of the Acquisition Agreement and all agreements,
instruments, approvals and documents executed and delivered in connection
therewith, certified as true, correct and complete by an authorized officer of
the Borrowers, (B) any other evidence deemed reasonably necessary by and
satisfactory to the Banks that the Acquisition has been consummated upon the
terms and conditions of the Acquisition Agreement, including, without
limitation, the execution and delivery of all documents and agreements to be
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executed and delivered pursuant to the Acquisition Agreement, (C) a copy,
certified by an authorized officer of Viking, of all corporation action taken by
Viking to authorize the Acquisition, and (D) evidence satisfactory to the Banks
that all consents, waivers and permits required to be obtained in connection
with the Acquisition from any Person have been obtained and are in effect and
unconditional.
O. Evidence satisfactory to the Agent that the Borrowers shall
have established certain accounts with the Agent as set forth in Section 4.5
hereof.
P. Evidence of the Borrowers' insurance satisfactory to the Agent
and the Banks and which in all other respects comply with the requirements of
Section 5.11 hereof.
Q. A closing certificate executed by each of the Borrowers and
certifying the accuracy of the representations and warranties made to the Banks
in the Loan Documents, compliance with all agreements and covenants set forth
therein and that there exists no default under Section 9 hereof.
R. After giving effect to the initial Loans hereunder, the
Aggregate Collateral Value shall exceed the Aggregate Outstandings by at least
$1,000,000, and each Borrower's Individual Collateral Value shall exceed such
Borrower's Individual Outstandings.
S. Copies of the five year income Projections of the Borrowers
and their Pro Forma Balance Sheets, each prepared on a Combined basis and
acceptable in all respects to the Banks.
T. Evidence satisfactory to the Agent and the Banks that the
Borrowers are in compliance with Section 5.16 above on the date hereof.
U. Such other documents and instruments, and evidence of the
performance by Borrower of such other obligations, as the Banks may reasonably
request.
SECTION 8. DISBURSEMENT.
8.1 Procedure. Except as otherwise provided herein, the Borrowers
may request a borrowing or reborrowing hereunder by delivering to the Agent, not
later than 11:00 A.M. (Pittsburgh, Pennsylvania time) (i) on the proposed
borrowing or reborrowing date with respect to Loans to which the Base Rate
Option applies and (ii) three (3) Business Days prior to the proposed borrowing
or reborrowing date with respect to Loans to which the Euro-Rate Option applies,
a written notice in the form of Exhibit "B" hereto requesting, and specifying
the date (if other than the date of such request), the amount of the applicable
interest rate Option (and, in the case of a borrowing or reborrowing for which
the Euro-Rate Option shall apply, the applicable Euro-Rate Interest Period), the
Designated Borrower with respect to such Loan and the manner of, each borrowing
and reborrowing hereunder. Each request for a borrowing or reborrowing to which
the Euro-Rate Option shall apply shall be irrevocable and shall be further
subject to the provisions of Subsections 2.5(c) and 2.5(d) hereof. Subject to
Section 12.2 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 Borrowers, 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 the Borrowers in their request, and
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upon availability of such funds Agent shall, as directed by the Borrowers,
credit one or more of the accounts of deposit (the "Accounts") maintained by the
Borrowers at the Agent in the amount to be borrowed or reborrowed. Each
borrowing or reborrowing by the Borrowers 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 9 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 Borrowers that the
foregoing conditions exist, and upon the request of Agent, the Borrowers shall
execute and deliver to the Agent a certificate as to the existence of the
foregoing conditions.
8.2 Use of Proceeds. Each 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 following purposes: (i)
financing oil or natural gas drilling, producing, gathering and associated
activities and facilities by the Borrowers or Restricted Subsidiaries, (ii) the
prepayment in full of the indebtedness owed by Resource Energy, Inc. to KeyBank,
(iii) for the repayment by Viking to Atlas of a loan in the amount of $9,000,000
used to finance part of the cash portion of the purchase price due under the
Acquisition Agreement, (iv) for the repayment by Viking to Resource America,
Inc. of a loan in the amount of $9,000,000 used to finance the remaining part of
the cash portion of the purchase price due under the Acquisition Agreement, (v)
to refinance certain existing indebtedness owed under the Prior Loan Agreement,
which indebtedness is hereby expressly assumed by the Borrowers, each of whom
hereby agrees to be jointly and severally liable for the repayment of such
indebtedness as renewed and recast hereunder, and (vi) for the purpose of
funding other general corporate activities of the Borrowers and the Restricted
Subsidiaries. No proceeds of the Loans shall be advanced to any Unrestricted
Subsidiary.
