RESOURCE AMERICA, INC. - S-3/A - 19980330 - BUSINESS
BUSINESS
General
The Company operates a specialty finance business focused on real estate
finance and equipment leasing. The Company was organized as a Delaware
corporation in 1966. For approximately 25 years prior to 1991, the Company was
principally involved in the energy industry and it continues to conduct energy
industry operations, including natural gas and oil production. Since 1991, the
Company's business strategy has focused on locating and developing niche
finance businesses in which the Company can realize attractive returns by
targeting well-defined financial services markets and by developing specialized
skills to service those markets on a cost-effective basis. To date, the Company
has developed two main businesses: real estate finance and equipment leasing.
Within its real estate finance business, the Company has developed a commercial
mortgage loan acquisition and resolution business and a residential mortgage
lending business. The Company has also sponsored RAIT, a real estate investment
trust, and currently owns 15% of RAIT's common shares of beneficial interest.
Within its equipment leasing business, the Company focuses primarily on small
ticket equipment lease financing, although it also manages five publicly-owned
equipment leasing partnerships and has a lease finance placement and advisory
business.
Real Estate Finance
Commercial Mortgage Loan Acquisition and Resolution Strategy
Identification and Acquisition of Troubled Commercial Mortgage Loans. The
Company believes that the success to date of its commercial mortgage loan
acquisition and resolution business has been due in large part to its ability
to identify and acquire troubled commercial mortgage loans which, due to
operational difficulties at the underlying properties, legal or factual
disputes, or other problems, are unable fully to meet debt service requirements
under the original loan terms and can be acquired at a discount from the unpaid
principal and interest amounts of the loan and the estimated value of the
underlying property. A principal part of this strategy is the Company's focus
on acquiring commercial mortgage loans held by large private sector financial
institutions and other entities. Due to the complexity of these loans and/or
their comparatively small size relative to a large institution's total
portfolio, the lender is often not able, or willing, to devote the managerial
and other resources necessary to resolve the problems to which the loans are
subject, and thus is sometimes willing to dispose of these loans at prices
favorable to the Company. The Company, which offers to acquire a loan quickly
and for immediate cash, provides a convenient way for an institution to
dispose of these loans and to eliminate future work-out costs. The Company
believes that the trend of consolidation in the banking industry, and the
implementation of risk-based capital rules in the insurance industry, may
cause an increase in the amount of smaller loans available for sale and
provide the Company significant opportunities for growth.
Efficient Resolution of Loans. The Company believes that a further aspect
of its success to date has been its ability to resolve problems surrounding
loans it has identified for acquisition. The principal element of this strategy
is the cost-effective use of management and third-party resources to negotiate
and resolve disputes concerning a troubled loan or the property securing it,
and to identify and resolve any existing operational or other problems at the
property. To implement this strategy, the Company has taken advantage of the
background and expertise of its management and has identified third-party
subcontractors (such as property managers and legal counsel) familiar with the
types of problems to which smaller commercial properties may be subject and who
have, in the past, provided effective services to the Company.
Refinancing or Sale of Senior Lien Interests in Portfolio Loans. The
Company seeks to reduce its invested capital and enhance its returns through
sale, at a profit, of senior lien interests in its loans or through refinancing
of the properties underlying its loans by borrowers. In so doing, the Company
has in the past obtained, and in the future anticipates obtaining, a return of
a substantial portion of its invested capital (and in some cases has obtained
returns of amounts in excess of its invested capital), which it will typically
seek to reinvest in further loans, while maintaining a significant continuing
position in the original loan. See "Business -- Real Estate Finance --
Commercial Mortgage Loan Acquisition and Resolution: Sale of Senior Lien
Interests and Refinancings." In addition, the Company has sold and anticipates
further sales of whole loans and
39
senior lien interests to RAIT (see "Business -- Real Estate Finance --
Sponsorship of Real Estate Investment Trust"). The Company's strategic plan
contemplates continued growth in its commercial mortgage loan portfolio, in
part through the liquidity provided by such sales or refinancings.
Disposition of Loans. In the event a borrower does not repay a loan when
due, the Company will seek to foreclose upon and sell the underlying property
or otherwise liquidate the loan. In appropriate cases and for appropriate
consideration, the Company may agree to forbear from the exercise of remedies
available to it. See "Business -- Real Estate Finance -- Commercial Mortgage
Loan Acquisition and Resolution: Forbearance Agreements" and "-- Commercial
Mortgage Loan Acquisition and Dissolution: Loan Status."
Market for Commercial Mortgage Loan Acquisition and Resolution Services
Discounted loans acquired by the Company are, at the time of acquisition,
secured by commercial properties (generally multi-family housing, office
buildings, hotels or single-user retail properties) which, while income
producing, are unable fully to meet the debt service requirements of the
original loan terms. The loans are usually acquired from banks, insurance
companies, investment banks, mortgage banks or other similar financial
organizations.
The market for commercial mortgage loan acquisition and resolution
services of the type provided by the Company is, the Company believes,
relatively new. A major impetus to the creation of this market had been the
sale of packages of under-performing and non-performing loans by government
agencies, in particular the Resolution Trust Corporation ("RTC") and Federal
Deposit Insurance Corporation ("FDIC"). While the need for loan acquisition and
resolution services by governmental agencies has declined in recent years (the
RTC terminated its loan pool packaging and sales operations on December 31,
1995, and any RTC assets remaining to be sold at that time were transferred to
the FDIC for sale), the Company believes that a permanent market for these
services is emerging in the private sector as financial institutions and other
entities realize that outside specialists may be able to resolve troubled loans
more cost-efficiently than their internal staff. Moreover, the sale of loans
provides selling institutions with a means of disposing of under-performing
assets, thereby obtaining liquidity and improving their balance sheets. The
trend has been reinforced, management believes, by consolidation within the
banking industry, the implementation of risk-based capital rules within the
insurance industry, and by the standardization of financing criteria by real
estate conduits and other "securitization" outlets.
Acquisition and Administration Procedures for Commercial Mortgage Loan
Acquisition and Resolution Operations
Prior to acquiring any commercial mortgage loan, the Company conducts an
acquisition review. This review includes an evaluation of the adequacy of the
loan documentation (for example, the existence and adequacy of notes,
mortgages, collateral assignments of rents and leases, and title policies
ensuring first or other lien positions) and other available information (such
as credit and collateral files). The value of the property securing the loan is
estimated by the Company based upon a recent independent appraisal obtained by
the borrower or seller of the loan, an independent appraisal obtained by the
Company, or upon valuation information obtained by the Company and thereafter
confirmed by an independent appraisal. One or more members of the Company's
management makes an on-site inspection of the property and, where appropriate,
the Company will require further inspections by engineers, architects or
property management consultants. The Company may also retain environmental
consultants to review potential environmental issues. The Company obtains and
reviews available rental, expense, maintenance and other operational
information regarding the property, prepares cash flow and debt service
analyses and reviews all pertinent information relating to any legal or other
disputes to which the property is subject. The amount of the Company's offer to
purchase any such loan is based upon the foregoing evaluations and analyses.
The Company generally will not acquire a loan unless (i) current net cash
flow from the property securing the loan is sufficient to yield a cash return
on the Company's investment of not less than 10% per annum; (ii) the ratio of
the Company's initial investment to the appraised value of the property
underlying the loan (generally utilizing an appraisal dated within one year of
acquisition) is less than 80%; (iii) there is the possibility of either prompt
refinancing of the loan by the borrower after acquisition, or sale by the
Company of a senior lien interest, that will result in an enhanced yield to the
Company on its (reduced) funds still
40
outstanding (see "Business -- Real Estate Finance -- Commercial Mortgage Loan
Acquisition and Resolution: Sale of Senior Lien Interests and Refinancings");
and (iv) there is the possibility of a substantial increase in the value of the
property underlying the loan over its appraised value, increasing the potential
amount of the loan discount recoverable by the Company at loan termination. On
occasion, the Company will acquire a loan that does not meet one or more of the
criteria specified above if, in the Company's judgment, other factors make the
loan an appropriate investment opportunity. As of December 31, 1997, the
Company had in its portfolio 11 loans in which the ratio of the cost of
investment to the appraised value of the underlying property (both at the time
of acquisition and at the date of the most recent appraisal) exceeded 80%. The
Company has a policy that appraisals of properties underlying loans be updated
no less often than every three years. While the Company has historically
acquired loans in the $1.0 million to $15.0 million range, it has recently
shifted its focus to also include larger loans which meet its investment
objectives. See also "Business -- Recent Developments -- Commercial Loan
Purchase." The Company is not limited by regulation or contractual obligation
as to the types of properties that secure the loans it may seek to acquire or
the nature or priority of any lien or other encumbrance it may accept with
respect to a property. The Company also does not have restrictions regarding
whether, after sale of a senior lien interest or a refinancing, its interest
in a particular loan must continue to be secured (although the Company will
typically retain a subordinated lien position), the amount it may invest in
any one loan, or the ratio of initial investment cost-to-appraised value of
the underlying property.
As part of the acquisition process, the Company typically resolves
disputes relating to the loans or the underlying properties. Through
negotiations with the borrower and, as appropriate or necessary, with other
creditors or parties in interest, the Company seeks to arrive at arrangements
that reflect more closely the current operating conditions of the property and
the present strategic position of the various interested parties. Where
appropriate, the Company will offer concessions to assure that the Company's
future control of the property's cash flow is free from dispute. These
arrangements are normally reflected in an agreement (a "Forbearance Agreement")
pursuant to which foreclosure or other action on the mortgage is deferred so
long as the arrangements reflected in the Forbearance Agreement are met. The
Company also seeks to resolve operational problems of the properties by
appointment of a property manager acceptable to it (see "Business -- Real
Estate Finance -- Commercial Mortgage Loan Acquisition and Resolution:
Forbearance Agreements") and may advance funds for purposes of paying property
improvement costs, unpaid taxes and similar items. Prior to loan acquisition,
the Company includes in its pre-acquisition analysis of loan costs and yields
an estimate of such advances. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations --
Commercial Mortgage Loan Acquisition and Resolution."
Upon acquisition of a loan, the Company typically requires that all
revenues from the property underlying the loan be paid into an operating
account on which the Company or its managing agent is the sole signatory. All
expenditures with respect to a property (including debt service, taxes,
operational expenses and maintenance costs) are paid from the Company's account
and are reviewed and approved by a senior officer of the Company prior to
payment. The Company further requires that its approval be obtained before any
material contract or commercial lease with respect to the property is executed.
To assist it in monitoring the loan, the Company requires that the borrower
prepare a budget for the property not less than 60 days prior to the beginning
of a year, which must be reviewed and approved by the Company, and submit both
a monthly cash flow statement and a monthly occupancy report. The Company
analyzes these reports in comparison with each other and with account activity
in the operating account.
The Company may alter the foregoing procedures in appropriate
circumstances. Where a borrower has refinanced a loan held by the Company (or
where the Company has acquired a loan subject to existing senior debt), the
Company may agree that the revenues be paid to an account controlled by the
senior lienor, with the excess over amounts payable to the senior lienor being
paid directly to the Company. Where the property is being managed by Brandywine
Construction & Management, Inc. ("BCMI"), a property manager affiliated with
the Company (see "Business -- Real Estate Finance -- Commercial Mortgage Loan
Acquisition and Resolution: Forbearance Agreements" and "Management -- Certain
Relationships and Related Party Transactions"), the Company may direct that
property revenues be paid to BCMI, as the Company's managing agent. As of
December 31, 1997, revenues are being paid to BCMI with respect to two loans
(loans 25 and 30). Where the Company believes that operating problems with
respect to an underlying property have been
41
substantially resolved, the Company may permit the borrower to retain revenues
and pay property expenses directly. As of December 31, 1997, the Company
permitted borrowers with respect to four loans (loans 24, 27, 37 and 41) to do
so. (Loan number designations correspond to the designations set forth in the
table included as part of "Business -- Real Estate Finance -- Commercial
Mortgage Loan Acquisition and Resolution: Loan Status.")
Commercial Mortgage Loan Acquisition and Resolution: Sale of Senior Lien
Interests and Refinancings
In evaluating a potential commercial mortgage loan, the Company places
significant emphasis on the likelihood of its being able to sell a senior lien
interest on favorable terms after the acquisition and/or the borrower's likely
ability, with or without the Company's assistance, to secure favorable
refinancing. When a loan is refinanced, or a senior lien interest sold, the
Company will obtain net sale or refinance proceeds in an amount representing a
major portion of (and sometimes exceeding) the amount of its investment in the
loan. After sale of a senior lien interest or refinancing, the Company will
typically retain an interest in the loan, which is usually subordinated to the
interest of the senior lienholder or refinance lender.
Where a senior lien interest is sold, the outstanding balance of the
Company's loan at the time of sale remains outstanding, including as a part of
that balance the amount of the senior lien interest. Thus, the Company's
remaining interest effectively "wraps around" the senior lien interest.
Typically, the interest rate on the senior lien interest is less than the
stated rate on the Company's loan. As of December 31, 1997, senior lien
interests with an aggregate balance of $12 million relating to seven of the
Company's loans obligate the Company, in the event of a default on a loan, to
replace such loan with a performing loan. These senior lien interests become
due upon the expiration of their respective Forbearance Agreements (one in
1999, three in 2000, two in 2001 and one in 2016). Two other senior lien
interests obligate the Company, upon their respective maturities (all in fiscal
2002), to repurchase the senior lien interest (if not theretofore paid off) at
a price equal to the outstanding balance of the senior lien interest plus
accrued interest ($1.6 million and $7.3 million, respectively, assuming all
debt service payments have been made). See "Business -- Real Estate Finance --
Commercial Mortgage Loan Acquisition and Resolution: Loan Status."
Where a refinancing is effectuated, the Company reduces the amount
outstanding on its loan by the amount of net refinancing proceeds received by
it and either converts the outstanding balance of the original note (both
principal and accrued interest, as well as accrued penalties) into the stated
principal amount of an amended note on the same terms as the original note, or
retains the original loan obligation as paid down by the amount of refinance
proceeds received by the Company. As with senior lien interests, the interest
rate on the refinancing is typically less than the interest rate on the
Company's retained interest.
After sale of a senior lien interest or a refinancing, the Company's
retained interest will usually be secured by a subordinate lien on the
property. In certain situations, however, (including seven loans aggregating
$7.7 million and constituting 6.6%, by book value, of the Company's loans as of
December 31, 1997), the Company's retained interest may not be formally secured
by a mortgage because of conditions imposed by the senior lender, although it
may be protected by a judgment lien, an unrecorded deed-in-lieu of foreclosure,
the borrower's covenant not to further encumber the property without the
Company's consent, and/or a similar device.
Commercial Mortgage Loan Acquisition and Resolution: Forbearance Agreements
Substantially all of the commercial mortgage loans acquired by the Company
are subject to Forbearance Agreements with borrowers pursuant to which the
holder of the loan (the Company, upon loan acquisition) (i) agrees, subject to
receipt of specified minimum monthly payments, to defer the exercise of
existing rights to proceed on the defaulted loan (including the right to
foreclose), (ii) receives the rents from the underlying property (either
directly or through a managing agent approved by the Company, subject to
certain exceptions; see "Business -- Real Estate Finance -- Acquisition and
Administration Procedures for Commercial Loan Acquisition and Resolution
Operations") and (iii) requires the borrower to retain a property management
firm acceptable to the holder. The Forbearance Agreements also provide that any
cash flow from the property (after payment of Company-approved expenses and
debt service on senior lien interests) above the minimum payments will be
retained by the Company and applied to accrued but unpaid debt service on the
loan. As a result of provision (iii), BCMI has assumed responsibility for
supervisory and, in many cases, day to day
42
management of the underlying properties with respect to substantially all of
the loans owned by the Company as of December 31, 1997. In ten instances, the
President of BCMI (or an entity affiliated with him) has also acted as the
general partner or trustee of the borrower; an entity affiliated with him is
also the general partner of the sole limited partner of an eleventh borrower.
See "Management -- Certain Relationships and Related Party Transactions --
Relationship with BCMI." The minimum payments required under a Forbearance
Agreement (generally related to anticipated cash flow from the property after
operating expenses) are normally materially less than the debt service payments
called for by the original terms of the loan. The difference between the
minimum required payments under the Forbearance Agreement and the payments
called for by the original loan terms continues to accrue, but (except for
amounts recognized as an accretion of discount; see "Business -- Real Estate
Finance -- Commercial Mortgage Loan Acquisition and Resolution: Accounting for
Discounted Loans") are not recognized as revenue to the Company until actually
paid.
At the end of the term of a Forbearance Agreement, the borrower is
required to pay the loan in full. The borrower's ability to do so, however,
will be dependent upon a number of factors, including prevailing conditions at
the underlying property, the state of real estate and financial markets
(generally and as regards the particular property), and general economic
conditions. In the event the borrower does not or cannot do so, the Company
anticipates that it will seek to sell the property underlying the loan or
otherwise liquidate the loan. Alternatively, the Company anticipates that it
might, in appropriate cases, and for appropriate additional consideration,
agree to further forbearance.
An existing Forbearance Agreement remains in effect without modification
when the Company sells a senior lien interest in a loan. In such instance, the
purchaser's interest in the loan is subject to the terms of the Forbearance
Agreement. However, when a borrower refinances a loan, the Forbearance
Agreement is amended to (i) reflect the pay down of the loan balance, (ii)
acknowledge the existence of the refinancing and (iii) provide for the
continued effectiveness of all provisions of the Forbearance Agreement for a
term specified except that where specific provisions of the Forbearance
Agreement are inconsistent with the terms of the refinancing, the terms of the
refinancing have priority. In some refinancings, the refinance lender may
require that the borrower issue an amended note (a "retained interest note") to
reflect the reduction of the borrower's indebtedness to the Company and, where
applicable, any other revised terms.
Commercial Mortgage Loan Acquisition and Resolution: Loan Status
At December 31, 1997, the Company's loan portfolio consisted of 43 loans
of which 33 loans were acquired as first mortgage liens and 10 loans were
acquired as junior lien obligations. The Company's strategy has been to acquire
loans in anticipation of selling a senior lien interest in the loan or in
anticipation of the borrower's refinancing of the loan. As of that date, the
Company had sold senior lien interests in 14 loans in its portfolio (including
senior interests in six loans initially acquired by the Company as junior lien
loans) and borrowers with respect to 12 of the Company's loans had obtained
refinancing. After such sales and refinancings, the Company held subordinated
interests in 30 loans of which seven interests, constituting approximately 6.6%
of the book value of the Company's loan portfolio, are not collateralized by
recorded mortgages (see "Business -- Real Estate Finance -- Commercial Mortgage
Loan Acquisition and Resolution: Sale of Senior Lien Interests and
Refinancings").
During the second quarter of fiscal 1998, the Company sold 10 of its
loans, and senior lien interests in two loans, to RAIT as indicated by Note (9)
to the following table. For certain information regarding this sale see
"Business -- Real Estate Finance -- Sponsorship of Real Estate Investment
Trust."
43
The following table sets forth certain information relating to the
Company's investments in commercial mortgage loans as of December 31, 1997.
Loan Type of
Number Property Location
------------ ----------------- ------------------
001 Multifamily Pennsylvania
002(9) Multifamily Pennsylvania
003 Multifamily New Jersey
004(9) Multifamily Pennsylvania
005 Office Pennsylvania
006(9) Office/Retail Virginia
007 Single User Minnesota
(Retail)
008(9) Multifamily Pennsylvania
009(9) Multifamily Pennsylvania
010(9) Multifamily Pennsylvania
011 Office Washington, D.C.
012(9) Multifamily Pennsylvania
013 Single User California
(Commercial)
014 Office Washington, D.C.
015 Condo/ North Carolina
Multifamily
016 Single User California
(Retail)
017 Single User West Virginia
(Retail)
018 Single User California
(Retail)
019(9) Multifamily Pennsylvania
020 Office New Jersey
021 Multifamily Pennsylvania
022 Multifamily Pennsylvania
023(9) Multifamily Pennsylvania
024 Multifamily Pennsylvania
025 Hotel/ Georgia
Commercial
026 Office Pennsylvania
027(9) Office Pennsylvania
028 Condo/ North Carolina
Multifamily
029 Commercial/ Pennsylvania
Retail
030 Hotel Nebraska
031 Multifamily Connecticut
032 Multifamily New Jersey
033 Single User Virginia
(Retail)
034 Multifamily Pennsylvania
035 Office Pennsylvania
036 Office North Carolina
037 Multifamily Florida
Sub Total
Loan Outstanding Appraised Value
Loan Acquired Loan of Property
Number Seller/Originator (Fiscal Year) Receivable(1) Securing Loan(2)
------------ --------------------------------------- --------------- ------------------ -----------------
001 Alpha Petroleum Pension Fund 1991 $ 8,537,276 $ 5,300,000
002(9) CoreStates Bank(10) 1992 1,579,496 900,000
003 RAM Enterprises/Glenn Industries 1993 2,737,559 1,350,000
Pension Plan
004(9) St. Paul Federal Bank for Savings(12) 1993 1,486,601 1,200,000
005 Shawmut Bank(10) 1993 6,408,289 1,700,000
006(9) Nationsbank(10) 1993 5,804,115 2,800,000
007 Prudential Insurance, Alpha 1993 5,050,886 2,515,000
Petroleum Pension Fund
008(9) Nomura/Cargill/Eastdil Realty(14) 1994 5,394,281 3,200,000
009(9) Mellon Bank(10) 1995 1,640,973 2,700,000
010(9) RIVA Financial 1994 1,600,713 800,000
011 First Union Bank(10) 1995 1,427,447 2,000,000
012(9) CoreStates Bank(10)(12) 1995 3,037,884 2,200,000
013 California Federal Bank, FSB 1994 2,969,853 2,400,000
014 Nomura/Cargill/Eastdil Realty(14) 1995 14,977,664 12,250,000
015 First Bank/South Trust Bank(15) 1995/1997 3,553,137 3,702,000
016 Mass Mutual/Alpha Petroleum 1995/1996 6,992,873 3,000,000
Pension Fund
017 Triester Investments(10)(16) 1996 1,453,966 1,900,000
018 Emigrant Savings Bank/Walter 1996 2,835,687 4,555,000
R. Samuels and Jay Furman(19)
019(9) Summit Bancorp(10) 1996 4,675,262 5,725,000
020 Cargill/Eastdil Realty(13) 1996 7,114,661 4,600,000
021 Bruin Holdings/Berkeley Federal 1996/1997 9,260,609 4,222,000
Savings Bank
022 FirsTrust FSB 1996 4,655,151 4,110,000
023(9) Jefferson Bank 1996 718,848(24) 600,000
024 U.S. Dept. of Housing & Urban 1996 3,427,028 3,250,000
Development
025 Bankers Trust Co. 1997 5,975,639 8,500,000
026 FirsTrust FSB/ 1997 8,498,640 5,000,000
The Metropolitan Fund
027(9) Lehman Brothers Holdings, Inc. 1997 53,183,775 34,000,000
028 First Bank/SouthTrust Bank(27) 1997 1,703,755 1,773,000
029 Castine Associates, L.P.(28) 1997 7,127,386 4,025,000
030 CNA Insurance 1997 7,274,234 4,000,000
031 John Hancock Mutual Life 1997 10,024,031 7,500,000
Insurance Company
032 John Hancock Mutual Life 1997 12,260,126 12,425,000
Insurance Company
033 Brambilla, Ltd. 1997 4,015,686 2,650,000
034 Resource America, Inc.(29) 1997 398,697 450,000
035 Jefferson Bank 1997 2,331,275 2,550,000
036 Union Labor Life Insurance Co. 1997 4,514,732 4,150,000
037 Howe, Soloman & Hall 1997 6,998,319 3,500,000
Financial, Inc. ------------ ------------
$231,646,554 $167,502,000
(1) Consists of the stated or face value of the obligation plus accrued
interest and the amount of the senior lien interest at December 31, 1997.