8.3 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 Closing Fee, the Commitment Fee, any Letter of Credit Fee, the
fees provided for in the side letter among Borrowers and Agent and the charges
set forth in Sections 5.13 and 11.3 hereof.
SECTION 9. DEFAULTS.
If one or more of the following events occur:
A. Any 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 any 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 any 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 such Borrower
or such Subsidiary or such Partnership in bankruptcy or seeking the relief
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described above in this Subsection 9.A, or any such action shall not have been
dismissed within thirty (30) days after it is commenced; or any 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 such Borrower or such Subsidiary or such Partnership; or any
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 any Bank by any Borrower or Subsidiary in an aggregate amount greater than
Fifty Thousand ($50,000) Dollars:
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 the Borrowers shall immediately and automatically terminate and the principal
of, and interest on, the Notes and all other indebtedness of the Borrowers and
the Subsidiaries to the Banks 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 the Borrowers.
If one or more of the following events occur:
C. Default by any Borrower (i) in the payment of interest on the
Notes, in the payment of any obligation with respect to any Letter of Credit, or
in the payment of any Fee or in the payment of items of expense or other charges
to be paid by any Borrower pursuant to the Loan Documents, including but not
limited to the times set forth in Section 5.13 or 11.3 hereof, when due and
payable, and continuance thereof for ten (10) days thereafter, or (ii) in any
payment of any principal of the Loans made hereunder or of any reimbursement
obligation with respect to any Letter of Credit when due and payable.
D. One or more courts shall render a final judgment or judgments
against any Borrower or any Subsidiary or any Partnership in an aggregate amount
greater than One Hundred Thousand ($100,000) 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 9.B hereof, one or more properties of any Borrower or
any Subsidiary or any Partnership shall be liened or attached under a claim or
claims in an aggregate amount greater than One Hundred Thousand ($100,000)
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 the Agent within thirty (30)
days after the property is liened or attached;
E. Any 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 such Borrower or such Subsidiary with respect to any
litigation or any judicial or administrative proceedings pending or threatened
against such Borrower or such Subsidiary or any Partnership or the Property or
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any Partnership Well, the outcome of which, in the reasonable judgment of the
Agent, would materially and adversely affect the financial condition of such
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 negative
covenant contained in Section 6 hereof, or, the default in the performance or
observance of any other agreement, covenant or obligation of any Loan Party set
forth in this Agreement or any other Loan Document, which default does not
constitute a specific default set forth in this Section 9, and continuance
thereof for thirty (30) days;
H. Default in the performance or observance of any agreement,
covenant or obligation of any Borrower or any Subsidiary or any Partnership in
any agreement between any Bank and such 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 9.C, 9.G and 9.H hereof,
default in the payment or performance of any obligation for borrowed money for
which any 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 any Borrower or any Subsidiary or
any Partnership, or default under the Acquisition Agreement or any document or
agreement executed in connection therewith, and continuance thereof for more
than the permitted period of grace, if any;
J. Any representation or warranty made by any Loan Party 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 Loan Party shall terminate its existence, dissolve,
liquidate substantially all of its assets, cease to exist or permanently cease
operations except as specifically permitted herein.
L. Any Change in Control.
M. If Tony C. Banks [or any other person(s) acceptable to Agent
and the Required Banks as set forth in this Subsection 9.M] does not, regardless
of the reason therefor, continue to act as a senior officer and management
executive of each Borrower and to devote his entire time and attention to the
business and affairs of each Borrower; provided, however, that if such default
occurs, the Borrowers may cure such default by engaging, within sixty (60) days
after such occurrence such other person(s) as shall be reasonably acceptable to
Agent and the Required Banks:
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then the Agent, upon the instruction or with the approval of the Required Banks,
at their option, may immediately declare this Agreement and/or the other Loan
Documents in default, may terminate any obligations of the Agent or the Banks or
the Issuing Bank under the Loan Documents or otherwise to make any further
advances to or for the benefit of the Borrowers or issue or renew any Letter of
Credit and/or may declare the principal of, and interest on, the Notes and/or
all other indebtedness of the Borrowers and the Subsidiaries to the Agent, the
Banks and the Issuing Bank including but not limited to all other Indebtedness
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 each
Borrower.
Notwithstanding anything to the contrary contained in this Section
9, for purposes of this Section 9, 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 the Banks in their sole discretion; provided, however, that this paragraph
shall in no way affect the calculation of any Individual Collateral Value
hereunder or the Borrowers' obligations to make mandatory prepayments under
Section 2.4 above.
SECTION 10. REMEDIES.
The Agent (on behalf of the Banks) shall be entitled at the election
of the Required Banks, in their sole discretion, to exercise each and every
remedy accorded it by law and/or specifically set forth in the Loan Documents,
which remedies are specifically incorporated herein by reference. Such remedies
may be asserted concurrently, cumulatively, successively or independently from
time to time so long as any part of the Indebtedness remains unpaid. No delay on
the part of the Agent, the Banks and the Issuing Bank or failure by the Agents,
the Banks and the Issuing Bank to exercise any power, right or remedy under this
Agreement or any other Loan Document shall operate as a waiver thereof, nor
shall any single or partial exercise of any power, right, or remedy or any
abandonment or discontinuance of steps to enforce such right, power or remedy
preclude other or further exercises thereof, or the exercise of any other power,
right or remedy.
In addition to the remedies set forth above, upon the occurrence of any default
set forth above, (i) the Issuing Bank shall have the right to require the
Borrowers to establish with the Issuing Bank and fund a cash collateral account
to cash collateralize the Stated Amount of each outstanding Letter of Credit,
and (ii) the Agent, the Banks and the Issuing Bank shall have all of the rights
and remedies granted to them under this Agreement and the other Loan Documents
and all other rights and remedies granted by law to creditors.
SECTION 11. MISCELLANEOUS.
11.1 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
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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 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 may only
be modified or waived by a written document executed by the Borrowers and the
Agent.
11.2 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 sent to the following addresses, by hand delivery,
recognized national overnight courier service, telex, telegram, facsimile
transmission or by United States Mail, first class, postage prepaid as follows:
(a) To the Borrowers:
c/o Atlas America, Inc.
311 Rouser Road
Coraopolis, Pennsylvania 15108
Attention: Tony C. Banks
President
Telephone: (412) 262-2830
Facsimile: (412) 262-3927
with a copy to:
Ledgewood Law Firm
Ledgewood Law Firm Building
1521 Locust Street
Philadelphia, Pennsylvania 19101-3723
Attention: Richard J. Abt, Esquire
Telephone: (215) 731-9450
Facsimile: (215) 735-2513
(b) To the Agent or the Issuing Bank:
PNC Bank, National Association
Agency Services
One PNC Plaza - 22nd Floor
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
Attention: Arlene M. Ohler
Telephone: (412) 762-3627
Facsimile: (412) 762-8672
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with a copy to:
PNC Bank, National Association
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222
Attention: Energy, Metals & Mining
Telephone: (412) 762-2431
Facsimile: (412) 762-2571
(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 this
Agreement or 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 parties hereto. All such
notices shall be effective three (3) days after mailing or when received,
whichever is earlier.
11.3 Certain Taxes. The Borrowers agree 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, which obligation of the Borrowers
shall survive the termination of this Agreement.
11.4 Right to Cure. In the event that the Borrowers shall fail for
any reason to pay any fee, cost, expense or other charge to be paid or
reimbursed by the Borrowers, 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 Loan Documents, shall be
payable on demand and shall bear interest at the highest lawful rate of interest
then payable under the Notes then outstanding until paid.
11.5 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 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
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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.