(2) The Company generally obtains appraisals on each of its properties at
least once every three years. Accordingly, appraisal dates range from
1994 to 1997.
(3) Consists of the original cost of the investment to the Company (including
acquisition costs and the amount of any senior lien interest to which the
property remained subject) plus subsequent advances, but excludes the
proceeds to the Company from the sale of senior lien interests or
borrower refinancings.
(4) Represents the unrecovered costs of the Company's calculated investment,
calculated as the cash investment made in acquiring the loan plus
subsequent advances less cash received from sale of a senior lien
interest in or borrower refinancing of the loan. Negative amounts
represent the receipt by the Company of proceeds from the sale of senior
lien interests or borrower refinancings in excess of the Company's
investment.
(5) Represents the cost of the investment carried on the books of the Company
after accretion of discount and allocation of gains from the sale of a
senior lien interest in, or borrower refinancing of the loan but excludes
an allowance for possible losses of $452,000. For a discussion of
accretion on discount and allocation of gains, see "Commercial Mortgage
Loan Acquisition and Resolution: Accounting for Discounted Loans."
(6) Consists of the amount set forth in the column "Outstanding Loan
Receivable" less senior lien interests at December 31, 1997 (excluding
one senior lien interest of $2,334,719 which is included in the cost of
investment carried on the books of the Company relating to loan 17).
(7) With respect to loans 6, 7, 8, 14, 25, 27, 30, 31, 32, 34, 35, 38 and 39,
the date given is for the maturity of the Company's interest in the loan.
For loan 43, the date given is the expiration date of the Forbearance
Agreement with respect to the loan in the original principal amount of
$404,026 (see note (34) below). For the remaining loans, the date given
is the expiration date of the related Forbearance Agreement.
(8) Represents the amount of the senior lien in place on date of acquisition,
except that, with respect to loan 40, it represents the amount of a
senior lien interest sold contemporaneously with the Company's
investment.
(9) Loans 2, 4, 6, 8, 9, 10, 12, 19, 23, and one of the four loans (in the
amount of $900,000) comprising loan 38 were sold to RAIT on January 23,
1998 (see note (30) below). In addition, senior lien interests in loans
27 and 38 were sold to RAIT on January 23, 1998. See "Business -- Real
Estate Finance -- Sponsorship of Real Estate Investment Trust."
(10) Successor by merger to the Seller.
(11) In December 1997, senior lien interests in loans 2, 4 and 10 were
transferred to loan 37.
(12) Seller was a wholly-owned subsidiary of this institution.
(13) Senior lien interest sold subject to the right of the holder (Citation
Insurance Company, a subsidiary of Physicians Insurance Company of Ohio),
upon default, to require the Company to substitute a performing loan.
46
Proceeds from
Ratio of Cost Refinancing or
Cost of of Investment to Sale of Senior
Investment(3) Appraised Value Lien Interests
--------------- ------------------ --------------------
$112,575,331 $ 56,154,355
8,580,000 81% 0
338,633 8% 0
43,154,886 92% 35,250,000(8)
14,546,344 79% 0
4,234,556 85% 0
1,518,188 67% 1,000,000(35)
------------ ------------
$184,947,938 $ 92,404,355
============ ============
Company's Net Maturity of Loan/
Interest In Expiration of
Net Book Value Outstanding Loan Forbearance
Investment(4) of Investment(5) Receivables(6) Agreement(7)
--------------- ------------------ ------------------ ------------------
$56,420,976 $ 81,368,392 $174,671,639
8,580,000 8,351,314 8,351,314 12/31/02
338,633 201,155 342,691 11/30/02
7,904,886 8,081,017 9,806,748 12/01/02
14,546,344 14,426,655 26,695,085 06/30/03
4,234,556 4,262,517 4,290,337 12/31/02
518,188 803,012 957,557 12/17/02
----------- ------------ ------------
$92,543,583 $117,494,062 $225,115,371
=========== ============ ============
(14) Seller was a partnership of these entities.
(15) Original lending institutions. In March 1997, as a result of agreements
among the borrower, the Company and a third party, Concord Investment,
L.P. ("Concord"), the borrower's partnership interests were transferred to
the Company which resold them to Concord for a mortgage note (which
wrapped around certain senior indebtedness) and cash.
(16) The loan acquired consists of a series of notes becoming due yearly
through December 31, 2016. The notes are being paid in accordance with
their terms and, accordingly, a Forbearance Agreement was not required.
(17) Senior lien interest sold to Peoples Thrift Savings Bank.
(18) Original senior lien interest repaid by the Company in December 1997.
(19) Amounts advanced by the Company were used in part to directly repay the
loan of Emigrant Savings Bank; the balance was applied to purchase a note
held by Messrs. Samuels and Furman.
(20) Senior lien interest sold to People's Thrift Savings Bank in 17
individual condominium units in a single building.
(21) The loan acquired consists of 31 separate mortgage loans on 49 individual
condominium units in a single building. Nine of such loans are due July 1,
2016, eighteen are due January 1, 2015, one is due October 1, 2007, one is
due March 1, 2001 and two are due October 9, 2001.
(22) Two senior lien interests were sold to Commerce Bank, N.A. ("Commerce"),
Philadelphia, Pennsylvania. The Company has the obligation to repurchase
these senior lien interests, at Commerce's option, on or after June 27,
2002 (loan 22) and September 29, 2002 (loan 27), if the senior lien
interest is not repaid in accordance with its terms by the borrower.
(23) Junior lien interest sold to Crafts House Apartments Partners, L.P., a
limited partnership in which officers and directors of the Company
beneficially own a 21.3% interest.
(24) Includes a note for $14,948 which is payable to the Company on demand.
(25) Senior lien interest sold to Crusader Bank. The senior lien interest was
paid off in connection with the acquisition of this loan by RAIT.
(26) Senior lien interest sold to CRC-Axewood Partners, L.P., a limited
partnership in which officers and directors of the Company beneficially
own an 18.3% interest.
(27) Original lending institutions. In connection with the transactions
referred to in Note (14), Concord acquired other condominium units in the
same building. These units secured a loan in the original principal amount
of $910,000 held by the Company. As part of that acquisition, the Company
made an additional mortgage loan to Concord of $797,675.
(28) From 1993 to October 1997, an officer of the Company served as the General
Partner.
(29) Loan originated by the Company.
(30) Consists of three related loans to one borrower secured by two properties.
A fourth related loan, in the amount of $100,000, was repaid in the first
quarter of fiscal 1998. The loans were originated by RAIT and funded by
the Company pending closing of RAIT's public offering. Upon completion of
that offering in the second quarter of fiscal 1998, the Company sold one
of the loans (in the principal amount of $900,000) and $4.9 million of
senior lien interests in the two remaining loans to RAIT, at cost. See
note (9) above.
(31) Construction loan with a maximum borrowing of $3,625,000.
(32) Company's estimate of the value of the property, pending completion of
appraisal.
(33) Original lending institution.
(34) Consists of two related loans to one borrower secured by a single property
in the original principal amounts of $1,600,000, due in October 2006, and
$404,026 which is subject to a Forbearance Agreement expiring in December
2002.
(35) Senior lien interest sold to Washsquare Properties Partners, L.P., a
limited partnership in which officers and directors of the Company
beneficially own a 17.8% limited partnership interest.
47
The following table sets forth certain information with respect to monthly
cash flow from the properties underlying the Company's commercial mortgage
loans, monthly debt service payable to senior lienholders and refinance
lenders, monthly payments with respect to the Company's retained interest and
the ratio of cash flow from the properties to debt service payable on senior
lien interests. It should be noted that monthly cash flow for loans 39 through
43 is based upon estimates or historical information different than the average
cash flow for the three months ended December 31, 1997 utilized for all other
loans.
(1) "Cash Flow" as used in this table is that amount equal to the operating
revenues from property operations less operating expenses, including real
estate and other taxes pertaining to the property and its operations, and
before depreciation, amortization and capital expenditures.
(2) Except as set forth in notes (4), (10), (11), and (12) monthly cash flow
from each of the properties has been calculated as the average monthly
amount during the three month period ended December 31, 1997.
(3) Monthly debt service consists of required payments of principal, interest
and other regularly recurring charges payable to the holder of the
refinanced loan or senior lien interest.
(4) Loans 15 and 28 represent different condominium units in the same
property and are, accordingly combined for cash flow purposes.
(5) Includes one-twelfth of an annual payment of $110,000 received in
December of each year.
(6) A senior lien interest of $4.9 million in loan 27 was sold to RAIT. (See
note (9) to the previous table). As a result of this sale, the cash flow
to the Company will decrease by $44,755 per month.
(7) Includes additional debt service of $2,083 per month attributable to a
senior lien interest sold in December 1997.
(8) Loan 38 consisted of four related loans of which one was repaid in the
first quarter of fiscal 1998. (See notes (9) and (30) to the previous
table). One loan in the amount of $900,000 was sold to RAIT. In addition,
RAIT acquired senior lien interests in two of the remaining loans in the
amount of $4.9 million. As a result of these sales the cash flow to the
Company will decrease by $48,180 per month.
(9) Excludes amounts attributable to loans 39 through 43, which are referred
to in the table below.
(10) Monthly cash flow currently consists of interest only since loan 39 is a
construction loan.
(11) Based upon average cash flow for the three months ended January 31, 1998.
(12) Estimate based on an historical analysis of the property's cash flow prior
to the Company's purchase of the loan.
All of the Company's portfolio loans are currently performing in
accordance with their respective repayment terms under Forbearance Agreements
or retained interest notes.
Commercial Mortgage Loan Acquisition and Resolution: Accounting for Discounted
Loans
The difference between the Company's cost basis in a loan and the sum of
projected cash flows from, and the appraised value of, the underlying property
(up to the amount of the loan) is accreted into interest income over the
estimated life of the loan using a method which approximates the level yield
method. The projected cash flows from the property are reviewed on a quarterly
basis and changes to the projected amounts reduce or increase the amounts
accreted into interest income over the remaining life of the loan on a method
approximating the level yield method.
The Company records the investments in its commercial mortgage loan
portfolio at cost, which is significantly discounted from the face value of,
and accrued interest and penalties on, the notes. This discount to face value
and accrued interest and penalties (as adjusted to give effect to refinancings
and sales of senior lien interests) totaled $110.4 million, $86.3 million,
$40.0 million and $16.1 million at December 31, 1997, and September 30, 1997,
1996 and 1995, respectively. The cost basis in the various loans is
periodically reviewed to determine that it is not greater than the sum of the
projected cash flows and the appraised value of the underlying properties. If
the cost basis were found to be greater, the Company would provide, through a
charge to operations, an appropriate allowance. For the quarter ended December
31, 1997, the Company recorded a provision for possible losses of $52,000. For
the year ended September 30, 1997, the Company recorded a provision for
possible losses of $400,000 to reflect the increase in size of its commercial
mortgage loan portfolio. As of December 31, 1997, the allowance for possible
loan losses totalled $452,000. For the years ended September 30, 1996 and 1995,
no such provision was required.
Gains on the sale of a senior lien interest in a loan (or gains, if any,
from the refinancing of a loan) are allocated between the portion of the loan
sold or refinanced and the portion retained based upon the fair value of those
respective portions on the date of such sale or refinancing. Any gain
recognized on a sale of a senior lien interest or a refinancing is brought into
income on the date of such sale or refinancing.
49
Residential Mortgage Loans
The Company's residential mortgage lending business provides first and
second mortgage loans on one-to-four family residences to borrowers who
typically do not conform to guidelines established by Fannie Mae because of
past credit impairment or other reasons. Through its subsidiaries, FMF and
Tri-Star (which was acquired in November 1997 and which, following regulatory
approvals regarding transfer of mortgage lending licenses, the Company
anticipates merging into FMF), the Company is licensed as a residential
mortgage lender in 23 states and is currently originating loans in 11 states
(Connecticut, Delaware, Indiana, Kentucky, Maryland, Mississippi, New Jersey,
North Carolina, Ohio, Pennsylvania and Virginia). The Company began its
residential mortgage lending business during fiscal 1997 and commenced
originating loans in the first quarter of fiscal 1998.
The Company's operational strategy is to concentrate on mid-size
residential mortgage loans with a targeted average loan of approximately
$50,000. Currently, the average loan size is approximately $44,000. Depending
upon the credit qualification of a borrower, the Company may originate loans
for its portfolio with a loan-to-value ratio of up to 60% (for the least
qualified borrowers) to 90% (for the most qualified borrowers). The Company
also originates "125 Loans," that is, loans with a cumulative loan-to-value
ratio of up to 125%. FMF originates 125 Loans that have been approved for
acquisition by third-party purchasers prior to funding. Tri-Star acts as a
delegated underwriter of 125 Loans for one investor, originating loans which
comply with such investor's underwriting criteria. During the quarter ended
December 31, 1997, the Company originated $11.8 million in residential mortgage
loans, of which $3.5 million were 125 Loans. Approximately 12% of the Company's
residential mortgage loans for the quarter ended December 31, 1997 conform to
Fannie Mae guidelines although the Company does not seek to originate these
loans and does not expect to establish goals with respect to the aggregate
percentage of conforming loans in its portfolio.
The Company typically originates residential mortgage loans directly with
consumers rather than acquiring such loans in bulk from other originators. The
Company primarily originates its loans through retail/consumer direct channels
(principally direct mail) under the trade name USDirect Mortgage. Potential
customers are identified using statistical models predicting consumer need and
capacity for a mortgage loan. The Company also anticipates entering into
"private label" arrangements with financial institutions and other entities to
originate loans by providing loan underwriting, processing and other services
to these institutions, under their names, for their non-conforming borrowers.
The Company reduces the time and costs related to underwriting, processing
and funding residential mortgage loans, and attempts to increase the
consistency of its loan underwriting, through an automated underwriting and
processing system which incorporates a proprietary credit evaluation system
developed from industry data and parameters established by FMF's management.
The Company (through FMF) has arranged two warehouse lines of credit, with an
aggregate credit amount of $35 million, to fund its lending operations. See
"Business -- Sources of Funds."
The Company is approved as a loan seller to 16 investors. The Company's
policy is to sell its loans for cash. During the first quarter of fiscal 1998,
however, the Company engaged in a sale of a pool of loans for a note. See "Risk
Factors -- Real Estate Finance Considerations -- Note Received in Sale of
Certain Residential Loans." The Company's policy is generally to sell loans on
a servicing-released basis, however, with respect to the sale of $6.9 million
of originated and acquired loans, the sale was on a servicing-retained basis.
The Company has subcontracted the servicing of these loans to Jefferson Bank.
See "Risk Factors -- Real Estate Finance Considerations -- Note Received in
Sale of Certain Residential Loans" and "Management -- Certain Relationships and
Related Party Transactions -- Jefferson Bank." As FMF and Tri-Star develop
their operations and increase staffing, they may retain servicing for their own
account and may retain certain loans for their portfolios.
Sponsorship of Real Estate Investment Trust
The Company is the sponsor of RAIT, a publicly-held real estate investment
trust whose common shares of beneficial interest are listed on the American
Stock Exchange. RAIT's primary business is to acquire or originate commercial
mortgage loans in situations that, generally, do not conform to the
underwriting standards of institutional lenders or sources that provide
financing through securitization. Although RAIT may acquire
50
commercial mortgage loans at a discount, it seeks to acquire such loans where
the workout process has been initiated and where, unlike the commercial
mortgage loans acquired by the Company, there is no need for RAIT's active
intervention. RAIT commenced operations on January 14, 1998.
As sponsor of RAIT, the Company acquired 15% of RAIT's common shares of
beneficial interest upon completion of the offering of such shares, at a cost
of approximately $7.0 million. So long as the Company owns 5% or more of RAIT's
common shares, the Company will have the right to nominate one person to RAIT's
board of trustees (the "Board of Trustees"). The Company sold 10 of its
mortgage loans and senior lien interests in two other loans (representing a net
investment by the Company at December 31, 1997 of $17.1 million, including $2.1
million of senior lien interests acquired by the Company in connection with the
sale) to RAIT, as part of RAIT's initial investments, for $20.2 million. The
Company may sell further loans to RAIT, to a maximum of 30% of RAIT's
investments (on a cost basis), excluding the initial investments. Betsy Z.
Cohen, spouse of the Company's Chairman and Chief Executive Officer, Edward E.
Cohen, and mother of Daniel G. Cohen, the Chairman and Chief Executive Officer
of FMF and an Executive Vice President and director of the Company, is the
Chairman and Chief Executive Officer of RAIT. Jonathan Z. Cohen, the son of Mr.
and Mrs. Cohen and the Secretary and a director of Resource Energy, Inc., a
wholly-owned subsidiary of the Company through which its energy operations are
conducted ("Resource Energy"), is the Company's nominee to the Board of
Trustees.
To limit conflicts between RAIT and the Company, it has been agreed that,
for two years following the completion of the RAIT offering, (i) the Company
will not sponsor another real estate investment trust with investment
objectives and policies which are the same as, or substantially similar to,
those of RAIT; (ii) if the Company originates a proposal to provide wraparound
or other junior lien or subordinated financing (as opposed to acquiring
existing financing) with respect to multifamily, office or other commercial
properties to a borrower (other than to a borrower with an existing loan from
the Company), the Company must first offer the opportunity to RAIT; and (iii)
if the Company desires to sell any loan it has acquired that conforms to RAIT's
investment objectives and policies with respect to acquired loans, it must
first offer to sell it to RAIT. The Company anticipates that complying with
these restrictions will not materially affect the Company's operations for the
foreseeable future. The Company has also agreed that if, after the expiration
of the two year period, the Company sponsors a real estate investment trust
with investment objectives similar to those of RAIT, the Company's
representative on the Board of Trustees (should the Company have a
representative on the Board at that time) will recuse himself or herself from
considering or voting upon matters relating to financings which may be deemed
to be within the lending guidelines of both RAIT and the real estate investment
trust then being sponsored by the Company.
Equipment Leasing
General
The Company's equipment leasing business commenced in September 1995 with
the acquisition of an equipment leasing subsidiary of a regional insurance
company. Through this acquisition, the Company assumed the management of five
publicly-held equipment leasing partnerships involving $49.8 million (original
equipment cost) in leased assets at December 31, 1997. More importantly,
through this acquisition the Company acquired an infrastructure of operating
systems, computer hardware and proprietary software (generally referred to as a
"platform"), as well as personnel, which the Company utilized in fiscal 1996 as
a basis for the development of an equipment leasing business for its own
account. As part of its development of this business, in early 1996 the Company
hired a team of four experienced leasing executives, including the former chief
executive officer of the U.S. leasing subsidiary of Tokai Bank, a major
Japanese banking institution.
The Company conducts its leasing operations through three corporate
divisions: Fidelity Leasing, Inc. ("FLI"), which conducts the Company's small
ticket leasing operations; F.L. Partnership Management, Inc. ("FLPM"), which
manages five public leasing partnerships; and FL Financial Services, Inc.
("FLFS"), which provides lease finance placement and advisory services. The
Company's primary focus in its equipment leasing operations is on the
development of FLI, which commenced small ticket leasing operations in August
1996. FLPM's operations will be reduced over the next several years as
partnership assets are sold and cash is
51
distributed back to the investors. FLPM does not anticipate forming new limited
partnerships in the future. FLFS will continue to operate its lease finance
placement and advisory business which, while profitable, is not expected to
constitute a material source of revenues for the Company.
Strategy
Focus on Small Ticket Leasing. The Company focuses on leasing equipment
costing between $5,000 and $100,000 ("small ticket" leasing). By so doing, the
Company takes advantage not only of the background and expertise of its leasing
management team, but also of the servicing platform the Company has acquired
and developed, which has the capacity to monitor the large amounts of equipment
and related assets involved in a small ticket leasing operation. In addition,
small ticket items represent a substantial portion of the equipment sought by
small businesses thereby affording the Company a niche market with significant
growth potential (see "Business -- Equipment Leasing -- Strategy -- Focus on
Leasing to Small Businesses"). Moreover, the small size of a typical
transaction relative to the Company's total lease portfolio reduces the
Company's credit risk exposure from any particular transaction.
Focus on Vendor Programs. The significant majority of equipment leased to
end-user customers by the Company will be purchased from manufacturers or
regional distributors with whom the Company is establishing vendor programs. In
so doing, the Company utilizes the manufacturer's or distributor's sales
organization to gain access to the manufacturer's end-user base without
incurring the costs of establishing independent customer relationships. The
Company is actively pursuing the establishment of multiple vendor programs in
an effort to reduce its reliance on any one vendor and, thus, to reduce the
risk of tying the success of the Company's leasing operations to the
continuation of a relationship with one (or a small group) of vendors. The
Company has currently established programs with ten manufacturers or
distributors. Two of such manufacturers (Minolta Corporation and Lucent
Technologies) accounted for 21% and 8%, respectively, of the equipment (by
cost) leased by the Company from the beginning of operations through December
31, 1997 (18% and 8%, respectively, for the quarter ended December 31, 1997).
Focus on Leasing to Small Businesses. The Company focuses its marketing
programs and resources on lease programs for small business end-users
(generally those with 500 or fewer employees). The Company has acquired and
developed credit evaluation and scoring systems (based upon credit evaluation
services provided by Dun & Bradstreet) which it believes significantly
increases its ability to evaluate the credit risk in dealing with small
business end-users (see "Business -- Equipment Leasing -- Small Ticket
Leasing"). The Company also believes that small business end-users, while
sensitive to the size of a monthly lease payment, are less sensitive than large
end-users to the interest rate structure of a lease, allowing the Company to
increase its yield by lengthening lease terms to lower monthly rent. The
Company currently offers lease terms from one to five years to meet the needs
of its end-users and will consider other lease terms in appropriate
circumstances.
Focus on Full-Payout Leases. The Company seeks to reduce the financial
risk associated with the lease transactions it originates through the use of
full-payout leases. A "full-payout lease" is a lease under which the
non-cancelable rental payments due during the initial lease term are at least
sufficient to recover the purchase price of the equipment under the lease,
related acquisition fees and, typically, a minimum return on the Company's
invested capital. To the extent possible, the Company seeks to substantially
increase this return through amounts received upon remarketing the equipment or
through continued leasing of the equipment after expiration of the initial
lease term.