11.6 Applicable Law. THIS AGREEMENT SHALL BE A CONTRACT MADE UNDER
AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA.
11.7 Severability. In the event that any term or provision of this
Agreement or any other Loan Document 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.
11.8 Successors and Assigns. (a) This Agreement and the other Loan
Documents shall be binding upon the Borrowers, the Agent and the Banks and their
respective successors and assigns, and shall inure to the benefit of the
Borrowers, the Agent and the Banks and the successors and assigns of the Agent
and the Banks (except that the Borrowers shall have no right to assign,
voluntarily or by operation of law, any of their rights hereunder or under any
other Loan Document without Agent's prior written consent at the consent of the
Required Bank, 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 11.8, 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 "H" and
satisfactory to the Agent, executed by the Transferor Bank, such Purchasing
Bank, the Agent and the Borrowers; provided, however, that prior to the
occurrence of any default under Section 9 hereof, the Borrowers 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 and subsequent to any such default only the consent of
the Agent shall be required, 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 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 Borrowers 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 and the Loans assumed
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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 and the Loans retained by it
hereunder.
(c) The Agent shall maintain at its address referred to in Section
11.2 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 Borrowers, 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 Borrowers 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
Borrowers 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.
11.9 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 any 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 any 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.
11.10 Certain Matters Regarding the Prior Loan Agreement. This
Agreement is intended to amend, restate and replace the Prior Loan Agreement
except with respect to any provisions thereof which by their terms expressly
survive the payment of Borrowers' obligations thereunder.
11.11 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.
11.12 Joint and Several Liability; Insolvency Laws.
(a) 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 any Borrower under and pursuant to this
Agreement and the other Loan Documents.
(b) If at any time any payment of the principal of, or
interest on, the Loans, any unreimbursed Draws or any other amounts payable by
the Borrowers under this Agreement, the Notes, or the other Loan Documents is
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rescinded or must be otherwise restored or returned upon the insolvency,
bankruptcy or reorganization of a Loan Party or otherwise, the obligations of
the other Borrowers under this Agreement, the Notes and the other Loan Documents
with respect to such payment shall be reinstated at such time as though such
payment had become due but had not been made at such time.
(c) Anything in this Agreement to the contrary
notwithstanding, the maximum liability of each Borrower hereunder shall in no
event exceed the amount for which such Borrower can be liable under applicable
federal and state laws relating to the insolvency of debtors.
(d) Each Borrower agrees that the Indebtedness owing by any
other Borrower may at any time and from time to time exceed the amount of the
liability of such Borrower under this Agreement without impairing the liability
of such Borrower under this Agreement or affecting the rights and remedies of
the Banks under this Agreement or under any other Loan Document.
11.13 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 Borrowers 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 Borrowers 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 Borrowers 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.
11.14 Headings. The headings of the Sections of this Agreement are
inserted for convenience only and shall not be deemed to constitute a part
hereof.
11.15 Confidentiality.
(a) General. The Agent and the Banks each agree to keep
confidential all information obtained from the Borrowers or their Subsidiaries
which is nonpublic and confidential or proprietary in nature (including any
information the Borrowers specifically designate 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
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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 11.8, (iii) to the extent requested by any bank regulatory authority or,
with notice to the Borrowers, 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 Borrowers 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 a Borrower or its
Subsidiaries (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 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 11.14 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 12. AGREEMENT AMONG BANKS
12.1 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 Security Documents 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.
12.2 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 Loans,
the Agent may assume that such Bank has made such portion available to the Agent
in accordance with Section 8.1 above and the Agent may, in reliance upon such
assumption, make Loans to the Borrowers. 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 Borrowers 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 Loan made
by such Bank for purposes of this Agreement. The failure by any Bank to pay its
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portion of a Loan made by the Agent shall not relieve any other Bank of its
obligation to pay its portion of net disbursements of Loans, but no Bank shall
be responsible for the failure of any other Bank to make its net share of Loans
to be made by such other Bank on such funding date.
12.3 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
Borrowers 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 Borrowers of this
Agreement or any other document referred to or provided for herein or to inspect
the properties or books of the Borrowers. 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 12.3 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.
12.4 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 12. 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 Borrowers 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 Borrowers.
(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
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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.
12.5 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 therewith, in accordance with the
instructions of the Required Banks (as such term is defined in Section 12.6
below) or, in the case of the matters set forth in items (i) through (viii) of
Section 12.13, from all of the Banks.
12.6 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.
12.7 Action Upon Occurrence of an Event of Default. If an event of
default set forth in Section 9 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.
12.8 Indemnification. To the extent the Borrowers do 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.
12.9 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 the Borrowers under
this Agreement, the other Loan Documents and any other agreements, instruments
and documents delivered pursuant hereto, the Agent shall have the same rights
-62-
<PAGE>
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 Borrowers as if it were not the Agent.
12.10 Payment to Banks. Promptly after receipt from the Borrowers 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
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.
12.11 Pro Rata Sharing. All interest and principal payments on the
Notes, the Closing Fee, all Commitment Fees and all Letter of Credit Fees are to
be divided pro rata among the Banks in accordance with their respective Ratable
Share. Any sums obtained from any Loan Party 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 12.11 shall be deemed to require the sharing
among the Banks of collections specifically relating to any other indebtedness
of any Loan Party to any Bank.
12.12 Successor Agent. The Agent may resign as Agent upon ninety
(90) days' notice to the Banks and the Borrowers. 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, if no default under Section 9 has
occurred and is continuing, be consented to by the Borrowers (which consent
shall not be unreasonably withheld), to serve as agent hereunder and under the
several documents. Following the occurrence and continuance of any default under
Section 9, Borrower's consent shall not be required for appointment of a
successor Agent. 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 Borrowers, 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 Section 12.12 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.
12.13 Amendments and Waivers. The Required Banks, or the Agent with
the consent in writing of the Required Banks, and the Borrowers may, subject to
the provisions of this Section 12.13, 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 Borrowers, 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:
-63-
<PAGE>
(i) waive any event of default by any Loan Party 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, any Pledge Agreement and/or
any Financing Statement or any other collateral described in any Security
Document except as permitted in Section 6.1 above;
(v) reduce the Commitment Fee;
(vi) increase the maximum principal amount of the Revolving Credit
or increase any Individual Collateral Value, the Aggregate Collateral Value or
any Individual Collateral Value Reduction Amount;
(vii) permit any Loan Party to assign its rights or duties
hereunderor under any of the other Loan Documents; or
(viii) amend or waive the provisions of this Section 12.13;
Any such supplemental agreement shall apply equally to each of the Banks and
shall be binding upon the Borrowers, the Banks, the Agent and all future holders
of the Notes. In the case of any waiver, the Borrowers, 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.
12.14 Agent's Fees. The Borrowers shall pay to the Agent certain
fees under the terms of a letter among the Borrowers and Agent, as amended from
time to time.
12.15 Funding by Branch, Subsidiary or Affiliate.
(a) Notional Funding. Each Bank shall have the right from time to
time, without notice to the Borrowers, to deem any branch, subsidiary or
affiliate (which for the purposes of this Section 12.15 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 Borrowers to such other office), and as a result of such change,
the Borrowers would not be under any greater financial obligation pursuant to
Subsection 2.5(h) than they would have been in the absence of such change.
-64-
<PAGE>
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 Subsection 12.15(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 Borrowers hereunder or require the Borrowers
to pay any other compensation to any Bank (including any expenses incurred or
payable pursuant to Subsection 2.5(h)) which would otherwise not be incurred.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-65-
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be
legally bound hereby, have caused this Loan Agreement to be executed by their
respective officers as of the date first written above.