Focus on Providing Service. The Company provides service and support to
its small business customers and vendors by seeking to minimize the time
required to respond to customer applications for lease financing and by
providing sales training programs to its vendors and their sales staff (which
it customizes to their particular needs) regarding the use of lease financing
for marketing purposes to increase a vendor's equipment sales and market share.
The Company has acquired and developed proprietary management systems to assist
it in providing lease quotes and application decisions to its customers,
generally within 4 hours after receipt of a request.
Focus on Lease Sales. The Company sells virtually all of its leases. In
fiscal 1997, the Company effected four sales in which it sold discrete pools of
leases and the equipment underlying the leases (including the residual
interest) to Intermediate Purchasers which then sold interests in the leases to
an institutional buyer.
52
In the first quarter of fiscal 1998, the Company entered into an arrangement
with an Intermediate Purchaser and a group of institutional buyers to
periodically sell leases originated by the Company, to a maximum of $50.0
million of leases. The Company has sold $14.4 million of leases under this
arrangement. See "Business -- Sources of Funds -- Forward Sale Commitment." To
date, the Company has retained the servicing rights on the leases it sells. The
Company anticipates that in the future it will enter into sale arrangements
similar to that concluded in the first quarter of fiscal 1998; however, the
Company may retain the residual interest in the equipment in the future.
Selling the leases allows the Company to recover a significant amount of its
investment in the leased equipment, freeing capital for further leasing
activity. See "Risk Factors -- Equipment Leasing Considerations -- Sale of
Leases."
Small Ticket Leasing
The Company offers full-payout leases with options, exercisable by the
lessee at the end of the lease term, either to purchase the equipment at fair
market value, to purchase the equipment for a fixed price negotiated at the
time the lease is signed, or to continue as a lessee on a month-to-month basis.
The Company's leases have a provision which requires the lessee to make all
lease payments under all circumstances. The leases are also net leases,
requiring the lessee to pay (in addition to rent) any other expenses associated
with the use of equipment, such as maintenance, casualty and liability
insurance, sales or use taxes and personal property taxes. The Company offers
lease terms from one to five years and will consider other lease terms in
appropriate circumstances.
The equipment that the Company presently purchases for lease includes
document processing and storage equipment, telecommunications systems, computer
equipment, small manufacturing machines and office furniture. The table below
sets forth the distribution of equipment purchased by the Company, by principal
product type and percentage of dollar volume of equipment purchased, during the
quarters ended December 31, 1997 and 1996 and fiscal years 1997 and 1996.
Equipment Volume by Product Type
(% by dollar volume of equipment purchased)
Quarter Ended Year Ended September
December 31, 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
Document processing and storage ......... 48% 68% 49% 73%
Telecommunications ...................... 38% 19% 37% 21%
Computer systems ........................ 10% 10% 8% 6%
Other ................................... 4% 3% 6% --
-- -- -- --
100% 100% 100% 100%
=== === === ===
The Company has developed a credit evaluation system, known as the "Small
Business Credit Scoring System," which is intended to respond to the inability
of small businesses to supply standardized financial information for credit
analysis (for example, audited financial statements). The system operates by
assigning point amounts, or "scores," to various factors (such as business
longevity, type of business, payment history, bank account balances and credit
ratings) deemed relevant by the Company in determining whether an end-user is a
creditworthy lessee. The scoring system declines approval of end-users with low
scores, approves end-users with high scores and refers mid-range scores to
credit analysts for further consideration and decision. Information is obtained
from the end-user, from reports by standard credit reporting firms and from
reports provided by consumer credit bureaus. The credit scoring system is also
based upon industry data and the past experience of the Company and will be
reviewed and modified as required in response to actual portfolio performance.
Financial statements may be required for larger transactions (in the $30,000 to
$100,000 range) as a complement to the scoring system.
The Company oversees its leasing program through lease administration and
management systems which control invoicing, collection, sales and property
taxes and financial and other reporting to management (including reports
regarding regular payments, payment shortages, advance payments, security
deposits,
53
insurance payments and late or finance charges). The Company has supplemented
the system with an internal audit department (which evaluates the safeguarding
of assets, reliability of financial information and compliance with the
Company's credit policies) and a collection department.
The Company is marketing its leasing services primarily through the
establishment of vendor programs. See "Business -- Equipment Leasing --
Strategy -- Focus on Vendor Programs." The Company has currently entered into
vendor program relationships with eight vendors: Minolta Corporation (copiers),
Celsis Incorporated (microbial testing systems), American Marbacom
Communications (Teleco) (telephone systems), CSi (test equipment), Telrad
Communications (telephone systems), ATI Communications (telephone systems), the
National Association of College Stores (affinity program) and Millipore Corp.
(test equipment). In addition, Lucent Technologies (telecommunications
equipment) and Softmart (computer software) have designated the Company as an
authorized lessor for their dealer distribution channels. Under a typical
vendor program, the Company will work with the vendor and the lessee to
structure the lease, finance the lease, purchase the related equipment and
administer the lease, including providing all billing and collection services
(except for private-label leasing, referred to below). At the end of the
initial lease term, the Company and the vendor will typically coordinate the
re-marketing of the equipment. The Company seeks to establish vendor
relationships by (i) obtaining manufacturers' endorsements of the Company's
finance programs, (ii) offering inventory financing credit lines to a
manufacturer's vendors, (iii) developing customized sales training programs to
offer to vendors and (iv) assisting the manufacturers and their vendors in
establishing a sales package including the lease financing provided by the
Company.
The Company also competes by establishing private-label leasing programs
with its vendors. Private-label leasing involves the lease by a vendor of its
own equipment on a lease form bearing the vendor's name as lessor (but
otherwise identical to the Company's lease form), the sale of the lease and
equipment to the Company, and the provision of basic administrative services by
the vendor (such as billing and collecting rent). The Company will provide
assistance, particularized rental payment structures and other customized lease
terms, remarketing, customized invoicing and management information reports.
The Company also seeks to develop programs marketing directly to end-user
groups, primarily through small business affinity groups or associations,
participations in trade shows and conventions, and media advertising.
Although there can be no assurance, it is anticipated that in the future
the Company may retain the residual interest in leases sold by it and derive a
significant portion of its leasing profits from residuals. Currently, repayment
of notes received by the Company from Intermediate Purchasers of the Company's
equipment leases depends, to a significant extent, on realization of residuals.
See "Risk Factors -- Equipment Leasing Considerations -- Residuals" and "--
Sale of Leases," see also "Business -- Equipment Leasing -- Revenue Recognition
and Lease Accounting." The Company anticipates that residuals will principally
involve the original end-users; however, equipment not sold or re-leased to
end-users will be disposed of in the secondary market. While residual
realization is generally higher with original end-users than in the secondary
market, the secondary market (essentially, networks of distributors and dealers
in various equipment categories) is well developed in the product categories
the Company currently pursues and transactions in these product categories have
historically resulted in residual recoveries, on average, equal to the book
value of the equipment. Equipment reacquired by the Company prior to lease
termination (through lease default or otherwise) will be sold in the secondary
market.
Revenue Recognition and Lease Accounting
General. The manner in which lease finance transactions are characterized
and reported for accounting purposes has a major impact upon the Company's
reported revenue, net earnings and the resulting financial measures. Lease
accounting methods significant to the Company's leasing operations are
discussed below.
Direct Financing Leases. The Company classifies its lease transactions, as
required by the Statement of Financial Accounting Standards No. 13, Accounting
for Leases ("FASB No. 13") as direct financing leases (as distinguished from
sales-type or operating leases). Direct financing leases transfer substantially
all benefits and risks of equipment ownership to the customer. A lease is a
direct financing lease if the creditworthiness of the customer and the
collectibility of lease payments are reasonably certain and it meets one of the
following criteria: (i) the lease transfers ownership of the equipment to the
customer by the end of the lease term; (ii) the
54
lease contains a bargain purchase option; (iii) the lease term at inception is
at least 75% of the estimated economic life of the leased equipment; or (iv)
the present value of the minimum lease payments is at least 90% of the fair
market value of the leased equipment at inception of the lease. The Company's
net investment in direct financing leases consists of the sum of the total
future minimum lease payments receivable and the estimated unguaranteed
residual value of leased equipment, less unearned income. Unearned lease
income, which is recognized as revenue over the term of the lease by the
effective interest method, represents the excess of the total future minimum
lease payments plus the estimated unguaranteed residual value expected to be
realized at the end of the lease term over the cost of the related equipment.
Initial direct costs incurred in consummating a lease are capitalized as part
of the investment in direct finance leases and amortized over the lease term as
a reduction in the yield.
Residual Values. Unguaranteed residual value represents the estimated
amount to be received at lease termination from lease extensions or disposition
of the leased equipment financed under direct financing leases. The estimates
are based upon available industry data and senior management's prior experience
with respect to comparable equipment. The residual values are recorded as
investment in direct financing leases, on a net present value basis. The
estimated residual values will vary, both in amount and as a percentage of the
original equipment cost depending upon several factors including the equipment
type, market conditions and the term of the lease. Amounts to be realized at
lease termination depend on the fair market value of the related equipment and
may vary from the recorded estimate. Residual values are reviewed periodically
to determine if the equipment's fair market value is below its recorded value.
Any required changes are recorded in accordance with FASB No. 13. In accordance
with generally accepted accounting principles, residual values can only be
adjusted downward.
Sales of Leases. The Company sells a large percentage of the leases it
originates (including residual values) through indirect securitization
transactions and other structured finance techniques. In a securitization
transaction, the Company sells and transfers a pool of leases to a bankruptcy
remote Intermediate Purchaser unaffiliated with the Company. Typically, the
Intermediate Purchaser will have no material assets apart from the leases sold
to it. The Intermediate Purchaser in turn simultaneously sells and transfers
its interest in the leases (excluding the residual value) to a financial
institution in return for cash equal to a percentage of the aggregate present
value of the finance lease receivables being sold. The consideration paid to
the Company for the lease receivables and the residuals sold to the
Intermediate Purchaser consists of the cash advanced by the financial
institution and an interest bearing note from the Intermediate Purchaser.
Gains on the sale of leasing portfolios are recorded at the date of sale
in the amount by which the sales price exceeds the book value of the underlying
leases. Subsequent to a sale, the Company has no remaining interest in the pool
of leases or equipment except (i) a security interest is retained in the pool
when a note is received as part of the sale proceeds and (ii) under certain
circumstances, the Company is obligated to replace non-performing leases in the
pool. See "Risk Factors -- Equipment Leasing Considerations -- Sale of Leases"
and "-- Potential Replacement of Leases" and "-- Residuals."
The Company maintains an allowance for possible losses in connection with
payments due under lease contracts held in the Company's portfolio and its
retained interest in leases securitized or sold. The allowance is determined by
management's estimate of future uncollectible lease contracts based on the
Company's historical loss experience, an analysis of delinquencies, economic
conditions and trends and management's expectations of future trends, industry
statistics and lease portfolio (including leases under the Company's
management) characteristics and assumptions of future losses. The Company's
policy is to charge off to the allowance those lease contracts which are
delinquent for which management has determined in the probability of collection
to be remote. Recoveries on leases previously charged off are restored to the
allowance. For the quarter ended December 31, 1997, the Company recorded a
provision for possible losses of $250,000 to reflect the increase in the number
of its lease originations. For the year ended September 30, 1997, it recorded a
provision for possible losses of $253,000. At December 31, 1997 the allowance
for possible lease losses was $492,000 or approximately 1% of lease receivables
under management.
To the extent that the Company determines to retain residuals for its own
account, the Company's gain on sale from any pool of leases so sold may be
materially reduced, although the Company's revenues in subsequent years from
realization of residuals may be increased. For a discussion of certain risks
relating to realization of residuals, see "Risk Factors -- Equipment Leasing
Considerations -- Residuals."
55
During the fiscal year ended September 30, 1997, the Company sold leases
on a servicing retained basis, with a book value of approximately $30.2 million
to Intermediate Purchasers in return for cash of $20.6 million and notes with a
total face value of $13.3 million resulting in a gain of $3.7 million. During
that fiscal year, $8.5 million of principal payments were made on these notes.
In the first quarter of fiscal 1998 the Company sold leases with a book value
of approximately $14.4 million to an Intermediate Purchaser in return for cash
of $12.3 million and a note with a face value of $3.9 million.
The Company accounts for the sale and servicing of lease equipment in
accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." See Note 2, Notes to
Consolidated Financial Statements. In calculating the gains on sale to
Intermediate Purchasers noted above, the Company assumed that the cash flows on
the underlying leases sold were discounted at rates ranging from 7.78% to 9.0%
per annum. See "Risk Factors -- Equipment Leasing Considerations -- Sale of
Leases" and "-- Potential Replacement of Leases."
Partnership Management
The Company acts as the general partner and manager of five public limited
partnerships formed between 1986 and 1990 with total assets at December 31,
1997 of $36.1 million, including $18.5 million (book value) of equipment with
an original cost of $49.8 million. The partnerships primarily lease computers
and related peripheral equipment to investment grade, middle market, and
capital intensive companies. The principal stated objective of each of the
limited partnerships is to generate leasing revenues for distribution to the
investors in the partnerships.
For its services as general partner, the Company receives management fees,
an interest in partnership cash distributions and a reimbursement of specified
expenses related to administration of the partnerships (including costs of
non-executive personnel, legal, accounting and third-party contractor fees and
costs, and costs of equipment used in a partnership's behalf). Management fees
range from 3% to 6% of gross rents except that, if leases are full payout
leases, management fees range from 1% to 3% of gross rents. In four of the
partnerships, management fees are subordinated to the receipt by limited
partners of a cumulative annual cash distribution of 11% (two partnerships) or
12% (two partnerships) of the limited partners' aggregate investment. The
Company's interest, as general partner, in cash distributions from the
partnerships is 3.5% (one partnership) and 1% (four partnerships).
Lease Finance Placement and Advisory Business
The Company also operates a lease finance placement and advisory business
which focuses on two related types of leasing transactions: the origination of
leases by others and the identification of third-party lease funding sources.
Lease transactions generated by the division are typically full payout leases.
The Company generally receives between 1% and 4% of the equipment cost at the
time the transaction is closed for its services in arranging a transaction. In
some of the transactions it generates, the Company also enters into a
remarketing agreement that entitles it to fees upon residual sale. Lease
finance placement and advisory services generated revenues of $252,000 and
$300,000 during the quarters ended December 31, 1997 and 1996, respectively,
and $657,000 and $650,000 during fiscal years 1997 and 1996, respectively.
Energy Operations
General
The Company produces natural gas and, to a lesser extent, oil from
locations principally in Ohio, Pennsylvania and New York. At December 31, 1997,
the Company had (either directly or through partnerships and joint ventures
managed by it) interests in 1,264 wells (including royalty or overriding
interests with respect to 182 wells), of which the Company operates 908 wells,
590 miles of natural gas pipelines and 91,000 acres (net) of mineral rights.
Natural gas produced from wells operated by the Company is collected in gas
gathering pipeline systems owned by partnerships managed by the Company (and in
which the Company also has an interest) and by systems directly owned by the
Company, and is sold to a number of customers, such as gas brokers and local
utilities, under a variety of contractual arrangements. Oil produced from wells
operated by the Company is sold at the well site to regional oil refining
companies at the prevailing spot price for
56
Appalachian crude oil. From time to time, the Company receives indications of
interest in the acquisition of its energy operations, and continually pursues
the increase of its reserve base through selective acquisition of producing
properties and other assets. Within the past nine months, the Company has
acquired the assets of two small energy companies. For further information, see
Note 11 to Consolidated Financial Statements.
Well Operations
The following table sets forth information as of December 31, 1997
regarding productive oil and gas wells in which the Company has a working
interest:
(1) Includes the Company's equity interest in wells owned by 64 partnerships
and joint ventures. Does not include royalty or overriding interests with
respect to 182 wells held by the Company.
The following table sets forth net quantities of oil and natural gas
produced, average sales prices, and average production (lifting) costs per
equivalent unit of production, for the periods indicated, including the
Company's equity interests in the production of 64 partnerships and joint
ventures, for the periods indicated.
(1) All periods are fiscal years, except that 1998 is for the first fiscal
quarter ended December 31, 1997.
(2) Oil production is converted to mcf equivalents at the rate of six mcf per
barrel.
Neither the Company nor the partnerships and joint ventures it manages are
obligated to provide any fixed quantities of oil or gas in the future under
existing contracts.
Exploration and Development
The following table sets forth information with respect to the number of
wells completed in Ohio and New York (the only areas in which Company drilling
activities occurred) at any time during the first quarter of fiscal year 1998
and fiscal years 1997, 1996, and 1995, regardless of when drilling was
initiated.
(1) All periods are fiscal years, except that 1998 is for the first fiscal
quarter ended December 31, 1997.
All drilling has been on acreage held by the Company. The Company does not
own its own drilling equipment; rather, it acts as a general contractor for
well operations and subcontracts drilling and certain other work to third
parties.
57
Oil and Gas Reserve Information
An evaluation of the Company's estimated proved developed oil and gas
reserves as of September 30, 1997, was verified by E.E. Templeton & Associates,
Inc., an independent petroleum engineering firm. Such study showed, subject to
the qualifications and reservations therein set forth, reserves of 15.2 million
mcf of gas and 358,000 barrels of oil. See Note 13 to the Consolidated
Financial Statements.
The following table sets forth information with respect to the Company's
developed and undeveloped oil and gas acreage as of December 31, 1997. The
information in this table includes the Company's equity interest in acreage
owned by 64 partnerships and joint ventures.
The terms of the oil and gas leases held by the Company for its own
account and by its managed partnerships vary, depending upon the location of
the leased premises and the minimum remaining terms of undeveloped leases, from
less than one year to five years. Rentals of approximately $27,600 in fiscal
1997 and $16,400 for the quarter ended December 31, 1997 were paid to maintain
leases on such acreage in force.
The Company believes that the partnership, joint venture and Company
properties have satisfactory title. The developed oil and gas properties are
subject to customary royalty interests generally contracted for in connection
with the acquisition of the properties, burdens incident to operating
agreements, current taxes and easements and restrictions (collectively,
"Burdens"). Presently, the partnerships, joint ventures and the Company are
current with respect to all such Burdens.
At December 31, 1997, the Company had no individual interests in any oil
and gas property that accounted for more than 10% of the Company's proved
developed oil and gas reserves, including the Company's interest in reserves
owned by 64 partnerships and joint ventures.
Pipeline Operation
The Company operates, on behalf of three limited partnerships of which it
is both a general and limited partner (in which it owns 20%, 46% and 25%
interests), and for its own account, various gas gathering pipeline systems
totaling approximately 590 miles in length. The pipeline systems are located in
Ohio, New York and Pennsylvania.
Well Services
The Company provides a variety of well services to wells of which it is
the operator and to wells operated by independent third party operators. These
services include well operations, petroleum engineering, well maintenance and
well workover and are provided at rates in conformity with general industry
standards.
Sources and Availability of Raw Materials
The Company contracts for drilling rigs and purchases tubular goods
necessary for the drilling and completion of wells from a substantial number of
drillers and suppliers, none of which supplies a significant portion of the
Company's annual needs. During fiscal 1997, and 1996, the Company faced no
shortage of such goods and services. The duration of the current supply and
demand situation cannot be predicted with any degree of certainty due to
numerous factors affecting the oil and gas industry, including selling prices,
demand for oil and gas, and governmental regulations.
58
Major Customers
The Company's natural gas and oil is sold to various purchasers. In fiscal
1998 through January 31, 1998, gas and oil sales to three purchasers accounted
for 36%, 14% and 11%, respectively, of the Company's total production revenues.
For the years ended September 30, 1997 and 1996, gas sales to two purchasers
accounted for 29% and 12%, and 29% and 13%, respectively, of the Company's
total production revenues. Gas sales to one purchaser individually accounted
for approximately 15% of total revenues from energy production for fiscal 1995.
Competition
The oil and gas business is intensely competitive in all of its aspects.
The oil and gas industry also competes with other industries in supplying the
energy and fuel requirements of industrial, commercial and individual
customers. Domestic oil and gas sales are also subject to competition from
foreign sources. Moreover, competition is intense for the acquisition of leases
considered favorable for the development of oil and gas in commercial
quantities. The Company's competitors include other independent oil and gas
companies, individual proprietors and partnerships. Many of these entities
possess greater financial resources than the Company. While it is impossible
for the Company to accurately determine its comparative industry position with
respect to its provision of products and services, the Company does not
consider its oil and gas operations to be a significant factor in the industry.
Markets
The availability of a ready market for oil and gas produced by the
Company, and the price obtained therefor, will depend upon numerous factors
beyond the Company's control including the extent of domestic production,
import of foreign natural gas and/or oil, political instability in oil and gas
producing countries and regions, market demands, the effect of federal
regulation on the sale of natural gas and/or oil in interstate commerce, other
governmental regulation of the production and transportation of natural gas
and/or oil and the proximity, availability and capacity of pipelines and other
required facilities. Currently, the supply of both crude oil and natural gas is
more than sufficient to meet projected demand in the United States. These
conditions have had, and may continue to have, a negative impact on the Company
through depressed prices for its oil and gas reserves.
Governmental Regulation
The exploration, production and sale of oil and natural gas are subject to
numerous state and federal laws and regulations. Compliance with the laws and
regulations affecting the oil and gas industry generally increases the
Company's costs of doing business in, and the profitability of its energy
operations. Inasmuch as such regulations are frequently changing, the Company
is unable to predict the future cost or impact of complying with such
regulations. The Company is not aware of any pending or threatened matter
involving a claim that it has violated environmental regulations which would
have a material effect on its operations or financial position.
Sources of Funds
Historically, the Company has relied upon internally generated funds to
finance its growth. During fiscal 1997, the Company augmented its internally
generated funds by a $5.0 million credit facility (increased to $20.0 million
in the first quarter of fiscal 1998) for its residential mortgage lending
operations and a $5.0 million credit facility for oil and gas asset
acquisitions and completed two capital markets transactions: a public offering
of its Common Stock resulting in $19.5 million in net proceeds to the Company,
and a private placement of $115.0 million of the Senior Notes due 2004 to a
small group of institutional investors, resulting in $109.7 million of net
proceeds to the Company. In addition, during fiscal 1997 the Company entered
into an initial $20.0 million credit facility for its equipment leasing
operations. In the first quarter of fiscal 1998, the Company entered into a
$50.0 million forward sales commitment and an additional $15.0 million
warehouse credit facility for its residential mortgage lending operations. See
Note 6 to Consolidated Financial Statements. See also "Business -- Recent
Developments."