WITNESS: ATLAS AMERICA, INC., a Pennsylvania corporation
____________________ By_____________________________________________ (SEAL)
Name: Jonathan Z. Cohen
Title: Vice Chairman
WITNESS: RESOURCE ENERGY, INC., a Delaware corporation
____________________ By_____________________________________________ (SEAL)
Name: Michael L. Staines
Title: President
WITNESS: VIKING RESOURCES CORPORATION, a Pennsylvania corporation
____________________ By_____________________________________________ (SEAL)
Name: Jonathan Z. Cohen
Title: Chairman
PNC BANK, NATIONAL ASSOCIATION, in its capacity as the
Agent and as the Issuing Bank hereunder
By______________________________________________________
Name:___________________________________________________
Title:__________________________________________________
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
-66-
<PAGE>
IN WITNESS WHEREOF, intending to be legally bound hereby, the
undersigned Bank has caused this Agreement by and among ATLAS AMERICA, INC.,
RESOURCE ENERGY, INC., VIKING RESOURCES CORPORATION, the Banks party hereto, the
Issuing Bank, PNC BANK, NATIONAL ASSOCIATION, as the Agent to be executed by its
duly authorized officers as of the date first above written.
Initial Commitment: $17,500,000 PNC BANK, NATIONAL ASSOCIATION
Commitment Percentage: 38.8889%
By:______________________________
Name:____________________________
Title:___________________________
Addresses for notice purposes:
PNC Bank, National Association
Agency Services
One PNC Plaza - 22nd Floor
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
Attention: Arlene M. Ohler
Telephone: (412) 762-3627
Telecopier: (412) 762-8672
PNC Bank, National Association
Energy, Metals & Mining
One PNC Plaza - Third Floor
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222
Attention: Thomas A. Majeski
Vice President
Telephone: (412) 762-2431
Telecopier: (412) 762-2571
Address for Euro-Rate Loan Funding if different from above:
N/A
- -----------------------------------
Telephone:_________________________
Telecopier:________________________
Telex:_____________________________
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
-67-
<PAGE>
IN WITNESS WHEREOF, intending to be legally bound hereby, the
undersigned Bank has caused this Agreement by and among ATLAS AMERICA, INC.,
RESOURCE ENERGY, INC., VIKING RESOURCES CORPORATION, the Banks party hereto, the
Issuing Bank, PNC BANK, NATIONAL ASSOCIATION, as the Agent to be executed by its
duly authorized officers as of the date first above written.
Initial Commitment: $17,500,000 FIRST UNION NATIONAL BANK
Commitment Percentage: 38.8889%
By:______________________________
Name:____________________________
Title:___________________________
Addresses for notice purposes:
First Union National Bank
1001 Fannin Street, Suite 2255
Houston, Texas 77002
Attention: Russell Clingman
Telephone: (713) 346-2716
Telecopier: (713) 650-6354
Address for Euro-Rate Loan Funding if different from above:
N/A
- -----------------------------------
Telephone:_________________________
Telecopier:________________________
Telex:_____________________________
-68-
<PAGE>
IN WITNESS WHEREOF, intending to be legally bound hereby, the
undersigned Bank has caused this Agreement by and among ATLAS AMERICA, INC.,
RESOURCE ENERGY, INC., VIKING RESOURCES CORPORATION, the Banks party hereto, the
Issuing Bank, PNC BANK, NATIONAL ASSOCIATION, as the Agent to be executed by its
duly authorized officers as of the date first above written.
Initial Commitment: $10,000,000 KEYBANK NATIONAL ASSOCIATION
Commitment Percentage: 22.2222%
By:______________________________
Name:____________________________
Title:___________________________
Addresses for notice purposes:
KeyBank National Association
Mail Code: OH-12-06-0205
126 Central Plaza North
Canton, Ohio 44702
Attention: Lou Poppovich
Telephone: (330) 489-5364
Telecopier: (330) 430-7631
Address for Euro-Rate Loan Funding if different from above:
N/A
- -----------------------------------
Telephone:_________________________
Telecopier:________________________
Telex:_____________________________
-69-
<PAGE>
AGREEMENT OF FORMER BORROWERS
Intending to be legally bound as of the date of this Loan Agreement
(this "Agreement"), each of the undersigned parties (each, a "Former Borrower"),
hereby (a) accepts and agrees to the terms and provisions of this Agreement, (b)
agrees to deliver to Agent for the benefit of the Banks a guaranty agreement
whereby such Former Borrower shall guaranty and become surety for all of the
Indebtedness (as defined in this Agreement) and shall continue to be jointly and
severally responsible for all obligations of a Borrower hereunder, (c)
acknowledges and agrees that such Former Borrower shall continue to be bound by
the provisions of this Agreement (specifically including, without limitation,
all of the terms and provisions of Section 2.9 of this Agreement) and liable to
the Banks for all reimbursement, Letter of Credit Fee, indemnification and other
obligations with respect to the Existing Letters of Credit, as if such Existing
Letters of Credit were Letters of Credit issued hereunder, and (d) ratifies and
confirms in all respects any reimbursement agreement or application for letter
of credit executed by such Former Borrower and further acknowledges that any
such reimbursement agreement and each such application for letter of credit
shall continue and remain in full force and effect and binding upon such Former
Borrower.