59
Senior Notes. The Senior Notes are unsecured general obligations of the
Company, payable interest only until maturity on August 1, 2004. The Senior
Notes are not subject to mandatory redemption except upon a change in control
of the Company, as defined in the indenture (the "Indenture") pursuant to which
the Senior Notes were issued, when the Noteholders have the right to require
the Company to redeem the Senior Notes at 101% of principal amount plus accrued
interest. No sinking fund has been established for the Senior Notes. At the
Company's option, the Senior Notes may be redeemed in whole or in part on or
after August 1, 2002 at a price of 106% of principal amount (through July 31,
2003) and 103% of principal amount (through July 31, 2004), plus accrued
interest to the date of redemption. The Indenture contains covenants that,
among other things, (i) require the Company to maintain certain levels of net
worth (generally, an amount equal to $50 million plus a cumulative 25% of the
Company's consolidated net income) and liquid assets (generally, an amount
equal to 100% of required interest payments for the next succeeding interest
payment date); and (ii) limit the ability of the Company and its subsidiaries
to (a) incur indebtedness (not including secured indebtedness used to acquire
or refinance the acquisition of loans, equipment leases or other assets), (b)
pay dividends or make other distributions in excess of 25% of aggregate
consolidated net income (offset by 100% of any deficit) on a cumulative basis,
(c) engage in certain transactions with affiliates, (d) dispose of certain
subsidiaries, (e) create liens and guarantees with respect to pari passu or
junior indebtedness and (f) enter into any arrangement that would impose
restrictions on the ability of subsidiaries to make dividend and other payments
to the Company. The Indenture also restricts the Company's ability to merge,
consolidate or sell all or substantially all of its assets and prohibits the
Company from incurring additional indebtedness if the Company's "leverage
ratio" exceeds 2.0 to 1.0. As defined by the Indenture, the leverage ratio is
the ratio of all indebtedness (excluding debt used to acquire assets,
obligations of the Company to repurchase loans or other financial assets sold
by the Company, guarantees of either of the foregoing, non-recourse debt and
certain securities issued by securitization entities, as defined in the
Indenture), to the consolidated net worth of the Company. The Indenture also
prohibits the Company from incurring pari passu or junior indebtedness with a
maturity date prior to that of the Senior Notes.
Lease Financing Credit Facility. FLI maintains a $20.0 million revolving
credit facility with term loan availability with CoreStates Bank and First
Union Bank for its equipment leasing operations. The facility has, in addition
to customary covenants, the following principal terms: (i) revolving credit
loans bear interest at adjusted LIBOR rate plus 175 basis points, while term
loans bear interest at adjusted LIBOR plus 225 basis points; (ii) the loans are
secured by a first lien on the equipment leases being financed (and on the
underlying equipment), a guaranty by the Company and a pledge of the capital
stock of FLI and Resource Leasing, Inc. (the direct parent of FLI and a
wholly-owned subsidiary of the Company); (iii) revolving credit loans may be
converted to term loans (with terms of 18, 24, or 36 months), provided that
term loans must be in increments of $2.0 million and no more than five term
loans may be outstanding at any time; (iv) adjustable rate term loans may, at
the option of FLI, be converted into fixed rate term loans at then quoted
rates; (v) FLI will be required to maintain a debt (excluding non-recourse
debt) to "worth" ratio of 4.5 to 1.0, a minimum tangible net worth equal to
$5.0 million plus 75% of FLI's net income, and specified ratios of cash flow to
the sum of debt service plus 25% of outstanding obligations under the revolving
line of credit plus mandatory principal payments; and (vi) the Company will be
required to maintain minimum stockholders' equity of $40.0 million. The
facility expires on May 29, 1998 but may be renewed annually by the lenders.
The Company is currently negotiating with the lenders for a renewal of the
facility and believes that the facility will be renewed on similar terms. There
can, however, be no assurance that the facility will be renewed or that the
renewal terms will be similar to the existing terms. See "Risk Factors --
General -- Ability to Generate Funding for Growth." During fiscal 1997, the
maximum borrowing by the Company under this facility was $7.1 million, all of
which was repaid prior to fiscal year end. As of December 31, 1997 there were
no borrowings under this line.
Forward Sale Commitment. In December 1997, the Company, through FLI,
entered into an arrangement (the "Commitment") with SW Leasing Portfolio IV,
Inc. ("SW"), as the Intermediate Purchaser, and First Union National Bank
("First Union") and Variable Funding Capital Corporation ("VFCC"), as the
ultimate investors, pursuant to which (1) SW will purchase equipment leases
(meeting specific eligibility requirements) and the underlying equipment from
FLI for a purchase price equal to the sum of the present value of scheduled
payments (the "Discounted Contract Balance") as of the date of sale and the
residual value of the equipment (the "Residual Value"), (2) First Union and
VFCC will purchase, for a price equal to the product of .88
60
multiplied by the aggregate Discounted Contract Balances on the date of sale,
up to $50.0 million of equipment leases from SW from time to time on or before
December 17, 1998 and (3) FLI acts as servicing agent for the equipment leases
purchased by First Union and VFCC from SW. SW uses the cash received by it
from First Union and VFCC to pay a portion of the purchase price of the leases
and pays the balance with a promissory note in an original principal amount
equal to the aggregate Residual Value and the non-advanced portion of the
aggregate Discounted Contract Balances. Lease collections in excess of fees
associated with the leases and a return to First Union and VFCC (equivalent to
LIBOR, the First Union prime rate, or the federal funds rate plus 1%,
depending on the circumstances) may be reinvested in eligible leases (unless
the capital limit (the product of the aggregate Discounted Contract Balances
multiplied by .88) has been exceeded, in which event the amount of such excess
must be paid to First Union and VFCC) or paid to SW in order to pay down the
promissory note to FLI. Under the Commitment, FLI is obligated to provide a
substitute equipment lease to First Union and VFCC in the event a lease is
terminated or prepaid in full prior to its scheduled expiration date and the
prepayment amount is less than the Discounted Contract Balance on the date of
prepayment plus any outstanding servicer advances. In addition, SW and FLI are
obligated to accept re-transfer of, or provide a substitute lease for, any
lease which does not meet the eligibility requirements. The Commitment is
subject to early termination under certain circumstances, including (i) if the
ratio of the average Discounted Contract Balances (for each of the previous
three months) for all leases delinquent in payments by 60 days or more to the
aggregate Discounted Contract Balances (for each of the previous three months)
for all non-delinquent leases exceeds 3% or (ii) if the ratio of the aggregate
Discounted Contract Balances (for each of the preceding six months) for all
defaulted leases (i.e., leases which the Company has determined are not
collectible or subject to repossession or which are delinquent in payments by
120 days or more) to the aggregate Discounted Contract Balances (for each of
the preceding six months) for all non-defaulted leases exceeds 2.75%. In the
first quarter of fiscal 1998, the Company sold to SW equipment leases with an
aggregate book value of $14.4 million in return for cash of $12.3 million and
a promissory note for $3.9 million.
Residential Mortgage Loan Credit Facilities. FMF maintains a $20.0 million
credit facility with CoreStates Bank, bearing interest at either (i) the
CoreStates prime rate, (ii) the federal funds rate plus 250 basis points, or
(iii) an adjusted LIBOR plus 150 basis points, with the rate to be elected by
FMF, and with the right in FMF to elect different rate formulas for separate
draws under the credit facility. The credit facility will be secured by a first
lien interest in the loans being financed by facility draws. Under the
facility, FMF is required to maintain a minimum tangible net worth of $1.0
million, and a debt to tangible net worth ratio of 5.0 to 1.0 (where debt
includes the unused portion of any financing commitment but excludes
subordinated debt). The facility expires on September 22, 1998 unless renewed
by the parties. As of December 31, 1997, the Company had no borrowings under
this facility.
FMF has also established a $15.0 million warehouse credit facility with
Morgan Stanley Mortgage Capital, Inc., bearing interest at LIBOR or, if
unavailable, the interbank eurodollars market rate plus 90 basis points. The
facility is secured by a first lien interest in the loans being financed by
facility draws. Under the credit facility, FMF is required to maintain tangible
net worth (capital and subordinated debt minus advances to affiliates and
intangible assets representing start up costs in excess of $1.0 million), and a
ratio of total indebtedness to tangible net worth of 10.0 to 1.0. The facility
expires on October 16, 1998. There were $4.4 million of borrowings outstanding
under this facility at December 31, 1997.
Oil and Gas Credit Facility. In October 1997, the Company obtained a $5.0
million credit facility from KeyBank for purposes of acquiring oil and gas
assets. The credit facility permits draws based on a percentage of reserves of
oil and gas properties pledged as security for the facility. Draws under the
facility bear interest at KeyBank's prime rate plus 25 basis points. The
facility requires the Company to maintain a tangible net worth in excess of
$31.0 million, a 2.0 to 1.0 ratio of current assets to current liabilities, a
1.5 to 1.0 ratio of cash flow to maturities of long-term debt coming due within
the calculation period and a ratio of adjusted debt to tangible net worth of
not more than 2.0 to 1.0. The facility terminates on June 30, 1999. As of
December 31, 1997, there were no borrowings outstanding under this line.
Employees
As of December 31, 1997, the Company employed 226 persons, including 8 in
general corporate, 112 in real estate finance, 80 in equipment leasing and 26
in energy.
61
Properties
The Company's executive office is located in Philadelphia, and is leased
under an agreement providing for rents of $65,000 per year through May 2000.
The Company's small ticket equipment leasing and residential mortgage loan
headquarters are located in Ambler, Pennsylvania, and are leased by the Company
under agreements providing for rents of $355,000 per year (including space
leased beginning July 1, 1997). The agreements terminate on June 30, 1998 and
June 30, 2007. The Company leases space for management operations with respect
to its five public leasing partnerships in Philadelphia for $87,000 per year.
That lease expires on January 24, 2003. The Company owns a 9,600 square foot
office building and related land in Akron, Ohio, housing its energy and
accounting operations. The Company also maintains two energy field offices in
Ohio and New York, as month to month tenancies, for which aggregate rent for
fiscal 1997 was $24,000. The Company also maintains a brokerage office in
California for which the rent is $25,000 per year through July 1999. Aggregate
rent for all of the Company's offices was $238,600 for fiscal 1997.
Legal Proceedings
The Company is party to various routine legal proceedings arising out of
the ordinary course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse effect
on the financial condition or operations of the Company.
Recent Developments
Commercial Loan Purchase. On March 13, 1998, the Company and RAIT jointly
purchased the Loan, in the original principal amount of $80.0 million (plus
accrued fees, restructuring charges, interest and costs), for a purchase price
of $85.5 million. The Company contributed $75.5 million of the purchase price
and RAIT contributed $10.0 million. The rights and interests of the Company and
RAIT with respect to the Loan are set forth in a Participation Agreement, the
terms of which are described below. The Company holds legal title to the Loan.
There can be no assurance that the Company will realize the full outstanding
amount of the Loan. See "Business -- Commercial Mortgage Loan Acquisition and
Resolution: Accounting for Discounted Loans."
The Loan is secured by a first priority mortgage lien on an office
building known as the "Evening Star Building" located at 1101 Pennsylvania
Avenue, N.W., Washington, D.C. (the "Property"). The Property has been valued
by an independent valuation firm at not less than $90.0 million. Such valuation
is only an estimate of value and should not be relied upon as a precise measure
of market value. As part of the purchase of its interest in the Loan, the
Company received an assignment of all of the seller's rights against the
borrower under the Loan (the "Bankruptcy Rights") pursuant to the bankruptcy
plan of reorganization (the "Plan") governing the Property. The Bankruptcy
Rights include the right to appoint a liquidating agent to manage, control and
take possession of the Property; the right to receive all net cash flow from
the Property, the right to approve leases and all other material contracts
related to the Property; and the right, but not the obligation, to cause title
to the Property to be transferred on or before June 30, 1998.
In addition to paying its portion of the purchase price of the Loan, the
Company incurred closing costs of approximately $3.0 million, comprised of
certain expenses that the Plan required the holder of the Loan to pay.
Approximately $1.5 million of these closing costs was paid into an escrow
account. In the event title is transferred, the $1.5 million will be delivered
to the borrower pursuant to the Plan.
Financing for the Company's purchase of its interest in the Loan was
provided by a loan, in the principal amount of $55.0 million, from Merrill
Lynch Capital Mortgage Inc. (the "Senior Financing"). The Senior Financing
bears interest at LIBOR plus 2.5% until September 9, 1998, and at LIBOR plus
4.0% from September 10, 1998 until July 1, 1999, when the Senior Financing
matures. The Company is currently seeking 10-year, fixed rate financing to
replace the Senior Financing, and anticipates (although there can be no
assurance) closing on such financing before September 10, 1998. The Company
incurred fees and expenses of approximately $950,000 in connection with the
Senior Financing.
RAIT's participation interest in the Loan entitles it to receive (i)
distributions from the monthly net cash flow of the Property, after monthly
debt service payments on the Senior Financing, in an amount sufficient to pay
interest on its $10.0 million investment at 10% per annum and (ii) the first
$10.0 million of principal payments from the Loan after the prior repayment of
the Senior Financing. In addition, RAIT received advance interest of
approximately $510,000.
62
Commercial Mortgage Loan Credit Facility. In March 1998, the Company,
through certain operating subsidiaries, established an $18.0 million revolving
credit facility with Jefferson Bank for its commercial mortgage loan
operations. The credit facility bears interest at the prime rate reported in
the Wall Street Journal plus .75%, and is secured by the borrowers' interests
in certain commercial loans and by a pledge of their outstanding capital stock.
In addition, repayment of the credit facility is guaranteed by the Company. The
facility expires on April 1, 1999. No borrowings have been made under this
facility to date. See "Management -- Certain Relationships and Related Party
Transactions."
63
MANAGEMENT
Directors and Executive Officers
The following sets forth certain information regarding the directors and
executive officers of the Company:
Name Age Position with the Company
------------------------------------- ----- -----------------------------------------------------
Edward E. Cohen(1) .................. 59 Chairman of the Board of Directors, President, Chief
Executive Officer and Director
Daniel G. Cohen(2) .................. 28 Executive Vice President and Director
Scott F. Schaeffer(1) ............... 35 Executive Vice President and Director
Steven J. Kessler ................... 55 Senior Vice President and Chief Financial Officer
Freddie M. Kotek .................... 42 Senior Vice President
Michael L. Staines(2) ............... 48 Senior Vice President, Secretary and Director
Nancy J. McGurk ..................... 42 Vice President-Finance and Treasurer
Carlos C. Campbell(1) ............... 59 Director
Andrew M. Lubin(3) .................. 50 Director
Alan D. Schreiber, M.D.(3) .......... 55 Director
John S. White(2) .................... 56 Director
(1) Term as director expires in 1999.
(2) Term as director expires in 2000.
(3) Term as director expires in 1998.
Edward E. Cohen has been Chairman of the Board of Directors of the Company
since 1990, its Chief Executive Officer and a director since 1988 and its
President since 1995. He is Chairman of the Board of Directors and a director
of BCMI, a real estate construction and management company. See "Management -
Certain Relationships and Related Party Transactions." Since 1981, Mr. Cohen
has been Chairman of the Executive Committee and a director of JeffBanks, Inc.
(a bank holding company with total assets of approximately $1.2 billion). From
1991 to 1996, Mr. Cohen was affiliated with Ledgewood Law Firm, P.C., most
recently in an of counsel capacity. See "Legal Matters." From 1969 through
1989, Mr. Cohen was Chairman of the Board or Chairman of the Executive
Committee of State National Bank of Maryland (now First Union Bank of Maryland)
and/or its holding company. Mr. Cohen is the father of Daniel G. Cohen.
Daniel G. Cohen has been an Executive Vice President and Director of the
Company since July, 1997. Prior thereto, since 1995, Mr. Cohen had been a
Senior Vice President of the Company. Mr. Cohen is also Chairman, Chief
Executive Officer and a director of FMF, the residential mortgage loan
origination subsidiary of the Company. Prior to joining the Company in November
1995, Mr. Cohen was principally engaged in graduate studies. Mr. Cohen is the
son of Edward E. Cohen.
Scott F. Schaeffer has been an Executive Vice President and Director of
the Company since July, 1997. Prior thereto, Mr. Schaeffer had been, since
1995, a Senior Vice President of the Company. Mr. Schaeffer has been President
of Resource Properties, Inc. (a wholly owned subsidiary of the Company) since
1992.
Steven J. Kessler has been Senior Vice President and Chief Financial
Officer of the Company since August 1997. Prior thereto, Mr. Kessler was Vice
President (Finance and Acquisitions) at Kravco Company (a national shopping
center developer and operator) from March 1994 until joining the Company. From
1983 through March of 1994, he was Chief Financial Officer and Chief Operating
Officer at Strouse Greenberg & Co., Inc., a regional full service real estate
company, and Vice President (Finance) and Chief Accounting Officer at its
successor, The Rubin Organization. Prior thereto, he was a partner at the
international accounting and consulting firm of Touche Ross & Co. (now Deloitte
& Touche LLP), Philadelphia, Pennsylvania.
64
Freddie M. Kotek has been a Senior Vice President of the Company since
1995 and an Executive Vice President of Resource Properties, Inc. (a wholly
owned subsidiary of the Company) since 1993. Prior thereto, he was a First Vice
President of Royal Alliance Associates (an investment banking and brokerage
firm) from 1991 to 1993, and a Senior Vice President and Chief Financial
Officer of Paine Webber Properties (a real estate investment firm) from 1990 to
1991.
Michael L. Staines has been Senior Vice President, Secretary and a
director of the Company since 1989 and President and a director of Resource
Energy since its organization in 1993.
Nancy J. McGurk has been Vice President-Finance of the Company since 1992
and Treasurer and Chief Accounting Officer of the Company since 1984.
Carlos C. Campbell has been a director of the Company since 1990. He is
President of C.C. Campbell and Company (a management consulting firm), Vice
Chairman of the Board of Directors of Computer Dynamics, Inc. (a computer
services corporation) and a director of Sensys, Inc. (a telecommunication/asset
management corporation).
Andrew M. Lubin has been a director of the Company since 1994. He has been
President of Delaware Financial Group, Inc. (a private investment firm) since
1984.
Alan D. Schreiber, M.D. has been a director of the Company since 1994. Dr.
Schreiber has been a Professor of Medicine and Assistant Dean for Research and
Research Training at the University of Pennsylvania School of Medicine since
1973 and Chairman of the Scientific Advisory Board of Inkine Pharmaceutical
Co., Inc. since 1997. From 1993 to 1997, Dr. Schreiber was Chief Scientific
Officer of CorBec Pharmaceuticals, Inc., a Company he founded.
John S. White has been a director of the Company since 1993. He has been
Chairman of the Board and Chief Executive Officer of DCC Securities Corporation
(a securities brokerage firm) since 1990.
Other Significant Employees
The following sets forth certain information regarding other significant
employees of the Company:
Abraham Bernstein, age 64, is the Chairman, Chief Executive Officer and
President of the small ticket equipment leasing subsidiary of the Company. From
1982 to 1993, he was the President and Chief Executive Officer of Tokai
Financial Services, Inc., the equipment leasing subsidiary of Tokai Bank of
Japan. From 1993 to 1995, the contractual period during which Mr. Bernstein's
restrictive covenant with Tokai was in effect, Mr. Bernstein was a Managing
Director of the Rittenhouse Consulting Group (a financial consulting company).
Crit DeMent, age 44, is the Executive Vice President of FLI. Prior
thereto, from 1983 through 1996 he was Vice President-Marketing and Leasing
Associate-Senior Account Representative for Tokai Financial Services, Inc.
Joseph T. Ellis, Jr., age 36, is the Director of Vendor Services for FLI.
Prior thereto, from 1985 through February 1996, he held various marketing and
sales positions with Tokai Financial Services, Inc., most recently as the
Director of Program Management and Strategic Market Development.
Frank V. Pellegrini, age 50, has been the Chairman, Chief Executive
Officer and President of Tri-Star since 1993. Prior to that, he was Senior Vice
President of Home American Financial Services, Inc. (now known as Upland
Mortgage Corporation), a residential mortgage lender.
Kathy B. Schauer, age 46, has served since February 1997 as the President,
Chief Operating Officer and a director of FMF. Immediately prior to joining
FMF, Ms. Schauer served as Director of Business and Product Development at
Standard & Poors Rating Services (where she was involved in the development and
implementation of credit scoring and pricing models for the residential
mortgage market), and, prior thereto, served in executive capacities with Smith
Barney, Meridian Bancorp and J.P. Morgan. From 1985 to 1993, Ms. Schauer was a
Vice President (Mortgage Products Group) of CS First Boston.
65
Bruce R. Schmidt, age 40, is Senior Vice President of FMF. From 1993 until
March 1997, Mr. Schmidt was Director of Marketing for Advanta Corp., a national
consumer home equity lender. Prior thereto, from 1988 to 1993, he was Vice
President, Marketing, for Nutri/System, Inc., a national weight loss program
company.
Jeffrey C. Simmons, age 39, has been Executive Vice President and a
director of Resource Energy since 1997. From 1994 to 1997 he was Vice
President-Exploration of the Company and from 1988 to 1994 he was Director of
Well Services of the Company.
Certain Relationships and Related Party Transactions
In the ordinary course of its business operations, the Company has ongoing
relationships with several related entities, primarily a property management
firm, a bank and RAIT. As particular opportunities have arisen, the Company has
purchased commercial mortgage loans from, or involving borrowers which are,
affiliated with officers of the Company. In three instances (excluding sales to
RAIT) the Company has sold senior or junior lien interests in commercial loans
to purchasers affiliated with officers of the Company. At December 31, 1997,
loans held with respect to related borrowers or acquired from related lenders
constitute 7% ($8.2 million), by book value, of the Company's commercial loan
portfolio, while the senior lien interests sold to related purchasers
constituted 4% ($4.1 million) of all senior lien interests with respect to the
Company's commercial loan portfolio. Transactions with affiliates must be
approved by the Company's Board of Directors, including a majority of the
disinterested directors. In addition, acquisitions of commercial mortgage loans
must be approved by the Investment Committee of the Board of Directors (which
consists of two disinterested directors). The Company believes that the terms
of its transactions with related parties are no less favorable than those
available from unrelated third parties. A more detailed description of these
relationships and transactions is set forth below.
Relationship with BCMI. The Company holds commercial mortgage loans of
borrowers whose underlying properties are managed by BCMI, a firm of which
Edward E. Cohen is Chairman of the Board of Directors and a minority
stockholder (approximately 8%). The Company has advanced funds to certain of
these borrowers for improvements on their properties, which have been performed
by BCMI. The President of BCMI (or an entity affiliated with him) has also
acted as the general partner or trustee of ten of the borrowers; an entity
affiliated with him is the general partner of the sole limited partner of an
eleventh borrower. BCMI has agreed to subordinate its management fees to
receipt by the Company of minimum required debt service payments under the
obligations held by the Company.
Relationship with Jefferson Bank. The Company maintains normal banking and
borrowing relationships with Jefferson Bank, a subsidiary of JeffBanks, Inc.
See also "Business -- Recent Developments -- Commercial Mortgage Loan Credit
Facility." The Company anticipates that it may effect other borrowings in the
future from Jefferson Bank. The Company, through FMF, subcontracts any
residential mortgage loan servicing duties to Jefferson Bank. See "Business --
Real Estate Finance -- Residential Mortgage Loans." Edward E. Cohen and his
spouse are officers and directors of JeffBanks, Inc. (and his spouse is
Chairman and Chief Executive Officer of Jefferson Bank and JeffBanks, Inc.),
and are principal stockholders thereof. Daniel G. Cohen is a director of
Jefferson Bank. Jefferson Bank is also a tenant at two properties which secure
loans held by the Company and, at one of such properties, subleases space to
RAIT.
Relationship with RAIT. The Company sponsored the formation and public
offering of common shares of beneficial interest of RAIT. See "Business -- Real
Estate Finance Sponsorship of Real Estate Investment Trust." RAIT raised $49.3
million (including the Company's investment) in the offering which was
completed in January 1998. The Company acquired 15% of RAIT's outstanding
shares for an investment of approximately $7.0 million. Edward E. Cohen's
spouse, Betsy Z. Cohen, is Chairman and Chief Executive Officer of RAIT. The
Company has the right to nominate one person for election to the Board of
Trustees until such time as its ownership of RAIT's outstanding common shares
is less than 5%. One of the current trustees, Jonathan Z. Cohen, is serving as
the Company's nominee. Jonathan Z. Cohen is the son of Edward E. Cohen
(Chairman, Chief Executive Officer and President of the Company), the brother
of Daniel G. Cohen (Executive Vice President and director of the Company and
Chairman and Chief Executive Officer of FMF), and is the Secretary and a
director of Resource Energy. The Company had advanced funds to RAIT for legal,
accounting
66
and filing fees and expenses, salaries of RAIT's executive officers, rent and
other organizational expenses and for the expenses incurred by the Company in
sponsoring RAIT including an allocation of compensation of Company employees.
These advances were without interest and were repaid from the proceeds of RAIT
offering.
In connection with RAIT's offering, the Company, through its subsidiaries,
sold ten loans and senior lien interests in two additional loans to RAIT (the
"Initial Investments") at an aggregate purchase price of $20.2 million
(including $2.1 million attributable to senior lien interests acquired by the
Company in connection with the sales to RAIT). Two of the Initial Investments
were originated for RAIT; one was sold to RAIT at cost and RAIT purchased a
senior lien interest in the other at cost. The Company realized a gain on the
sale of the Initial Investments of $3.1 million. See also "Business -- Recent
Developments -- Commercial Loan Purchase." The Company anticipates that,
subject to certain limitations, it will sell additional investments to RAIT.
Relationships with Certain Borrowers. The Company has from time to time
purchased loans in which affiliates of the Company are affiliates of the
borrowers, as discussed in the following paragraphs. (Loan numbers are as set
forth in the table of loans in "Business -- Real Estate Finance -- Commercial
Mortgage Loan Acquisition and Resolution: Loan Status.")
In August 1997, the Company, through a subsidiary, acquired a loan (loan
35) with a face amount of $2.3 million from Jefferson Bank at a cost of $1.6
million. The loan is secured by a property owned by a partnership in which Mr.
Schaeffer, the Company's executive vice president and a director, is the
general partner and Edward E. Cohen, together with his spouse, are limited
partners. The Company leases its headquarters space at such property. The lease
provides for rents of $65,000 per year through May 2000. Ledgewood Law Firm,
P.C., a law firm which provides legal services to the Company, and BCMI are
also tenants at such property.
In June 1997, the Company acquired a loan (loan 29) with a face amount of
$7.0 million from a partnership in which Mr. Schaeffer and Edward E. Cohen,
together with his wife, are limited partners. Mr. Schaeffer was previously the
general partner of such partnership. The Company acquired such loan at a cost
of $3.0 million.
In December 1994, the Company acquired a loan (loan 13) with a face amount
of $3.0 million from California Federal Bank, FSB at a cost of $1.7 million.
The loan is secured by a property owned by a borrower whose general partner is
the President of BCMI. Edward E. Cohen, together with his wife, is a limited
partner in such partnership. The borrower refinanced the Company's loan in
September 1995, applying $2.0 million of the proceeds to the repayment of the
Company's loan. As a result, the Company obtained a gain on its investment of
$303,000, while maintaining a continuing interest in the loan of approximately
$1.0 million.
In August 1994, the Company acquired from third parties a loan (loan 8),
in the original principal amount of $ 3.4 million (and with a then-outstanding
balance of $4.4 million), for an investment of $1.6 million. The borrower is a
limited partnership of which Mr. Lubin, a director of the Company, is currently
the general partner. Mr. Lubin assumed such position after the Company's
acquisition of the loan. Previously, the general partner had been the President
of BCMI. The borrower subsequently refinanced the loan with another third party
and repaid the Company $934,000, leaving the Company with a net investment of
$419,000. This loan was sold to RAIT in January 1998.
Relationships with Certain Lienholders. The Company has sold two senior
lien interests and one junior lien interest in its commercial loans to entities
in which officers of the Company have minority interests as discussed in the
following paragraphs.
In December 1997, the Company purchased from third parties, for an
aggregate of $1.52 million, two loans (loan 43) in the aggregate original
principal amount of $2.0 million and with an aggregate outstanding balance at
the time of purchase of $1.96 million. The loans are secured by an apartment
building. The Company sold to a limited partnership in which Edward E. Cohen
and Scott F. Schaeffer beneficially own a 17.8% interest a senior lien interest
in one of the loans for $1.0 million, reducing the Company's net investment to
$518,000 and leaving the Company with a retained interest in outstanding loan
receivables of $1.0 million (at a book value of $803,000).
67
From November 1996 to June 1997 the Company acquired from third parties
loans (loan 26) relating to one property in the aggregate original principal
amount of $5.8 million (and with aggregate outstanding balances at the
respective times of purchase of $7.6 million) for an investment of $2.5
million. The Company sold a senior lien interest in the loan for $2.2 million
reducing the Company's net investment to $235,000 and leaving the Company with
a retained interest in outstanding loan receivables of $5.9 million (at a book
value of $2.3 million). The purchaser was a limited partnership in which Edward
E. Cohen and Scott F. Schaeffer beneficially own an 18.3% limited partnership
interest.
In June 1996, for an investment of $2.4 million the Company acquired from
third parties a loan (loan 22), in the original principal amount of $3.3
million (and with a then-outstanding balance of $3.3 million). The Company sold
a junior lien interest in the loan for $875,000, leaving the Company with a net
investment of $1.5 million, to a limited partnership in which Messrs. Edward E.
Cohen and Scott F. Schaeffer beneficially own a 21.3% limited partnership
interest.
Relationship with Financing Institution. The Company has in the past
obtained material amounts of financing from Physicians Insurance Company of
Ohio ("PICO") by the sale to PICO, in May 1994, of an $8 million principal
amount 9.5% senior note and by the sale to PICO, in fiscal years 1995 and 1996,
of $12 million of senior lien interests in seven of the Company's portfolio
loans, together with warrants to purchase 983,150 shares of Common Stock. In
July 1997, the Company repaid the senior note in full and PICO exercised, and
subsequently sold, the common shares underlying the warrants to institutional
investors in private transactions pursuant to which the Company granted certain
registration rights. See "Shares Eligible for Future Sale." Following such
transactions, John R. Hart, an executive officer and director of PICO who had
become a director of the Company in connection with the PICO financings,
resigned from the Board of Directors of the Company.
68
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of shares of
Common Stock owned, as of March 25, 1998, by (a) each person who, to the
knowledge of the Company, is the beneficial owner of 5% or more of the
outstanding shares of Common Stock, (b) each of the Company's present
directors, (c) each of the Company's executive officers, and (d) all of the
Company's present executive officers and directors as a group. This information
is reported in accordance with the beneficial ownership rules of the Securities
and Exchange Commission under which a person is deemed to be the beneficial
owner of a security if that person has or shares voting power or investment
power with respect to such security or has the right to acquire such ownership
within 60 days. Shares of Common Stock issuable pursuant to options or warrants
are deemed to be outstanding for purposes of computing the percentage of the
person or group holding such options or warrants but are not deemed to be
outstanding for purposes of computing the percentage of any other person. See
note (2) below, for information concerning outstanding options.
Common Stock
------------------------------------------------------
Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
--------------------------------------------- ---------------------------------------- -----------
Directors(1)
Carlos C. Campbell .......................... 160 *
Daniel G. Cohen ............................. 6,368(2) *
Edward E. Cohen ............................. 426,657(2)(3)(4)(6) 8.89%
Andrew M. Lubin ............................. 280 *
Scott F. Schaeffer .......................... 100,371(2)(3)(4)(5) 2.11%
Alan D. Schreiber, M.D. ..................... 5,370 *
Michael L. Staines .......................... 44,390(2)(3)(4) *
John S. White ............................... 0 *
Executive Officers(1)
Steven J. Kessler ........................... 0 *
Freddie M. Kotek ............................ 26,401(2)(3)(4) *
Nancy J. McGurk ............................. 24,914(2)(3)(4) *
All present officers and directors as a group
(11 persons) ............................... 580,178(2)(3)(4)(5)(6) 11.98%
Other owners of 5% or More of Outstanding
Shares(7)
Friedman, Billings, Ramsey Investment
Management, Inc. ........................... 314,005 6.61%
Keefe Managers, Inc. ........................ 450,000 9.47%
Kramer Spellman L.P. ........................ 536,800 11.30%
Wellington Management Company, LLP. ......... 548,500 11.55%
* Less than 1%
(1) The address for each director and executive officer is 1521 Locust Street,
Fourth Floor, Philadelphia, Pennsylvania 19102.
(2) Includes shares allocated under the Resource America, Inc. Employee Savings
Plan (the Company's 401(k) plan) in the amounts of: Mr. E. Cohen -- 3,199
shares; Mr. Kotek -- 1,568 shares; Ms. McGurk -- 4,718 shares; Mr.
Schaeffer -- 876 shares; Mr. Staines -- 558 shares; and Mr. D. Cohen --
750 shares, as to which each has voting power.
(3) Includes shares issuable on exercise of options granted in 1993 and 1995
under the 1989 Key Employee Stock Option Plan in the amounts of: Mr. E.
Cohen -- 47,753 shares; Mr. Schaeffer -- 5,618 shares; Mr. Staines --
22,472 shares; Mr. Kotek -- 9,832 shares; and Ms. McGurk -- 5,618 shares.
69
(4) Includes shares allocated under the 1989 Employee Stock Ownership Plan in
the amounts of: Mr. E. Cohen -- 20,089 shares; Mr. Staines -- 13,624
shares; Mr. Schaeffer -- 7,047 shares; Mr. Kotek -- 5,170 shares; and Ms.
McGurk -- 8,960 shares, as to which each has voting power.
(5) Includes 60,815 shares held by a limited partnership, of which Mr.
Schaeffer is the general partner and in which he has a 10% interest.
(6) Includes Mr. Cohen's proportionate interest (aggregating 54,733 shares) in
shares held by a limited partnership in which Mr. Cohen is the limited
partner.
(7) Includes shares held by entities managed by the named persons. The address
for Friedman, Billings, Ramsey Investment Management, Inc., an affiliate
of Friedman, Billings, Ramsey & Co., Inc., is 1001 19th Street North, 18th
Floor, Arlington, Virginia 22209; the address for Keefe Managers, Inc. is
375 Park Avenue, Suite 3108, New York, New York 10152; the address for
Kramer Spellman L.P. is 2050 Center Avenue, Suite 300, Fort Lee, New
Jersey 07024; and the address for Wellington Management Company, LLP. is
75 State Street, Boston, Massachusetts 02109.
70
DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 50,000,000 shares of capital stock,
consisting of 49,000,000 shares of Common Stock, par value $.01 per share, and
1,000,000 shares of preferred stock, par value $1.00 per share ("Preferred
Stock"). As of March 25, 1998, there were 4,750,717 shares of Common Stock
outstanding and no shares of Preferred Stock outstanding. The Company intends,
during the 1998 fiscal year, to issue a stock dividend of two shares of Common
Stock for each outstanding Share of Common Stock (the "Stock Dividend"). There
can be no assurance that the Stock Dividend will be declared by the Board of
Directors.
Common Stock
Holders of Common Stock are entitled to dividends when, as and if declared
by the Company's Board of Directors and in such amounts as the Board of
Directors may deem advisable. See "Price Range of Common Stock and Dividend
Policy." In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, holders of Common Stock are
entitled, after payment or provision for payment of the debts or other
liabilities of the Company, and subject to the prior rights of holders of any
Preferred Stock which may then be outstanding, to share ratably in the
remaining assets of the Company. Shares of Common Stock do not possess
preemptive rights. Holders of Common Stock are entitled to one vote for each
share held of record on each matter submitted to a vote at a meeting of
stockholders. For a description of certain provisions of the Company's
Certificate of Incorporation and Delaware law which affect the voting rights of
stockholders of the Company and provide for a classified board of directors,
see "Description of Capital Stock -- Anti-Takeover Provisions of Delaware Law"
and " -- Classes of Directors."
Preferred Stock
Preferred Stock may be issued from time to time in one or more series and
the Board of Directors, without further approval of the stockholders, is
authorized to fix the dividend rights and terms, conversion rights, voting
rights, redemption rights and terms, liquidation preferences, sinking funds and
any other rights, preferences, privileges and restrictions applicable to each
such series of Preferred Stock. The issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the voting
power of the holders of Common Stock and, under certain circumstances, make it
more difficult for a third party to gain control of the Company. The Company
has no current plan to issue any Preferred Stock.
Anti-Takeover Provisions of Delaware Law
The Company is a Delaware corporation and consequently is subject to
certain anti-takeover provisions of the Delaware General Corporation Law (the
"Delaware Law"). Under the business combination provision contained in Section
203 of the Delaware Law ("Section 203"), a Delaware corporation may not engage
in any business combination with any interested stockholder for a period of
three years following the date such stockholder became an interested
stockholder, unless (i) prior to such date the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, or (ii) upon
completion of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding, for purposes of determining the number of shares
outstanding, (a) shares owned by persons who are directors and also officers
and (b) employee stock plans, in certain instances), or (iii) on or subsequent
to such date the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders by at least
two-thirds of the outstanding voting stock that is not owned by the interested
stockholder. Section 203 defines an interested stockholder of a corporation to
be any person (other than the corporation and any direct or indirect
majority-owned subsidiary of the corporation) who (i) owns, directly or
indirectly, 15% or more of the outstanding voting stock of the corporation or
(ii) is an affiliate or associate of the corporation and was the owner of 15%
or more of the outstanding voting stock of the corporation at any
71
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person (and the affiliates and the
associates of such person) is an interested stockholder. Section 203 defines
business combinations to include certain mergers, consolidations, asset sales,
transfers and other transactions resulting in a financial benefit to the
interested stockholder.
The restrictions imposed by Section 203 will not apply to a corporation if
(i) the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203 or (ii) the
corporation, by the action of stockholders holding a majority of outstanding
voting stock, adopts an amendment to its certificate of incorporation or
by-laws expressly electing not to be governed by Section 203 (such amendment
will not be effective until 12 months after adoption and shall not apply to any
business combination between such corporation and any person who became an
interested stockholder of such corporation on or prior to such adoption). The
Company has not opted out of Section 203. Section 203 could under certain
circumstances make it more difficult for a third party to gain control of the
Company, deny stockholders the receipt of a premium on their Common Stock and
have a depressive effect on the market price of the Common Stock.
Classes of Directors
The Board of Directors is currently classified into three classes. One
class of directors is elected each year and the members of such class hold
office for a three-year term or until each of their successors is duly elected
and qualified. The classification of directors will have the effect of making
it more difficult for a third party to change the composition of the Board of
Directors without the support of the incumbent Board. At least two annual
stockholder meetings, instead of one, will be required to effect a change in
the control of the Board, unless stockholders remove directors for cause.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
72
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Certificate of Incorporation authorizes the issuance of
50,000,000 shares of capital stock, consisting of 49,000,000 shares of Common
Stock and 1,000,000 shares of Preferred Stock. Upon completion of this
offering, there will be outstanding 6,250,717 shares of Common Stock (assuming
no exercise of the Underwriters' over-allotment option).
The 1,500,000 shares of Common Stock to be sold in this offering
(1,725,000 shares if the Underwriters' over-allotment option is exercised in
full) will be available to the public without restriction or further
registration under the Securities Act, except for shares purchased by
affiliates of the Company (in general, any person who has a control
relationship with the Company), which shares will be subject to the resale
limitations of Rule 144 promulgated under the Securities Act ("Rule 144"). The
Company, its executive officers and directors, and Friedman, Billings, Ramsey
Investment Management, Inc. have agreed not to offer, sell or contract to sell
or otherwise dispose of Common Stock without the prior consent of Friedman,
Billings, Ramsey & Co., Inc. ("FBR") or, in the case of sale by Friedman,
Billings, Ramsey Investment Management, Inc., the Company, for a period of 120
days following the conclusion of the Offering. See "Underwriting".
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell, within any three month period, a number of shares
which does not exceed the greater of 1% of the then outstanding shares of the
Common Stock or the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the date on which notice of the sale is filed
with the Commission. Sales under Rule 144 may also be subject to certain manner
of sale provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the three months preceding a sale, and who has beneficially owned
shares within the definition of "restricted securities" under Rule 144 for at
least two years, is entitled to sell such shares under Rule 144(k) without
regard to the volume limitation, manner of sale provisions, public information
requirements or notice requirements.
Pursuant to a contractual obligation, the Company has filed a registration
statement on Form S-3 with the Commission in order to register the resale of an
aggregate of 983,150 shares of Common Stock by certain selling stockholders.
All of the shares included in the registration statement may be sold to the
public without restriction, at the discretion of the selling stockholders. The
Company has agreed to maintain the effectiveness of the registration statement
until March 20, 2000.
There are currently outstanding options held by officers and directors to
purchase 262,431 shares of Common Stock.
The Company has reserved an additional 207,795 shares of Common Stock for
future option grants.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or availability of such shares for future sale will have
on the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock (including shares issued upon the exercise
of outstanding options), or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock.
73
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through Friedman, Billings,
Ramsey & Co., Inc., BancAmerica Robertson Stephens and Janney Montgomery Scott
Inc., as their representatives (the "Representatives"), have severally agreed
to purchase from the Company the following respective number of shares of
Common Stock at the offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
Underwriter Number of Shares
----------- ----------------
Friedman, Billings, Ramsey & Co., Inc ......
BancAmerica Robertson Stephens .............
Janney Montgomery Scott Inc. ...............
Total .................................... 1,500,000
=========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares offered hereby (other than those
covered by the over-allotment option described below), if any of such shares
are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the shares of Common Stock to the public at the offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $________ per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $_______
per share to certain other dealers. After the initial offering, the offering
price and other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 225,000
additional shares of Common Stock at the initial offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 1,500,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 1,500,000 shares are being offered.
The Company, its executive officers and directors, and entities affiliated
with FBR have agreed not to offer, sell or contract to sell or otherwise
dispose of any shares of Common Stock without the prior consent of FBR or, in
the case of sale by affiliates of Friedman, Billings, Ramsey Investment
Management, Inc., the Company, for a period of 120 days following the
conclusion of the Offering.
The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act.
In connection with this offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Such transactions may include stabilization transactions
pursuant to which the Representatives may bid for or purchase Common Stock for
the purpose of stabilizing its market price. The Underwriters also may create a
short position for the account of the Underwriters by selling more Common Stock
in connection with this offering than they are committed to purchase from the
Company and in such case the Representatives may purchase Common Stock in the
open market following completion of this offering to cover all or a portion of
such short position. The Underwriters may also cover all or a portion of such
short position by exercising the Underwriters' over-allotment option referred
to above. In addition, the Representatives, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby they may reclaim from an Underwriter (or dealer participating in this
offering), for the account of other Underwriters, the selling concession with
respect to Common Stock that is distributed in this offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the
74
maintenance of the price of the Common Stock at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid might
also affect the price of the Common Stock to the extent that it could
discourage resales of the security. Neither the Company nor any of the
Underwriters makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase shares of Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive
market maker generally may not exceed 30% of its average daily trading volume
in the Common Stock during a specified two-month prior period, or 200 shares,
whichever is greater. A passive market maker must identify passive market
making bids as such on the Nasdaq electronic inter-dealer reporting system.
Passive market making may stabilize or maintain the market price of the Common
Stock above independent market levels. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of the Common Stock offered hereby to any accounts over
which they exercise discretionary authority.
As of March 25, 1998, Friedman, Billings, Ramsey Investment Management,
Inc., an affiliate of FBR, was the beneficial owner of 314,005 shares of the
Common Stock, representing 6.6% of all Common Stock issued and outstanding.
LEGAL MATTERS
The legality of the Common Stock offered hereby is being passed upon by
Ledgewood Law Firm, P.C., Philadelphia, Pennsylvania. Certain legal matters
will be passed upon for the Underwriters by Silver, Freedman & Taff, L.L.P.,
Washington, D.C.
INDEPENDENT AUDITORS
The consolidated financial statements and schedules of the Company and its
subsidiaries as of September 30, 1997 and 1996 and for each of the three years
in the period ended September 30, 1997 included in this Prospectus have been so
included in reliance upon the reports of Grant Thornton LLP, independent
certified public accountants, upon the authority of such firm as experts in
accounting and auditing.
75
Report of Independent Certified Public Accountants
Stockholders and Board of Directors
RESOURCE AMERICA, INC.
We have audited the accompanying consolidated balance sheets of Resource
America, Inc. and subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended September 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Resource
America, Inc. and subsidiaries as of September 30, 1997 and 1996, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles.
Grant Thornton LLP
Cleveland, Ohio
November 6, 1997, except for
Earnings Per Share disclosures
in Footnote 2 to the financial
statements for which the date is
February 19, 1998
F-1
RESOURCE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30,
December 31, ---------------------------
1997 1997 1996
-------------- ------------ ------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents ...................................... $ 28,086 $ 69,279 $ 4,154
Accounts and notes receivable .................................. 5,309 2,414 1,479
Prepaid expenses and other current assets ...................... 948 576 473
--------- --------- ---------
Total current assets ......................................... 34,343 72,269 6,106
Investments in Real Estate Loans (less allowance for possible
losses of $468, $400, and $0) .................................. 128,884 88,816 21,798
Notes Secured by Equipment Leases ............................... 9,008 4,761 --
Net Investment in Direct Financing Leases (less allowance for
possible losses of $492, $248 and $7) .......................... 4,206 3,391 729
Property and Equipment
Oil and gas properties and equipment (successful efforts) ...... 25,967 24,939 24,035
Gas gathering and transmission facilities ...................... 1,609 1,606 1,536
Other .......................................................... 3,652 2,874 1,666
--------- --------- ---------
31,228 29,419 27,237
Less accumulated depreciation, depletion, and amortization ..... (16,073) (15,793) (14,857)
--------- --------- ---------
15,155 13,626 12,380
Other Assets (less accumulated amortization of $1,307, $1,014
and $885) ...................................................... 16,323 12,256 2,946
--------- --------- ---------
$ 207,919 $ 195,119 $ 43,959
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt ........................... $ 5,100 $ 708 $ 105
Accounts payable ............................................... 1,754 1,339 585
Accrued interest ............................................... 6,180 2,734 253
Accrued liabilities ............................................ 2,884 1,967 344
Estimated income taxes ......................................... 772 4,093 377
--------- --------- ---------
Total current liabilities .................................... 16,690 10,841 1,664
Long-Term Debt, less current maturities ......................... 118,116 118,786 8,966
Other Long-Term Liabilities ..................................... 1,830 663 --
Deferred Income Taxes ........................................... 826 -- 2,206
Commitments and Contingencies ................................... -- -- --
Stockholders' Equity
Preferred Stock, $1.00 par value; 1,000,000 authorized shares -- -- --
Common Stock, $.01 par value; 8,000,000 authorized shares ...... 55 54 20
Additional paid-in capital ..................................... 59,343 56,787 21,761
Retained earnings .............................................. 25,486 22,005 12,458
Less treasury stock, at cost ................................... (14,074) (13,664) (2,699)
Less loan receivable from Employee Stock Ownership Plan
("ESOP") ..................................................... (353) (353) (417)
--------- --------- ---------
Total stockholders' equity ................................... 70,457 64,829 31,123
--------- --------- ---------
$ 207,919 $ 195,119 $ 43,959
========= ========= =========
See accompanying notes to consolidated financial statements.