ATLAS ENERGY GROUP, INC.
ATLAS RESOURCES, INC.
TRANSATCO CORPORATION
ATLAS ENERGY CORPORATION
MERCER GAS GATHERING, INC.
PENNSYLVANIA INDUSTRIAL ENERGY, INC.
WITNESS:
__________________________________ By:______________________________________
Name: Tony C. Banks
Title: Senior Vice President
AIC, INC.
AED INVESTMENTS, INC.
ARD INVESTMENTS, INC.
WITNESS:
__________________________________ By:______________________________________
Name: Tony C. Banks
Title: President
<PAGE>
ANNEX I
TO
LOAN AGREEMENT
Each of the "Applicable Euro-Rate Margin" and "Applicable Base Rate
Margin" means, for any date, the rate set forth below in the row opposite such
term and in the column corresponding to the Utilization Rate that exists on such
date.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Utilization Rate <= 50% > 50% - <=65% > 65% - <=80% > 80% - <=90% > 90
- ----------------------------------------------------------------------------------------------------------------------
Applicable Euro-Rate Margin 150.0 162.5 175.0 200.0 225.0
- ----------------------------------------------------------------------------------------------------------------------
Applicable Base Rate Margin 0 12.5 25 50 75
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 12
COMPUTATION OF RATIOS
(in thousands)
1999
-------
Income from continuing operations before income taxes $39,539
Fixed charges 33,696
-------
Total $73,235
Earnings to fixed charges(1) 2.17
(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
PA Industrial Energy, Inc. Pennsylvania
Mercer Gas Gathering, Inc. Pennsylvania
Atlas Information Management, L.L.C. Pennsylvania
Atlas Technologies, L.L.C. Pennsylvania
Atlas Energy Group, Inc. Ohio
AED Investments, Inc. Delaware
Atlas Resources, Inc. Pennsylvania
ARD Investments, Inc. Delaware
Atlas Pipeline Partners GP, LLC Delaware
Viking Resources Corporation Pennsylvania
Ohio Hauling, Inc. Ohio
RFI Holding Company, Inc. Ohio
Viking Natural Gas Marketing, Inc. Ohio
Viking Investments, Inc. Ohio
Resource Leasing, Inc. Delaware
Fidelity Leasing, Inc. Pennsylvania
Fidelity Leasing Canada Inc. Ontario
FL Canada Leasing, Inc. Ontario
FL Sales Canada, Inc. Ontario
FL Sales, Inc. Delaware
Fidelity Leasing SPC I, Inc. Delaware
FL Partnership Management, Inc. Delaware
FL Financial Services, Inc. Delaware
Fidelity Leasing SPC II, Inc. Delaware
Fidelity Leasing SPE III, LLC Delaware
Fidelity Leasing SPC IV, Inc. Delaware
JLA Credit Corporation Delaware
JLA Funding Corp. Delaware
JLA Funding Corp. II Delaware
JLA Funding Corp. III Delaware
Fidelity Equipment Lease Depositor I, LLC Delaware
Fidelity Equipment Lease Depositor II, LLC Delaware
Fidelity Leasing Holding, LLC Delaware
Fidelity Leasing Holding 2, LLC Delaware
Reseller Finance Corporation 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
<PAGE>
Resource Properties X, Inc. Delaware
Resource Properties XI, Inc. Delaware
Resource Properties XII, Inc. Delaware
Resource Properties XIII, Inc. Delaware
Resource Properties XIV, Inc. Delaware
Resource Properties XV, Inc. Delaware
Resource Properties XVI, Inc. Delaware
Resource Properties XVII, Inc. Delaware
Resource Properties XVIII, Inc. Delaware
Resource Properties XIX, Inc. Delaware
Resource Properties XX, Inc. Delaware