F-2
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Quarter Ended
December 31, Years Ended September 30,
--------------------------- -----------------------------------------
1997 1996 1997 1996 1995
------------ ------------ ---------- ------------ -------------
(Unaudited)
REVENUES
Real Estate Finance ........................ $ 9,392 $ 3,219 $19,144 $ 7,171 $6,114
Equipment Leasing .......................... 3,172 1,202 7,162 4,466 --
Energy: Production ......................... 1,232 950 3,936 3,421 3,452
Services ............................... 583 389 1,672 1,736 1,879
Interest on Corporate Investments .......... 698 84 930 197 149
-------- -------- ------- -------- ------
15,077 5,844 32,844 16,991 11,594
COSTS AND EXPENSES
Real Estate Finance ........................ 1,523 163 1,069 852 801
Equipment Leasing .......................... 1,325 883 3,822 2,339 --
Energy: Exploration and Production ......... 574 412 1,823 1,582 1,733
Services ............................... 309 224 909 869 1,026
General and Administrative ................. 927 592 2,851 1,756 2,265
Depreciation, Depletion and
Amortization .............................. 508 379 1,614 1,368 1,335
Interest ................................... 3,870 409 5,273 872 1,091
Provision for Possible Losses .............. 318 10 653 7 --
Other -- Net ............................... -- -- (27) -- (2)
-------- -------- ------- -------- ------
9,354 3,072 17,987 9,645 8,249
-------- -------- ------- -------- ------
Income from Operations ................. 5,723 2,772 14,857 7,346 3,345
-------- -------- ------- -------- ------
OTHER INCOME (EXPENSE)
Gain (Loss) on Sale of Property ............ 3 88 74 7 (1)
-------- -------- ------- -------- ------
Income Before Income Taxes ................. 5,726 2,860 14,931 7,353 3,344
Provision for Income Taxes ................. 1,775 575 3,980 2,206 630
-------- -------- ------- -------- ------
Net Income ................................. $ 3,951 $ 2,285 $10,951 $ 5,147 $2,714
======== ======== ======= ======== =======
Net Income Per Common Share -- Basic $ .83 $ .91 $ 3.15 $ 2.72 $ 1.43
-------- -------- ------- -------- -------
Weighted Average Common Shares
Outstanding ............................... 4,733 2,507 3,478 1,890 1,904
======== ======== ======= ======== ========
Net Income Per Common Share --
Diluted ................................... $ .81 $ .66 $ 2.51 $ 1.88 $ 1.23
-------- -------- ------- -------- --------
Weighted Average Common Shares ............. 4,906 3,476 4,358 2,757 2,235
======== ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
F-3
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(Dollar amounts in thousands)
Common Stock Additional
---------------------- Paid-In Retained
Shares Amount Capital Earnings
------------ -------- ------------ -----------
Balance, October 1, 1994 ................ 817,912 $ 8 $ 19,136 $ 7,979
Treasury shares acquired ................
Cash dividends ($.09 per share).......... (161)
Warrants issued ......................... 78
Repayment of ESOP loan ..................
Net income .............................. 2,714
--------- --- -------- --------
Balance, September 30, 1995 ............. 817,912 $ 8 $ 19,214 $ 10,532
Treasury shares issued .................. (24)
6% stock dividends ...................... 82,688 1 2,453 (2,453)
5 for 2 stock split effected in the
form of a 150% stock
dividend................................ 1,136,609 11 (11)
Issuance of common stock ................ 10,000 77
Treasury shares acquired ................
Cash dividends ($.38 per share).......... (757)
Warrants issued ......................... 41
Repayment of ESOP loan ..................
Net income .............................. 5,147
--------- --- -------- --------
Balance, September 30, 1996 ............. 2,047,209 $20 $ 21,761 $ 12,458
Treasury shares issued .................. (34)
Issuance of common stock ................ 3,363,436 34 35,060
Treasury shares acquired ................
Cash dividends ($.40 per share).......... (1,404)
Repayment of ESOP loan ..................
Net income .............................. 10,951
--------- --- -------- --------
Balance, September 30, 1997 ............. 5,410,645 $54 $ 56,787 $ 22,005
(Unaudited)
Treasury shares issued .................. 34
Issuance of common stock ................ 49,956 1 2,522
Treasury shares acquired ................
Cash dividends ($.10 per share).......... (470)
Net Income .............................. 3,951
--------- --- -------- --------
Balance, December 31, 1997 .............. 5,460,601 $55 $ 59,343 $ 25,486
========= === ======== ========
Treasury Stock ESOP Total
---------------------------- Loan Stockholders'
Shares Amount Receivable Equity
------------- ------------- ------------ --------------
Balance, October 1, 1994 ................ (131,402) $ (2,437) $ (546) $ 24,140
Treasury shares acquired ................ (21,298) (284) (284)
Cash dividends ($.09 per share).......... (161)
Warrants issued ......................... 78
Repayment of ESOP loan .................. 64 64
Net income .............................. 2,714
-------- --------- ------ ----------
Balance, September 30, 1995 ............. (152,700) $ (2,721) $ (482) $ 26,551
Treasury shares issued .................. 1,889 39 15
6% stock dividends ...................... 1
5 for 2 stock split effected in the
form of a 150% stock
dividend................................
Issuance of common stock ................ 77
Treasury shares acquired ................ (1,637) (17) (17)
Cash dividends ($.38 per share).......... (757)
Warrants issued ......................... 41
Repayment of ESOP loan .................. 65 65
Net income .............................. 5,147
-------- --------- ------ ----------
Balance, September 30, 1996 ............. (152,448) $ (2,699) $ (417) $ 31,123
Treasury shares issued .................. 23,023 483 449
Issuance of common stock ................ 35,094
Treasury shares acquired ................ (579,623) (11,448) (11,448)
Cash dividends ($.40 per share).......... (1,404)
Repayment of ESOP loan .................. 64 64
Net income .............................. 10,951
-------- --------- ------ ----------
Balance, September 30, 1997 ............. (709,048) $ (13,664) $ (353) $ 64,829
(Unaudited)
Treasury shares issued .................. 1,366 30 64
Issuance of common stock ................ 2,523
Treasury shares acquired ................ (10,000) (440) (440)
Cash dividends ($.10 per share).......... (470)
Net Income .............................. 3,951
-------- --------- ------ ----------
Balance, December 31, 1997 .............. (717,682) $ (14,074) $ (353) $ 70,457
======== ========= ====== ==========
See accompanying notes to consolidated financial statements
F-4
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Quarter Ended
December 31, Years Ended September 30,
-------------------------- -----------------------------------------
1997 1996 1997 1996 1995
------------ ------------ ----------- -------------- ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 3,951 $ 2,285 $ 10,951 $ 5,147 $ 2,714
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................... 508 379 1,614 1,368 1,335
Amortization of discount on senior note and
deferred finance costs ............................... 208 24 657 75 74
Provision for possible losses .......................... 318 10 653 7 --
Deferred income taxes .................................. 826 382 (2,206) 1,059 473
Accretion of discount .................................. (1,666) (793) (4,124) (954) (1,176)
Gain on asset dispositions ............................. (4,740) (785) (11,375) (3,650) (1,727)
Property impairments and abandonments .................. -- -- 38 71 56
Change in operating assets and liabilities:
Net of effects from purchase of subsidiaries ...........
(Increase) decrease in accounts receivable ............. (3,086) 316 (935) (175) 81
(Increase) decrease in prepaid expenses and other
current assets ....................................... (372) 236 (103) (310) 88
Increase (decrease) in accounts payable ................ 367 377 754 (137) (291)
Increase (decrease) in accrued income taxes ............ -- -- 3,716 377 (100)
Increase in other liabilities .......................... 1,043 409 4,451 81 51
--------- --------- --------- -------- ---------
Net cash provided by (used in) operating activities ..... (2,643) 2,840 4,091 2,959 1,578
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, less cash acquired ............. (997) -- (1,226) -- (877)
Cost of equipment acquired for lease .................... (15,972) (4,411) (34,567) (731) --
Capital expenditures .................................... (1,811) (130) (1,791) (1,097) (817)
Principal payments on notes receivable .................. -- -- 8,514 -- --
Proceeds from sale or refinancings of assets ............ 56,305 2,323 37,713 18,577 10,348
Increase in notes receivable ............................ (355) -- -- -- --
Increase in other assets. ............................... (974) (1,536) (3,319) (152) (59)
Investments in real estate loans ........................ (79,232) (28,881) (69,857) (17,650) (14,708)
Increase in other long-term liabilities ................. 1,168 -- -- -- --
Payments received (revenue recognized) in excess of
revenue recognized (cash received) on leases ........... 437 76 1,394 (7) --
--------- --------- --------- ----------- ---------
Net cash used in investing activities ................... (41,431) (32,559) (63,139) (1,060) (6,113)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings. ................................... -- 15,570 129,320 536 2,000
Short-term borrowings ................................... 6,670 (110) -- -- 2,500
Dividends paid .......................................... (470) (190) (1,404) (756) (161)
(Increase) decrease in other assets ..................... (15) -- (5,376) (31) 4,864
Principal payments on long-term borrowing ............... (704) (2,043) (22,148) (27) (4,524)
Principal payments on short-term borrowing .............. (2,245) -- -- -- --
Purchase of treasury stock .............................. (440) -- -- (17) (284)
Proceeds from issuance of stock ......................... 85 19,659 23,781 93 --
--------- --------- --------- ---------- ---------
Net cash provided by (used in) financing activities ..... 2,881 32,886 124,173 (202) 4,395
--------- --------- --------- ---------- ---------
Increase (decrease) in cash and cash equivalents ........ (41,193) 3,167 65,125 1,697 (140)
Cash and cash equivalents at beginning of period ........ 69,279 4,154 4,154 2,457 2,597
--------- --------- --------- ---------- ---------
Cash and cash equivalents at end of period .............. $ 28,086 $ 7,321 $ 69,279 $ 4,154 $ 2,457
========= ========= ========= ========== =========
See accompanying notes to consolidated financial statements
F-5
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 1--NATURE OF OPERATIONS
Resource America, Inc. (the "Company") is a specialty finance company
engaged in three lines of business: (1) the financing of mortgage loans,
including the acquisition and resolution of commercial real estate loans and,
beginning in the fiscal year ending September 30, 1998, the origination,
acquisition and sale of residential loans; (2) commercial equipment leasing,
and (3) energy operations, including natural oil and gas production. Based on
net assets and net income, the financing of mortgage loans is the dominant
current business line.
The markets for the Company's business lines are as follows: in the
financing of mortgage loans, the Company obtains its commercial mortgage loans
on properties located throughout the United States from various financial
institutions and other organizations, while its residential mortgage loans will
be obtained through direct mail supported by outbound telemarketing and several
wholesale channels to potential borrowers throughout the United States; in
commercial equipment leasing, the Company markets its equipment leasing
products nationwide through equipment manufacturers, regional distributors and
other vendors; and in energy, gas is sold to a number of customers such as gas
brokers and local utilities; oil is sold at the well site to regional oil
refining companies in the Appalachian basin.
The Company's ability to acquire and resolve commercial mortgage loans,
obtain residential mortgage loans and to fund equipment lease transactions will
be dependent on the continued availability of funds. The availability of
third-party financing for each of these specialty finance businesses will be
dependent upon a number of factors over which the Company has limited or no
control, including general conditions in the credit markets, the size and
liquidity of the market for the types of real estate loans or equipment leases
in the Company's portfolio and the respective financial performance of the
loans and equipment leases in the Company's portfolio.
The Company's growth will also depend on its continued ability to generate
attractive opportunities for acquiring commercial mortgage loans at a discount
and to originate equipment leases. The availability of loans for acquisition on
terms acceptable to the Company will be dependent upon a number of factors over
which the Company has no control, including economic conditions, interest
rates, the market for and value of properties securing loans which the Company
may seek to acquire, and the willingness of financial institutions to dispose
of troubled or under-performing loans in their portfolios.
Mortgage loans and equipment leases are subject to the risk of default in
payment by borrowers and lessees. Mortgage loans are further subject to the
risk that declines in real estate values could result in the Company being
unable to realize the property values projected.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
and its wholly owned subsidiaries and its pro rata share of the assets,
liabilities, income, and expenses of the oil and gas partnerships in which the
Company has an interest. All material intercompany transactions have been
eliminated. All per share amounts and references to numbers of shares give
effect to 6% stock dividends paid in both January and April 1996 and a
five-for-two stock split (effected in the form of a 150% stock dividend) in May
1996.
Use of Estimates
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
F-6
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
In the opinion of management, all adjustments (consisting of normally
recurring accruals) necessary for a fair statement of the results of operations
for the interim period included herein have been made.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events
or circumstances indicate that the carrying amount of an asset may not be
recoverable. If it is determined that an asset's estimated future cash flows
will not be sufficient to recover its carrying amount, an impairment charge
will be recorded to reduce the carrying amount for that asset to its estimated
fair value.
Stock-Based Compensation
The Company adopted the disclosure only option under Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock Based
Compensation, effective January 1, 1997. As such, the Company recognizes
compensation expense with respect to stock option grants to employees using the
intrinsic value method prescribed by Accounting Principles Board Opinion No.
25. Accordingly, SFAS No. 123 had no impact on the Company's financial position
or results of operations (see Note 9).
Transfers of Financial Assets
The Company adopted SFAS No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities effective January 1,
1997. This statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996,
and is to be applied prospectively. Earlier or retroactive application was not
permitted. The adoption of SFAS 125 did not have a material impact on the
Company's financial position or results of operations.
Oil and Gas Properties
The Company follows the successful efforts method of accounting.
Accordingly, property acquisition costs, costs of successful exploratory wells,
all development costs, and the cost of support equipment and facilities are
capitalized. Costs of unsuccessful exploratory wells are expensed when such
wells are determined to be nonproductive. The costs associated with drilling
and equipping wells not yet completed are capitalized as uncompleted wells,
equipment, and facilities. Geological and geophysical costs and the costs of
carrying and retaining undeveloped properties, including delay rentals, are
expensed as incurred.
Production costs, overhead, and all exploration costs other than costs of
exploratory drilling are charged to expense as incurred.
Unproved properties are assessed periodically to determine whether there
has been a decline in value and, if such decline is indicated, a loss is
recognized. The Company compares the carrying value of its oil and gas
producing properties to the estimated future cash flow, net of applicable
income taxes, from such properties in order to determine whether their carrying
values should be reduced. No adjustment was necessary during the fiscal years
ended September 30, 1997, 1996 or 1995.
On an annual basis, the Company estimates the costs of future
dismantlement, restoration, reclamation, and abandonment of its gas and oil
producing properties. Additionally, the Company evaluates the estimated salvage
value of equipment recoverable upon abandonment. At September 30, 1997 and 1996
the Company's evaluation of equipment salvage values was greater than or equal
to the estimated costs of future dismantlement, restoration, reclamation, and
abandonment.
F-7
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Depreciation, Depletion and Amortization
Proved developed oil and gas properties, which include intangible drilling
and development costs, tangible well equipment, and leasehold costs, are
amortized on the unit-of-production method using the ratio of current
production to the estimated aggregate proved developed oil and gas reserves.
Depreciation of property and equipment, other than oil and gas properties,
is computed using the straight-line method over the estimated economic lives,
which range from 3 to 25 years.
Other Assets
Included in other assets are intangible assets that consist primarily of
contracts acquired through acquisitions recorded at fair value on their
acquisition dates, the excess of the acquisition cost over the fair value of
the net assets of a business acquired (goodwill) and deferred financing costs.
The contracts acquired are being amortized on a declining balance method over
their respective estimated lives, ranging from five to thirteen years, goodwill
is being amortized on a straight-line basis over fifteen years, deferred
financing costs are being amortized over the terms of the related loans (two to
seven years) and other costs are being amortized over varying periods of up to
five years.
Other assets at December 31, 1997 and September 30, 1997 and 1996 were:
The following methods and assumptions were used by the Company in
estimating the fair value of each class of financial instruments for which it
is practicable to estimate fair value.
For cash and cash equivalents, receivables and payables, the carrying
amounts approximate fair value because of the short maturity of these
instruments. For long-term debt, including current maturities, the fair value
of the Company's long-term debt approximates historically recorded cost since
interest rates approximate market.
Based upon available market information and appropriate valuation methods,
the Company believes the carrying cost of investments in direct financing
leases approximates fair value.
For investments in real estate loans, the Company believes the carrying
amounts of the loans are reasonable estimates of their fair value considering
the nature of the loans and the estimated yield relative to the risks involved.
F-8
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of periodic temporary
investments of excess cash. The Company places its temporary excess cash
investments in high quality short-term money market instruments, principally at
Jefferson Bank (see Note 3), and other high quality financial institutions. The
amounts of these instruments may at times be in excess of the FDIC insurance
limit. At December 31, 1997 and September 30, 1997, the Company had $27.9
million and $67.7 million, respectively, in deposits at Jefferson Bank, of
which $26.9 million and $66.6 million, respectively, were over the FDIC
insurance limit. No losses have been experienced on such investments.
Revenue Recognition
Real Estate Finance
The difference between the Company's cost basis in a loan and the sum of
projected cash flows from, and the appraised value of, the underlying property
(up to the amount of the loan) is accreted into interest income over the
estimated life of the loan using a method which approximates the level interest
method. Projected cash flows and appraised values of the property are reviewed
on a regular basis and changes to the projected amounts reduce or increase the
amounts accreted into interest income over the remaining life of the loan.
Gains on the sale of a senior lien interest in a loan (or gains, if any,
from the refinancing of a loan) are recognized based on an allocation of the
Company's cost basis between the portion of the loan sold or refinanced and the
portion retained based upon the fair value of those respective portions on the
date of sale or refinance. Any gain recognized on a sale of a senior lien
interest or a refinancing is brought into income at the time of such sale or
refinancing.
Equipment Leasing
Direct finance leases, as defined by SFAS No. 13, Accounting for Leases,
are accounted for by recording on the balance sheet the total future minimum
lease payments receivable plus the estimated unguaranteed residual value of
leased equipment less the unearned lease income. Unearned lease income
represents the excess of the total future minimum lease payments plus the
estimated unguaranteed residual value expected to be realized at the end of the
lease term over the cost of the related equipment. Unearned lease income is
recognized as revenue over the term of the lease by the effective interest
method. Initial direct costs incurred in consummating a lease are capitalized
as part of the investment in direct finance leases and amortized over the lease
term as a reduction in the yield.
Gains arising from the sale of direct financing leases and notes secured
by equipment leases occur when the Company obtains permanent funding through
the sale of a pool of leases to a third party. Subsequent to a sale, the
Company has no remaining interest in the pool of leases or equipment except (i)
if a note is delivered as part of the sale proceeds, a security interest in the
pool, and (ii) the obligation of the Company under certain circumstances to
replace non-performing leases in the pool. Upon consummation of the sale
transaction, the Company records a provision for anticipated losses under its
guaranty. At December 31, 1997 and September 30, 1997, the Company had
guaranteed approximately $4.9 million and $5.5 million, respectively, of lease
receivables with respect to leases sold.
Equipment leasing revenues also consist of management fees, brokerage fees
and a share of net income from partnerships in which a subsidiary of the
Company serves as general partner. Management fees are earned for management
services provided to the partnerships. Such fees are recognized as earned (see
Limited Partnerships, below).
F-9
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Energy Operations
Working interest, royalties and override revenues are recognized as
production and delivery takes place. Well service income is recognized as
revenue as services are performed.
Cash Flow Statements
The Company considers temporary investments with a maturity at the date of
acquisition of 90 days or less to be cash equivalents.
Supplemental disclosure of cash flow information:
Quarter Ended Years Ended
December 31, September 30,
----------------------- --------------------------------
1997 1996 1997 1996 1995
----------- --------- ----------- ------ ---------
(Unaudited)
(in thousands)
Cash paid during the periods for:
Interest .................................................... $ 173 $ 575 $ 2,727 $797 $1,104
Income taxes ................................................ 4,180 450 2,094 770 255
Non-cash activities include the following:
Notes received in exchange for -
Sales of leases ........................................... $ 3,891 $3,260 $13,275 $ -- $ --
Sale of mortgages ......................................... 8,093 -- -- -- --
Debt assumed upon acquisition of real estate loan ........... -- -- 2,381 -- --
Receipt of note in satisfaction of real estate sale ......... 1,000 -- 3,500 -- --
Note payable issued in acquisition .......................... 925 -- --
Stock issued in acquisition ................................. 2,500 -- 315 -- --
Details of acquisition:
Fair value of assets acquired ............................... $ 3,545 $ -- $ 2,466 $ -- $1,189
Debt issued ................................................. -- -- (925) -- --
Stock issued ................................................ (2,500) -- (315) -- --
Liabilities assumed .......................................... (48) -- -- -- (312)
-------- ------ ------- ---- ------
Net cash paid ................................................ $ 997 $ -- $ 1,226 $ -- $ 877
======== ====== ======= ==== ======
Limited Partnerships
The Company conducts certain energy and leasing activities through, and a
portion of its revenues and are attributable to, limited partnerships
("Partnerships"). The Company serves as general partner of the Partnerships and
assumes customary rights and obligations for the Partnerships. As the general
partner, the Company is liable for Partnership liabilities and can be liable to
limited partners if it breaches its responsibilities with respect to the
operations of the Partnerships.
The Company is entitled to receive management fees, reimbursement for
administrative costs incurred, and to share in the Partnerships' revenue and
costs and expenses, according to the respective Partnership agreements. Such
fees and reimbursements are recognized as income and are included in energy
services and equipment leasing revenue. Amounts reimbursed for costs incurred
as operator of certain oil and gas partnership properties and as the general
partner in certain equipment leasing partnerships for the quarters ended
December 31, 1997 and 1996 was $880,000 and $673,000, respectively, and for the
years ended September 30, 1997, 1996, and 1995 approximated $1.8 million, $1.6
million, and $.5 million, respectively. The Company includes in its operations
the portion of the oil and gas Partnerships' revenues and expenses applicable
to its interests therein.