Resource Properties XXI, Inc. Delaware
Resource Properties XXII, Inc. Delaware
Resource Properties XXIII, Inc. Delaware
Resource Properties XXIV, Inc. Delaware
Resource Properties XXV, Inc. Delaware
Resource Properties XXVI, Inc. Delaware
Resource Properties XXVII, Inc. Delaware
Resource Properties XXVIII, Inc. Delaware
Resource Properties XXIX, Inc. Delaware
Resource Properties XXX, Inc. Delaware
Resource Properties XXXI, Inc. Delaware
Resource Properties XXXII, Inc. Delaware
Resource Properties XXXIII, Inc. Delaware
Resource Properties XXXIV, Inc. Delaware
Resource Properties XXXV, Inc. Delaware
Resource Properties XXXVI, Inc. Delaware
Resource Properties XXXVII, Inc. Delaware
Resource Properties XXXVIII, Inc. Delaware
Resource Properties XXXIX, Inc. Delaware
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
FM Sheridan Land, 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
Resource Properties 54, Inc. Delaware
RAI Financial, 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
<PAGE>
Resource Housing Investors IV, Inc. Delaware
ABB Associates I, Inc. Delaware
ABB Associates II, Inc. Delaware
Resource Brokerage, Inc. Delaware
Chesterfield Mortgage Investors, Inc. Delaware
Fidelity Mortgage Funding, Inc. Delaware
Bryn Mawr Resources, Inc. Delaware
BMR Holdings, Inc. Delaware
Bryn Mawr Energy Company Delaware
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PETROLEUM CONSULTANTS
Wright & Company, Inc. (Wright) hereby consents to the use of our reports dated
November 24, 1998, entitled "Evaluation and Review of Oil and Gas Reserves to
the Interests of Resource Energy, Inc. and Atlas America, Inc., in Certain
Properties Located in Various States, Job 8.463" and November 15, 1999,
entitled "SUMMARY REPORT, Evaluation of Oil and Gas Reserves to the Interests
of Resource America, Inc. in Certain Properties Located in Various States,
Pursuant to the Requirements of the Securities and Exchange Commission,
Effective September 30, 1999, Job 9.510" in Resource America, Inc.'s Annual
Report on Form 10-K for fiscal year ended September 30, 1999.
Wright & Company, Inc.
By: s/s D. Randall Wright
------------------------------
D. Randall Wright
President
December 29, 1999
Brentwood, Tennessee
<PAGE>
EXHIIT 23.2
E.E. Templeton & Associates, Inc.
407 1/2 Second Street
Marietta, Ohio 45750
(614) 373-5046
CONSENT OF INDEPENDENT PETROLEUM CONSULTANTS
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, 1999.
Very truly yours,
/s/ E.E. Templeton
---------------------------------
E.E. Templeton & Associates, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1,000
<CASH> 42,643
<SECURITIES> 9,300
<RECEIVABLES> 682,091
<ALLOWANCES> 11,422
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 109,182
<DEPRECIATION> 21,213
<TOTAL-ASSETS> 901,387
<CURRENT-LIABILITIES> 0
<BONDS> 577,822
0
0
<COMMON> 244
<OTHER-SE> 263,543
<TOTAL-LIABILITY-AND-EQUITY> 263,787
<SALES> 11,633
<TOTAL-REVENUES> 145,089
<CGS> 0
<TOTAL-COSTS> 59,594
<OTHER-EXPENSES> 41,339
<LOSS-PROVISION> 4,617
<INTEREST-EXPENSE> 33,696
<INCOME-PRETAX> 39,539
<INCOME-TAX> 12,847
<INCOME-CONTINUING> 26,692
<DISCONTINUED> 7,962
<EXTRAORDINARY> 299
<CHANGES> 569
<NET-INCOME> 18,460
<EPS-BASIC> .83
<EPS-DILUTED> .81
</TABLE>