F-10
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Income Taxes
The Company records deferred tax assets and liabilities, as appropriate,
to account for the estimated future tax effects attributable to temporary
differences between the financial statement and tax bases of assets and
liabilities and the value at currently enacted tax rates, of operating loss
carryforwards. The deferred tax provision or benefit each year represents the
net change during that year in the deferred tax asset and liability balances.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings per Share." This statement is effective for financial
statements issued for periods ending after December 15, 1997; earnings per
share data included herein have been restated to reflect the new standard.
Under this statement the previous calculation of primary earnings per share
("EPS") is changed to exclude the dilutive effect of stock options and is
referred to as Basic EPS.
Earnings per share-basic are determined by dividing net income by the
weighted average number of common shares outstanding during the period.
Earnings per share - diluted are computed by dividing net income by the
weighted average number of shares and dilutive potential common shares
outstanding during the period. Dilutive potential common shares include shares
issuable under the terms of various stock option and warrant agreements net of
the number of such shares that could have been reacquired (at the weighted
average price of the Company's Common Stock during the period) with the
proceeds received from the exercise of the options and warrants (see Notes 8
and 9).
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for the quarter ended December 31, 1996 to conform with the
presentation for the quarter ended December 31, 1997. In addition, certain
reclassifications have been made to the consolidated financial statements for
the fiscal years ended September 30, 1996 and 1995 to conform with the
presentation for the fiscal year ended September 30, 1997.
NOTE 3--TRANSACTIONS WITH RELATED PARTIES
Until April 1996, the Chairman of the Company was of counsel to Ledgewood
Law Firm, P.C. ("LLF") which provides legal services to the Company. LLF was
paid $803,000, $402,000 and $562,000 during fiscal 1997, 1996 and 1995,
respectively, for legal services rendered to the Company. The Chairman of the
Company receives certain debt service payments from LLF related to the
termination of his affiliation with such firm and its redemption of his
interest therein.
The Company holds commercial real estate loans of borrowers whose
underlying properties are managed by Brandywine Construction & Management, Inc.
("BCMI"). The Chairman of the Company is Chairman of the Board of Directors and
a minority stockholder (approximately 8%) of BCMI. The Company has advanced
funds to certain of these borrowers for improvements on their properties which
have been performed by BCMI. In several instances, the President of BCMI has
also acted as the general partner of the borrower or as an officer of a
corporate general partner. BCMI has subordinated receipt of its management fees
to receipt by the Company from the properties of minimum debt service payments
required under the obligations held by the Company.
The Company also maintains normal banking and borrowing relationships with
Jefferson Bank, a subsidiary of JeffBanks, Inc. The Chairman of the Company is
an officer and director of JeffBanks, Inc. and, together with his spouse, is a
principal stockholder thereof; his spouse is Chairman and Chief Executive
Officer
F-11
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 3--TRANSACTIONS WITH RELATED PARTIES -- (Continued)
of Jefferson Bank. Another officer and director of the Company is a director of
Jefferson Bank. The Company anticipates that it may, in the future, effect
borrowings from Jefferson Bank; it anticipates that any such borrowings will be
on terms similar to those which could be obtained by an unrelated borrower.
Jefferson Bank is also a tenant at two properties which secure loans held by
the Company. Management believes that the terms of the leases with Jefferson
Bank are typical of similar leases for similar space.
In August 1997, the Company, through a subsidiary, acquired a loan with a
face amount of $2.3 million from Jefferson Bank at a cost of $1.6 million. The
loan is secured by a property owned by a partnership in which an officer of the
Company and the Chairman of the Company, together with his wife, are limited
partners. The Company leases its headquarters space at such property. LLF and
BCMI are also tenants at such property (see Note 10). In September 1997, the
Company sold a senior lien interest in this loan to an unrelated party,
recognizing a gain of $224,000.
In June 1997, the Company acquired two loans with an aggregate face amount
of $7.0 million from a partnership in which an officer of the Company and the
Chairman of the Company, together with his wife, are limited partners. The
officer of the Company was previously the general partner of such partnership.
The Company acquired such loan at a cost of $3.0 million. In September 1997,
the Company sold a senior lien interest in one loan to an unrelated third party
and was paid off with respect to the other loan, recognizing an aggregate gain
of $804,000.
In June 1997 the Company sold two senior lien interests to two different
limited partnerships for $875,000 and $2.25 million, realizing gains of
$310,000 and $811,000, respectively. Officers and directors of the Company hold
beneficial interests in these partnerships totalling 21.3% and 18.3%,
respectively.
In December 1996, the Company, through a subsidiary, acquired a loan with
a face amount of $52.7 million from an unaffiliated third party at a cost of
$19.3 million. The property securing such loan is owned by two partnerships:
1845 Walnut Associates (the "Building Partnership"), which owns the office
building and Mutual Associates Ltd. (the "Garage Partnership"), which owns the
parking garage. Pursuant to a 1993 loan restructuring agreement, an affiliate
of the holder of the loan is required to hold, as additional security for the
loan, general partnership interests in both the Building Partnership and the
Garage Partnership. As part of the loan purchase transaction, a partnership
interest in the Building Partnership was assigned by an affiliate of the loan
Seller to a limited partnership of which subsidiaries of the Company are the
general and limited partners. Similarly, a partnership interest in the Garage
Partnership was assigned to a limited partnership of which a third subsidiary
of the Company is general partner and RPI Partnership is limited partner. RPI
Partnership is a limited partnership in which officers of the Company,
including the Chairman, are limited partners. Although the Company does not
anticipate any economic benefit to RPI Partnership, any which may be received
will be assigned and transferred to the Company.
In December 1997 the Company sold a senior lien interest to a limited
partnership for $1,000,000 in the form of an interest bearing note, realizing a
gain of $267,000. The note was repaid in February 1998. Officers and directors
of the Company hold an aggregate beneficial interest in the partnership of
17.8%.
Management believes that any other such commercial real estate
transactions and balances involving parties that may be considered to be
related parties are not material.
The Company administers the activities of certain energy partnerships that
it sponsors (see Note 2). Energy service revenues primarily represent services
provided to Partnerships and joint ventures managed by the Company. In
accordance with industry practice, the Company charges each producing well in
the Partnerships and joint ventures a fixed monthly overhead fee and a
proportionate share of certain lease operating expenses. These charges are to
reimburse the Company for certain operating and general and administrative
expenses.
F-12
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 4--INVESTMENTS IN REAL ESTATE LOANS
The Company has focused its real estate activities on the purchase of
income producing mortgages at a discount from both the face value of such
mortgages and the appraised value of the properties underlying the mortgages.
Cash received by the Company for payment on each mortgage is allocated between
principal and interest with the interest portion of the cash received being
recorded as income to the Company. Additionally, the Company records as income
the accretion of a portion of the discount to the underlying collateral value.
For the quarters ended December 31, 1997 and 1996, the accretion of discount
amounted to $1.7 millon and $793,000, respectively. This accretion of discount
amounted to $4.1 million and $1.0 million during the years ended September 30,
1997 and 1996, respectively. As the Company sells senior lien interests or
receives funds from refinancings in such mortgages, a portion of the cash
received is utilized to reduce the cumulative accretion of discount included in
the carrying value of the Company's investment in real estate loans.
At December 31, 1997 and at September 30, 1997 and 1996, the Company held
real estate loans having aggregate face values of $330.1 million, $233.7
million and $100.5 million, respectively, which were being carried at aggregate
costs of $128.9 million, $88.8 million and $21.8 million, including cumulative
accretion. Amounts receivable, net of senior lien interests, were $236.9
million, $178.1 million, $61.8 million at December 31, 1997 and September 30,
1997 and 1996, respectively.
The following is a summary of the changes in the carrying value of the
Company's investments in real estate loans for the years ended September 30,
1997 and 1996:
Quarter Ended Year Ended
September 30,
December 31, -----------------------
1997 1997 1996
--------------- ---------- ----------
(Unaudited)
(in thousands)
Balance, beginning of period ............ $ 88,816 $ 21,798 $ 17,991
New loans ............................... 63,648 71,720 15,127
Additions to existing loans ............. 1,998 1,860 2,564
Reserve for possible losses ............. (52) (400) --
Accretion of discount ................... 1,666 4,124 954
Collections of principal ................ (35,250) (517) (9,377)
Cost of loans sold ...................... (3,784) (9,769) (5,461)
Investment in residential loans ......... 11,842 -- --
--------- -------- --------
Balance, end of period .................. $ 128,884 $ 88,816 $ 21,798
========= ======== ========
A summary of activity in the Company's allowance for possible losses
related to real estate loans for the quarter ended December 31, 1997 and for
the year ended September 30, 1997 is as follows:
Quarter Ended Year Ended
December 31, September 30,
1997 1997
--------------- --------------
(Unaudited)
(in thousands)
Balance, beginning of period .......... $400 $ --
Provision for possible losses ......... 68 400
Writeoffs ............................. -- --
---- ----
Balance, end of period ................ $468 $400
==== ====
F-13
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 5 -- INVESTMENT IN DIRECT FINANCING LEASES
Components of the net investment in direct financing leases as of December
31, 1997 and 1996 and September 30, 1997 and 1996, as well as future minimum
lease payments receivable, including residual values, are as follows:
September 30,
December 31, -----------------------
1997 1997 1996
-------------- --------- -----------
(Unaudited)
(in thousands)
Total future minimum lease payments receivable ......... $ 5,383 $4,186 $ 847
Initial direct costs, net of amortization .............. 95 75 67
Unguaranteed residual .................................. 425 310 75
Unearned lease income .................................. (1,205) (932) (253)
Allowance for possible losses .......................... (492) (248) (7)
-------- ------ --------
Net investment in direct financing leases .............. $ 4,206 $3,391 $ 729
======== ====== =======
At September 30, 1997, minimum lease payments for each of the five
succeeding fiscal years are as follows: 1998 -- $1.4 million; 1999 -- $1.0
million; 2000 -- $914,000; 2001 -- $502,000; and 2002 -- $365,000.
A summary of activity in the Company's allowance for possible losses
related to direct financing leases for the quarter ended December 31, 1997 and
the years ended September 30, 1997 and 1996 are as follows:
Quarter Ended Year Ended
September 30,
December 31, ----------------
1997 1997 1996
--------------- -------- -----
(Unaudited)
(in thousands)
Balance, beginning of period .......... $248 $ 7 $--
Provision for possible losses ......... 250 253 7
Write offs ............................ (6) (12) --
------ ----- ---
Balance, end of period ................ $492 $ 248 $ 7
===== ===== ===
Unguaranteed residual value represents the estimated amount to be received
at contract termination from the disposition of equipment financed under direct
financing leases. Amounts to be realized at contract termination depend on fair
market value of the related equipment and may vary from the recorded estimate.
Residual values are reviewed periodically to determine if the equipment's fair
market is below its recorded value.
Certain of the leases include options to purchase the underlying equipment
at the end of the lease term at fair value or the stated residual which is not
less that the book value at termination.
F-14
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 6 -- LONG-TERM DEBT
Long-term debt consists of the following:
September 30,
December 31, ------------------------
1997 1997 1996
-------------- ----------- ----------
(Unaudited)
(in thousands)
12% senior unsecured notes payable, interest due semi-
annually, principal due August 2004 .......................... $115,000 $115,000 $ --
9.5% senior secured note payable, repaid in July 1997 ......... -- -- 7,902
Loan payable to a bank, secured by a certificate of
deposit, 20 equal semiannual installments of $32,143
through February 2003, and quarterly payments of
interest at 1/2% above the prime rate through 2003 (See
Note 9) ...................................................... 353 353 418
Secured warehouse credit facility at 0.9% above LIBOR
(6.62% at December 31, 1997) ................................. 4,425 -- --
Unsecured loan, monthly installments of approximately
$5,200 including interest at 2.25% above the prime rate
(but not less than 7% nor greater than 14.25%) through
April 2004 at which time the unpaid balance is due.
This loan was refinanced in December 1996 .................... -- -- 536
Loans payable, secured by real estate, monthly
installments totaling approximately $39,000 including
interest ranging from prime (8.5% at September 30,
1997) to 10.25%, due at various times from December
2001 through January 2019 .................................... 2,513 3,216 215
Unsecured note payable, due in two equal annual
Installments of principal and interest beginning March
1998, interest at LIBOR (6 9/32% at September 30, 1997) 925 925 --
-------- -------- -------
123,216 19,494 9,071
Less current maturities ....................................... 5,100 708 105
-------- -------- -------
$118,786 $118,786 $ 8,966
======== ======== =======
As of September 30, 1997 the long-term debt maturing over the next five
fiscal years is as follows: 1998 -- $708,000; 1999 -- $727,000; 2000 --
$285,000; 2001 -- $309,000; and 2002 -- $712,000.
In July 1997, the Company issued $115 million of 12% Senior Unsecured
Notes (the "12% Notes") due August 2004 in a private placement. Provisions of
the 12% Notes limit dividend payments, mergers and indebtedness, place
restrictions on liens and guarantees and require the maintenance of certain
financial ratios.
F-15
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 6 -- LONG-TERM DEBT -- (Continued)
At September 30, 1997, the Company was in compliance with such provisions. In
November 1997, the Company filed a registration statement with the Securities
and Exchange Commission offering to exchange the privately placed 12% Notes
with a like amount of fully registered 12% Notes.
In May 1994, the Company privately placed with an insurance company a 9.5%
senior secured note in the principal amount of $8 million together with an
immediately exercisable detachable warrant to purchase, at any time through May
24, 2004, 449,440 shares, subject to adjustment, of the Company's common stock
at an exercise price of $3.38 per share. The value assigned to the warrant
($100,000) was accounted for as paid-in capital, resulting in a discount which
was being amortized on a straight-line basis over the life of the note. The
senior note was collateralized by substantially all of the Company's oil and
gas properties and certain of the Company's real estate loans. This note was
paid in full in July 1997 from proceeds of the offering of the 12% Notes. The
warrants were exercised in July 1997. (See Note 8.)
In December 1996, FLI, the Company's equipment leasing subsidiary, entered
into a secured revolving credit and term loan facility with a maximum borrowing
limit of $20 million with two banking institutions. Interest on the revolving
credit and term loan borrowings is payable at a rate equal to the London
Interbank Offered Rate ("LIBOR") plus 1.75% and LIBOR plus 2.25% per annum,
respectively. The credit facility expires on March 31, 1998 and is renewable
annually at the lenders' discretion. A commitment fee of 3/8% per annum is
assessed on the unused portion of the borrowing limit. Borrowings under this
facility are collateralized by the leases and the underlying equipment being
financed and are guaranteed by the Company. The agreement contains certain
covenants pertaining to FLI and the Company including the maintenance of
certain financial ratios and restrictions on changes in the FLI's ownership and
a key management position. During fiscal 1997, the maximum borrowing under this
facility was $7.1 million, all of which was repaid prior to fiscal year end.
There were no borrowings under this facility during the quarter ended December
31, 1997.
In September 1997, FMF, the Company's residential mortgage lending
business, entered into a secured credit facility with a maximum borrowing limit
of $5 million with a banking institution. In December 1997, the limit was
raised to $20 million. Interest on each draw under this facility is payable at
FMF's election, at either the institution's prime rate, or at the federal funds
rate plus 2.5%, or at an adjusted LIBOR plus 1.5%. The credit facility expires
in September 1998 unless renewed by the parties. Borrowings under this facility
are collateralized by the mortgage loans and the underlying property being
financed. The agreement contains certain covenants pertaining to FMF and the
Company including the maintenance of certain financial ratios. During fiscal
1997 there were no borrowings under this facility.
In October 1997, FMF established a $15 million warehouse credit facility
with a financial institution, bearing interest at LIBOR or, if unavailable, the
interbank eurodollars market rate, plus 90 basis points. The facility is
collateralized by a first lien interest in the loans being financed by facility
draws. The facility expires in October 1998. The agreement contains certain
covenants pertaining to FMF, including the maintenance of certain financial
ratios. In the quarter ended December 31, 1997, borrowings under this facility
were $6.7 million of which $2.3 million was repaid prior to December 31, 1997.
In October 1997, the Company obtained a $5 million credit facility from a
banking institution for purposes of acquiring oil and gas assets. The credit
facility permits draws based on a percentage of reserves of oil and gas
properties pledged as security for the facility. Draws under the facility bear
interest at this institutions prime rate plus 25 basis points. The facility
terminates in June 1999. The agreement contains certain covenants pertaining to
the Company, including the maintenance of certain financial ratios.
F-16
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 7 -- INCOME TAXES
The following table details the components of the Company's income tax
expense for the fiscal years 1997, 1996 and 1995.
Year Ended September 30,
---------------------------------
1997 1996 1995
----------- --------- -------
(in thousands)
Provision for Federal income tax:
Current ....................... $ 6,186 $1,147 $157
Deferred ...................... (2,206) 1,059 473
-------- ------ ----
$ 3,980 $2,206 $630
======== ====== ====
A reconciliation between the statutory Federal income tax rate and the
Company's effective Federal income tax rate is as follows:
Year Ended September 30,
---------------------------------
1997 1996 1995
--------- --------- ---------
(in thousands)
Statutory tax rate ............................... 34% 34% 34%
Statutory depletion .............................. (2) (4) (4)
Non-conventional fuel and low-income housing
credits ........................................ (3) -- (1)
Tax-exempt interest .............................. (2) -- --
Adjustment to valuation allowance for deferred tax
assets ......................................... -- -- (7)
Other ............................................ -- -- (3)
---- ---- -----
27% 30% 19%
==== ==== ====
The components of the net deferred tax liability are as follows:
September 30,
-------------------------
1997 1996
----------- -----------
(in thousands)
Deferred tax assets:
Tax credit carryforwards ............................. $ 507 $ --
Alternative minimum tax credit carryforwards ......... -- 61
Interest receivable .................................. 1,490 45
Net operating loss carryforwards ..................... 357 --
Provision for possible losses ........................ 220 --
-------- --------
2,574 106
Deferred tax liabilities:
Depreciation ......................................... (2,290) (2,160)
ESOP benefits ........................................ (120) (140)
Other items, net ..................................... (164) (12)
-------- --------
(2,574) (2,312)
-------- --------
Net deferred tax liability ........................... $ -- $ (2,206)
======== ========
F-17
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 8 -- STOCKHOLDERS' EQUITY
In July 1997, the Company issued 983,150 unregistered shares of the
Company's common stock pursuant to the exercise of warrants held by the holder
of the Company's 9.5% senior secured note payable due 2004, realizing proceeds
of $3.66 million. The 983,150 shares were subsequently sold by the holder in a
separate private placement to a small group of institutional investors.
In December 1996, the Company closed a public offering of 1.66 million
shares of its Common Stock. The Company received proceeds from the offering of
$19.99 million, before offering expenses of $515,000.
In September 1996, the Company's stockholders authorized an amendment to
the Certificate of Incorporation of the Company to increase the total
authorized capital stock to 9 million shares, of which 8 million shares were
Common Stock and 1 million shares were Preferred Stock.
On December 20, 1995 and March 12, 1996, the Board of Directors declared
6% stock dividends on the Common Stock. Furthermore, on May 9, 1996 the Board
of Directors authorized a five-for-two stock split effected in the form of a
150% stock dividend. These stock dividends resulted in the issuance of 1.2
million additional shares of Common Stock. Earnings per share and weighted
average shares outstanding reflect the above transactions.
NOTE 9 -- EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan
The Company sponsors an Employee Stock Ownership Plan ("ESOP"), which is a
qualified non-contributory retirement plan established to acquire shares of the
Company's Common Stock for the benefit of all employees who are 21 years of age
or older and have completed 1,000 hours of service for the Company.
Contributions to the ESOP are made at the discretion of the Board of Directors.
The ESOP has borrowed funds to purchase shares from the Company, which borrowed
the funds for the loan to the ESOP from a bank.
The Common Stock purchased by the ESOP with the money borrowed is held by
the ESOP trustee in a suspense account. On an annual basis, a portion of the
Common Stock is released from the suspense account and allocated to
participating employees. Any dividends on ESOP shares are used to pay principal
and interest on the loan. As of September 30, 1997, there were 113,930 shares
allocated to participants which constitute substantially all shares in the
plan. Compensation expense related to the plan was $12,600 for both quarters
ended December 31, 1997 and 1996. Compensation expense related to the plan
amounted to $50,400, $50,300 and $91,000 for the years ended September 30,
1997, 1996 and 1995, respectively.
The loan from the bank to the Company is payable in semiannual
installments through February 1, 2003. The loan from the Company to the ESOP
was fully repaid in August 1996. Both the loan obligation and the unearned
benefits expense (a reduction in stockholders' equity) will be reduced by the
amount of any loan principal payments made by the Company.
Employee Savings Plan
The Company sponsors an Employee Retirement Savings Plan and Trust under
Section 401(k) of the Internal Revenue Code which allows employees to defer up
to 10% of their income (subject to certain limitations) on a pretax basis
through contributions to the savings plan. The Company matches up to 100% of
each employee's contribution. Included in general and administrative expenses
are $67,900 and $17,100 for the quarters ended December 31, 1997 and 1996,
respectively. Included in general and administrative expenses are $131,900,
$44,700 and $28,100 for the Company's contributions for the years ended
September 30, 1997, 1996 and 1995, respectively.
F-18
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- (Continued)
Stock Options
The Company has three employee stock option plans, those of 1984, 1989 and
1997. The 1984 and 1989 plans authorize the granting of up to 56,180 and
589,890 (as amended during the fiscal year ended September 30, 1996) shares,
respectively, of the Company's common stock in the form of incentive stock
options ("ISO's"), non-qualified stock options and stock appreciation rights
("SAR's"). No further grants may be made under these two plans.
In April 1997, the stockholders approved the Resource America, Inc., 1997
Key Employee Stock Option Plan ("Employee Plan"). This plan, for which 275,000
shares were reserved, provides for the issuance of ISO's and non-qualified
stock options. In the first quarter of fiscal 1998 and in fiscal 1997, options
for 42,205 and 25,000 shares, respectively, were issued under this plan.
Options under the 1984, 1989 and 1997 plans become exercisable as to 25%
of the optioned shares each year after the date of grant, and expire not later
than ten years after grant. The Company received $506,400 from the exercise of
stock options in fiscal 1997.
Transactions for all three stock option plans are as follows:
Year Ended September 30,
------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ --------------------------
Weighted Weighted Weighted
Average Average Average
Shares ExercisePrice Shares Exercise Price Shares Exercise Price
------------- --------------- ------------ ---------------- --------- ---------------
Outstanding -- beginning of
year ........................... 348,316 $ 6.21 202,248 $ 2.88 202,248 $ 2.88
Granted ...................... 25,000 $ 39.50 202,248 $ 8.58 -- $ --
Exercised .................... (144,663) $ 3.50 (28,090) $ 2.76 -- $ --
Cancelled .................... -- $ -- (28,090) $ 2.76 -- $ --
-------- ------- -------
Outstanding -- end of year ...... 228,653 $ 11.56 348,316 $ 6.21 202,248 $ 2.88
======== ======= =======
Exercisable, at end of year ..... 63,554 $ 7.06 109,551 $ 2.92 101,124 $ 2.88
-------- ------- -------
Available for grant ............. 250,000 -- 5,618
======== ======= =======
Weighted average fair value
per share of options
granted during the year ........ $ 35.93 $ 6.51 --
========== ========= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- (Continued)
In addition, a key employee of Fidelity Leasing, Inc. ("FLI"), a wholly
owned subsidiary of the Company, has received options to purchase 10% of the
common stock of FLI (1 million shares) at an aggregate price of $220,000 and,
should FLI declare a dividend, will receive payments on the options in an
amount equal to the dividends that would have been paid on the shares subject
to the options had they been issued. In the event that, prior to becoming a
public company, FLI issues stock to anyone other than the Company or the key
employee, the employee is entitled to receive such additional options as will
allow him to maintain a 10% equity position in FLI upon exercise of all options
held by such employee (excluding shares issuable pursuant to the employee
option plan referred to below), at an exercise price equal to the price paid or
value received in the additional issuance. FLI does not anticipate making any
such issuances.
The options issued to the key employee vest 25% per year beginning in
March 1997 (becoming fully invested in March 2000), and terminate in March
2005. The options become fully vested and immediately exercisable in the event
of a change in control of FLI. The key employee has certain rights, commencing
after March 5, 2000, to require FLI to register his option shares under the
Securities Act of 1933. In the event FLI does not become a public company by
March 5, 2001, the key employee may require that FLI thereafter buy, for cash,
FLI shares subject to his options at a price equal to ten times FLI's net
earnings (as defined in the agreement) per share for the fiscal year ended
immediately prior to the giving of notice of his exercise of this right. FLI is
required to purchase 25% of such employee's shares in each year following such
employee's exercise of this right.
FLI has also established another option plan providing for the granting of
options, at the discretion of FLI's board of directors, for up to 500,000
shares of common stock to other employees of FLI. As of September 30, 1997,
options for 393,000 shares had been issued to certain employees.
Transactions for both FLI stock option plans are as follows:
Year Ended September 30,
--------------------------------------------------------------------
1997 1996
--------------------------------- --------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
-------------- ---------------- -------------- ---------------
Outstanding -- beginning of year ..... 1,000,000 $ .22 -- $ -
Granted ........................... 393,000 $ .22 1,000,000 $ .22
Exercised ......................... -- $ -- -- $ --
Cancelled ......................... -- $ -- -- $ --
--------- ---------
Outstanding -- end of year ........... 1,393,000 $ -- 1,000,000 $ .22
========= =========
Exercisable, at end of year .......... 250,000 $ .22 -- $ --
========= =========
Available for grant .................. 107,000 500,000
========= =========
Weighted average fair value per
share of options granted during
the year ........................... $ .11 $ .10
=========== ===========
F-20
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- (Continued)
Outstanding Exercisable
----------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Contractual Average Average
Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price
----------------- ----------- -------------- ---------------- --------- ---------------
$.22 - $.22 1,393,000 8.79 $ .22 250,000 $ .22
========= =======
Fidelity Mortgage Funding, Inc. ("FMF"), another wholly-owned subsidiary
of the Company (and in which the Company owns 17 million shares of common
stock), has established an option plan pursuant to which 3 million shares of
FMF's common stock (representing 15% of FMF's common stock on a fully-diluted
basis) have been reserved for options which may be issued to key employees.
Under the program, a director and officer of the Company who is also the
Chairman of FMF has received options to purchase 2 million shares (representing
10% of FMF's common stock on a fully-diluted basis) at an aggregate price of
$235,294 ($.118 per share) and, should FMF declare a dividend, will receive
payments on the options in an amount equal to the dividends that would have
been paid on the shares subject to the options had they been issued. The
options generally will have the same terms as those relating to the FLI
options, except that (i) the option term and vesting period commenced in April
1997 and (ii) the period during which the officer/director may sell FMF shares
to FMF will commence in April 2002. The options become fully vested and
immediately exercisable in the event of a change in control or potential change
in control of FMF or the Company. In addition, as part of the program, at
September 30, 1997, FMF had granted options to (i) its President and Chief
Operating Officer to purchase 800,000 shares at an aggregate price of $100,000
($.125 per share) (representing 4% of FMF's common stock on a fully-diluted
basis), and (ii) to certain other of its employees to purchase 145,000 shares
at an aggregate price of $18,125 ($.125 per share), leaving 55,000 shares
reserved for issuance of options under the plan at September 30, 1997.
Transactions for the FMF stock option plan are as follows:
Year Ended September 30, 1997
--------------------------------
Weighted
---------------
Average
Shares Exercise Price
-------------- ---------------
Outstanding -- beginning of year ............... -- --
Granted ..................................... 2,945,000 $ .12
Exercised ................................... -- --
Cancelled ................................... -- --
---------
Outstanding -- end of year ..................... 2,945,000 $ .12
Exercisable, at end of year .................... -- --
=========
Available for grant ............................ 55,000
=========
Weighted average fair value per share of options
granted during the year ...................... $ .06
===========
F-21
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- (Continued)
Outstanding Exercisable
----------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Range of Contractual Average Average
Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price
----------------- ----------- -------------- ---------------- -------- ---------------
$.118 - $.125 2,945,000 9.63 $ .12 -- --
========= ========
As discussed in Note 2, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
interpretations. Accordingly, no compensation expense has been recognized in
the financial statements for these employee stock arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share as if the Company had
adopted the fair value method for stock options granted after June 30, 1996. No
such options were granted in fiscal 1996. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions: expected life, 5 or 10 years
following vesting; stock volatility, 96%, 87% and 144% in 1997, 1996 and 1995
respectively; risk free interest rate, 6.6%, 6.0% and 6.0% in 1997, 1996 and
1995 respectively; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. If the computed fair values of the awards had
been amortized to expense over the vesting period of the awards, pro forma net
income would have been $10.5 million ($3.02 per share -- basic; $2.40 per share
-- diluted) in fiscal 1997.
In addition to the various stock option plans, in May 1997 the
stockholders approved the Resource America, Inc. Non-Employee Director Deferred
Stock and Defined Compensation Plan (the "Director Plan") for which 25,000
shares were reserved for issuance. Each director vests in shares granted under
the Director Plan on the fifth anniversary of the date of grant. If a director
terminates service prior to such fifth anniversary, all of the shares granted
are forfeited. In May 1997, 1,000 shares were granted under the Director Plan
to each of the Company's four non-employee directors. The fair value of the
grants ($22.50 per share, $90,000 in total) is being charged to operations over
the five year vesting period.
NOTE 10--COMMITMENTS
The Company leases office space under leases with varying expiration dates
through 2002 (see Note 3). Rental expense was $238,600, $188,900 and $60,500
for the years ended September 30, 1997, 1996 and 1995, respectively. Future
minimum rental commitments for the next five fiscal years were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 10--COMMITMENTS -- (Continued)
As of December 31, 1997 and September 30, 1997, the Company had
outstanding commitments to fund the purchase of equipment which it intends to
lease, with an aggregate cost of $4.1 million and $11.4 millon, respectively.
The Company believes, based on its past experience, that approximately $1.8
million and $4.0 millon, respectively, will be funded.
As of December 31, 1997 and September 30, 1997, subsidiaries of the
Company had four and two warehouse lines of credit which allow them to borrow
up to $60 million and $25 millon, respectively. As of December 31, 1997, $4.4
million was outstanding with respect to these lines of credit. No borrowings
were outstanding at September 30, 1997.
The Company has an employment agreement with its Chairman pursuant to
which the Company has agreed to provide him with a supplemental employment
retirement plan ("SERP") and with certain financial benefits upon termination
of his employment. Under the SERP, he will be paid an annual benefit of 75% of
his Average Income after he has reached Retirement Age (each as defined in the
employment agreement). Upon termination, he is entitled to receive lump sum
payments in various amounts of between 25% and five times Average Compensation
(depending upon the reason for termination) and, for termination due to
disability, a monthly benefit equal to the SERP benefit (which will terminate
upon commencement of payments under the SERP). During the first quarter of
fiscal 1998, the Company accrued $87,000 with respect to these commitments.
During fiscal 1997, the Company accrued $240,000 with respect to these
commitments.
NOTE 11--ACQUISITIONS
In June 1997, the Company acquired equity interests in 288 wells
(representing 78 wells net to the Company's interest) and operating rights to
an additional 62 wells, together with 220 miles of natural gas pipelines and
21,830 gross acres (9,340 net acres) of mineral rights, for $1.25 million in
cash, $925,000 by a note and 17,000 shares of the Company's Common Stock. The
acquisition was accounted for as a purchase and, accordingly, the assets and
liabilities acquired have been recorded at their estimated fair market values
at the date of acquisition. The purchase price resulted in an excess of costs
over net assets acquired (goodwill) of approximately $400,000, which is being
amortized on a straight line basis over 15 years.
In April 1997, the Company acquired all the outstanding shares of Bryn
Mawr Resources, Inc. ("BMR") for 579,623 shares of common stock. BMR's only
asset was 579,623 shares of the Company's Common Stock held by subsidiaries of
BMR (excluding 3,807 shares of the Company's Common Stock attributable to
minority interests held by third parties in BMR's subsidiaries).
In December 1997, the Company acquired equity interests in approximately
135 wells (representing approximately 88 net wells, together with 60 miles of
natural gas pipelines and 17,000 gross acres of mineral rights, for $900,000 in
cash. This acquisition was recorded as a purchase.
These acquisitions were immaterial to the results of operations of the
Company, and therefore pro forma information is excluded.
F-23
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 12--INDUSTRY SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company operates in three principal industry segments - real estate,
leasing and energy. Segment data for the quarters ended December 31, 1997 and
1996 and for years ended September 30, 1997, 1996 and 1995 are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 12--INDUSTRY SEGMENT INFORMATION AND MAJOR CUSTOMERS -- (Continued)
Operating profit (loss) represents total revenue less costs attributable
thereto, including interest and provision for possible losses, and less
depreciation, depletion and amortization, excluding general corporate expenses.
The Company's natural gas is sold under contract to various purchasers.
For the years ended September 30, 1997 and 1996, gas sales to two purchasers
accounted for 29% and 12% and 29% and 13% of the Company's total production
revenues, respectively. Gas sales to one purchaser individually accounted for
15% of total revenues for the year ended September 30, 1995.
In commercial mortgage loan acquisition and resolution, interest and fees
earned from a single borrower in the fiscal year ended September 30, 1997
approximated 20%, while for the fiscal year ended September 30, 1996 interest
and fees from a (different) single borrower approximated 24% of total revenues.
No single borrower generated revenues in excess of 10% in fiscal 1995.
NOTE 13--SUPPLEMENTAL OIL AND GAS INFORMATION
Results of operations for oil and gas producing activities:
Capitalized Costs Related to Oil and Gas Producing Activities
The components of capitalized costs related to the Company's oil and gas
producing activities (less impairment reserve of $28,000, $22,000, and $30,000
at September 30, 1997, 1996, and 1995, respectively and $29,000 at December 31,
1997), are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 13--SUPPLEMENTAL OIL AND GAS INFORMATION -- (Continued)
Costs Incurred in Oil and Gas Producing Activities
The costs incurred by the Company in its oil and gas activities during the
quarters ended December 31, 1997 and 1996, and during the fiscal years 1997,
1996 and 1995 are as follows:
The Company's estimates of net proved developed oil and gas reserves and
the present value thereof have been verified by E.E. Templeton & Associates,
Inc., an independent petroleum engineering firm. The Company does not estimate
the value of its proven undeveloped reserves.
The Company's oil and gas reserves are located within the United States.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future net revenues and the timing of development
expenditures. The reserve data presented represent estimates only and should
not be construed as being exact. In addition, the standardized measures of
discounted future net cash flows may not represent the fair market value of the
Company's oil and gas reserves or the present value of future cash flows of
equivalent reserves, due to anticipated future changes in oil and gas prices
and in production and development costs and other factors for which effects
have not been provided.
F-26
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 13--SUPPLEMENTAL OIL AND GAS INFORMATION -- (Continued)
The standardized measure of discounted future net cash flows is
information provided for the financial statement user as a common base for
comparing oil and gas reserves of enterprises in the industry.
Gas Oil
(mcf) (bbls)
--------------- ------------
Balance at September 30, 1994 ........... 12,112,116 296,859
Purchases of reserves in-place. ......... 893,104 23,284
Current additions ....................... 430,330 3,641
Sales of reserves in-place. ............. (79,294) (628)
Revisions to previous estimates ......... 624,471 14,423
Production. ............................. (1,198,245) (36,420)
---------- -------
Balance at September 30, 1995 ........... 12,782,482 301,159
Purchase of reserves in-place ........... 293,602 8,880
Current additions ....................... 237,070 726
Sales of reserves in-place .............. (18,645) (1,885)
Revision to previous estimates .......... 723,242 35,002
Production .............................. (1,165,477) (33,862)
---------- -------
Balance at September 30, 1996 ........... 12,852,274 310,020
Purchase of reserves in-place ........... 1,903,853 45,150
Current additions ....................... 15,984 0
Sales of reserves in-place .............. (1,393) 0
Revision to previous estimates .......... 1,614,704 38,654
Production .............................. (1,227,887) (35,811)
---------- -------
Balance at September 30, 1997 ........... 15,157,535 358,013
========== =======
Presented below is the standardized measure of discounted future net cash
flows and changes therein relating to proved developed oil and gas reserves.
The estimated future production is priced at year-end prices. The resulting
estimated future cash inflows are reduced by estimated future costs to develop
and produce the proved developed reserves based on year-end cost levels. The
future net cash flows are reduced to present value amounts by applying a 10%
discount factor.
Year Ended September 30,
----------------------------------------
1997 1996 1995
------------ ----------- -----------
(in thousands)
Future cash inflows .............................. $ 42,634 $ 34,516 $ 30,257
Future production and development costs .......... (21,585) (16,764) (15,200)
Future income tax expense ........................ (2,740) (2,732) (1,260)
--------- --------- ---------
Future net cash flows ............................ 18,309 15,020 13,797
Less 10% annual discount for estimated timing of
cash flows ...................................... (8,186) (6,671) (5,987)
--------- --------- ---------
Standardized measure of discounted future net cash
flows ........................................... $ 10,123 $ 8,349 $ 7,810
========= ========= =========
F-27
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of March 31, 1997 and for the six months ended
March, 31, 1997 and 1996 is unaudited)
NOTE 13--SUPPLEMENTAL OIL AND GAS INFORMATION -- (Continued)
The following table summarizes the changes in the standardized measure of
discounted future net cash flows from estimated production of proved developed
oil and gas reserves after income taxes.
Year Ended September 30,
-----------------------------------------
1997 1996 1995
------------- ----------- -----------
(in thousands)
Balance, beginning of year ............................ $ 8,349 $ 7,810 $ 7,961
Increase (decrease) in discounted future net cash
flows:
Sales and transfers of oil and gas net of related costs (2,411) (1,928) (1,870)
Net changes in prices and production costs ............ 512 1,392 (187)
Revisions of previous quantity estimates .............. 2,483 697 418
Extensions, discoveries, and improved recovery less
related costs ........................................ 10 145 253
Purchases of reserves in-place ........................ 1,474 242 612
Sales of reserves in-place, net of tax effect ......... (1) (26) (46)
Accretion of discount ................................. 997 851 842
Net change in future income taxes ..................... (14) (924) (240)
Other ................................................. (1,276) 90 67
--------- -------- --------
Balance, end of year .................................. $10,123 $ 8,349 $ 7,810
========= ======== ========
NOTE 14--EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT
The Company is the sponsor of Resource Asset Investment Trust ("RAIT"), a
recently formed real estate investment trust which commenced operations in
January 1998. RAIT has been formed to acquire and provide mortgage financing in
situations that generally do not conform to the debt underwriting standards of
institutional lenders or sources that provide financing through securitization.
The chairman of RAIT is the spouse of the chairman of the Company; their
son, who is not otherwise an officer or director of the Company, is the
Company's representative on RAIT's board of trustees.
In January 1998, the Company sold 10 loans and senior lien interests in
two other loans. The aggregate price paid by RAIT for the loans and the senior
lien interests was $20.1 million (including $2.0 million attributable to senior
lien interests acquired by the Company and sold to RAIT, at cost, in connection
with such purchase. The Company realized a gain on such sale of $3.0 million.
The Company anticipates selling further loans to RAIT.
F-28
No person is authorized to give any information or to make any
representation not contained in this Prospectus and any information or
representation not contained herein must not be relied upon as having been
authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer of any securities other than the securities to which it
relates or an offer to any person in any jurisdiction where such an offer would
be unlawful. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof.
TABLE OF CONTENTS
Page
------
Available Information ........................ 2
Additional Information ....................... 2
Incorporation of Certain Documents by
Reference ................................. 3
Prospectus Summary ........................... 4
Risk Factors ................................. 11
Price Range of Common Stock and
Dividend Policy ........................... 23
Capitalization ............................... 24
Selected Consolidated Financial Data ......... 25
Use of Proceeds .............................. 27
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ................................ 27
Business ..................................... 39
Management ................................... 64
Security Ownership of Certain Beneficial
Owners and Management ..................... 69
Description of Capital Stock ................. 71
Shares Eligible for Future Sale .............. 73
Underwriting ................................. 74
Legal Matters ................................ 75
Independent Auditors ......................... 75
Consolidated Financial Statements ............ F-1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1,500,000 Shares
[GRAPHIC OMITTED]
RESOURCE AMERICA, INC.
Common Stock
PROSPECTUS
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
BANCAMERICA ROBERTSON
STEPHENS
JANNEY MONTGOMERY
SCOTT INC.
____________, 1998
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Registration and Filing Fees:
Securities and Exchange Commission ......... $ 23,981
NASD ....................................... 17,500
--------
Total Registration and Filing Fees ......... $ 41,481
Printing and Engraving* ....................... $ 70,000
Legal* ........................................ 400,000
Blue Sky* ..................................... 10,000
Accounting* ................................... 80,000
Transfer Agent ................................ --
Total Other Expenses* ......................... $198,519
--------
Total Expenses ................................ $800,000
========
------------
* Estimate
Item 15. Indemnification of Directors and Officers
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
the Company's Certificate of Incorporation provides that directors of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, relating to prohibited
dividends or distributions or the repurchase or redemption of stock, or (iv)
for any transaction from which the director derives an improper personal
benefit. In addition, the Company's By-laws provide for indemnification of the
Company's officers and directors to the fullest extent permitted under Delaware
law. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
The Company maintains directors' and officers' liability insurance against
any actual or alleged error, misstatement, misleading statement, act, omission,
neglect or breach of duty by any director or officer, excluding certain matters
including fraudulent, dishonest or criminal acts or self-dealing.
II-1
Item 16. Exhibits and Financial Statement Schedules.
a. Exhibits.
1.* Form of Underwriting Agreement.
2. Agreement and Plan of Merger among Tri-Star Financial Services, Inc. Frank
Pellegrini, Resource Tri-Star Acquisition Corp. and the Registrant(1)
3.1 Restated Certificate of Incorporation of the Registrant.(2)
3.2 Bylaws of the Registrant, as amended.(2)
4. Form of certificate for Common Stock.(2)
4.2 Indenture with respect to 12% senior notes due 2004 (including form of note).(3)
5.* Opinion of Ledgewood Law Firm, P.C., as to the legality of the securities being
registered (including consent).
10.1 Receivables Purchase Agreement (lease sales)(4)
10.2 Purchase and Sale Agreement (lease sales)(4)
12. Statement regarding computation of ratios.(1)
23.1 Consent of E. E. Templeton & Associates, Inc.(4)
23.2 Consent of Grant Thornton LLP
23.3 Consent of Ledgewood Law Firm, P.C. (included in Exhibit 5)
24. Power of Attorney (included as part of signature pages to this registration
statement).
* To be filed by amendment.
(1) Filed previously as an Exhibit to the Company's Annual Report on Form 10-K
for the year ended September 30, 1997.
(2) Filed previously as an Exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 333-13905) and by this reference incorporated
herein.
(3) Filed previously as an Exhibit to the Company's Registration Statement on
Form S-4 (Registration No. 333-40231) and by this reference incorporated
herein.
(4) Filed previously as an Exhibit to this Registration Statement as filed with
the Commission on or about March 5, 1998.
Item 17. Undertakings.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions of registrant's Certificate of
Incorporation, Bylaws or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the
II-2
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant undertakes that:
1. For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
2. For the purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Philadelphia, Commonwealth of Pennsylvania, on March
30, 1998.
RESOURCE AMERICA, INC.
By: /s/ Edward E. Cohen
------------------------------------
Edward E. Cohen, Chairman of the
Board of Directors, Chief Executive
Officer and President
II-4
POWER OF ATTORNEY
Each person whose signature appears below in so signing also makes,
constitutes and appoints Edward E. Cohen, Steven J. Kessler, Michael L.
Staines, and each of them acting alone, his true and lawful attorney-in-fact,
with full power of substitution, for him in any and all capacities to execute
and cause to be filed with the Securities and Exchange Commission any and all
amendments and post-effective amendments to this registration statement with
exhibits thereto and other documents in connection therewith, and hereby
ratifies and confirms all that said attorney-in-fact or said attorney-in-fact's
substitute or substitutes may do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
EDWARD E. COHEN, Chairman of Date: March 30, 1998
the Board of Directors,
Chief Executive Officer,
President and Director
(Chief Executive Officer)
CARLOS C. CAMPBELL, Director Date: March 30, 1998
DANIEL G. COHEN, Executive Vice Date: March 30, 1998
President and Director
ANDREW M. LUBIN, Director Date: March 30, 1998
SCOTT F. SCHAEFFER, Executive Vice Date: March 30, 1998
President and Director
ALAN D. SCHREIBER, M.D., Date: March 30, 1998
Director
MICHAEL L. STAINES, Senior Date: March 30, 1998
Vice President, Secretary
and Director
JOHN S. WHITE, Director Date: March 30, 1998
STEVEN J. KESSLER, Senior Vice President Date: March 30, 1998
-- Finance and Chief Financial Officer
NANCY J. MCGURK, Vice Date: March 30, 1998
President -- Finance
(Chief Accounting Officer)
By: /s/ Steven J. Kessler
---------------------------------
STEVEN J. KESSLER,
as attorney-in-fact for each such
person pursuant to power of
attorney heretofore filed as part
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Consent of Grant Thornton LLP
We have issued our reports dated November 6, 1997 accompanying the
consolidated financial statements and schedules of Resource America, Inc. and
subsidiaries included in the Annual Report on Form 10-K for the year ended
September 30, 1997, which form is incorporated by reference in this Registration
Statement; we have also issued our reports dated November 6, 1997, except for
the earnings per share disclosures in footnote 2 for which the date is
February 19, 1998, accompanying the consolidated financial statements for the
years ended September 30, 1997 and 1996 and for each of the three years in the
period ended September 30, 1997, which financial statements are included in
this Registration Statement. We consent to the incorporation by reference and
the use in the Registration Statement of the aforementioned reports and to the
use of our name as it appears under the caption "Experts."
/s/ Grant Thornton LLP
----------------------
Cleveland, Ohio
March 30, 1998
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