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The following is an excerpt from a S-3/A SEC Filing, filed by RESOURCE AMERICA INC on 3/30/1998.
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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

44

                                             Proceeds from
                    Ratio of Cost           Refinancing or
    Cost of       of Investment to          Sale of Senior
 Investment(3)     Appraised Value          Lien Interests
---------------  ------------------  ----------------------------
  $ 4,704,540           89%               $     2,570,000(8)
      547,813           61%                             0(11)
    1,325,081           98%                       627,000
      862,356           72%                             0(11)
    1,229,417           72%                       940,000(13)
    2,391,040           85%                       840,000
    1,354,382           54%                     2,099,000
    1,614,174           50%                       934,300
    1,393,031           52%                       654,600
      457,356           57%                             0(11)
    1,180,030           59%                       660,000(13)
    1,296,565           59%                     1,079,000
    1,694,799           71%                     1,975,000(13)
   10,571,763           86%                     6,487,000
    2,787,774           75%                     2,558,000(8)
    2,114,520           70%                     2,375,000(13)
      895,113           47%                     1,000,000(17)(18)
    2,227,199           49%                     1,969,000(13)
    3,758,685           66%                     3,020,000
    3,225,589           70%                     2,562,000
    2,454,437           58%                     2,760,000(20)
    4,016,498           98%                     2,636,000(22)(23)
      480,643           80%                       450,000(25)
    2,740,093           84%                     2,318,750
    5,877,874           69%                             0
    2,484,966           50%                     2,240,000(26)
   19,243,749           57%                     7,920,000(22)
    1,028,143           58%                             0
    2,986,618           74%                     1,000,000(17)
    3,673,462           92%                             0
    4,760,894           63%                             0
    7,374,894           59%                             0
    2,003,684           76%                     1,383,705(8)
      400,000           89%                             0
    1,591,662           62%                     1,000,000(17)
    3,053,846           74%                             0
    2,772,641           79%                     2,096,000(11)(13)
 ------------                                 -----------
 $112,575,331                                 $56,154,355


                                          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)
---------------  ------------------  ------------------  ------------------
  $ 2,134,540        $ 2,580,970         $ 5,967,276          12/31/02
      547,813            785,295           1,579,496          10/31/98
      698,081            731,656           2,103,068          01/01/03
      862,356          1,134,958           1,486,601          10/31/98
      289,417            784,776           5,568,289          02/07/01
    1,551,040          1,670,669           4,928,075          07/31/98
     (744,618)           567,169           2,919,116          12/31/14
      679,874          1,270,541           4,296,133          07/31/98
      738,431            564,876             755,711          11/01/99
      457,356            734,073           1,600,713          09/02/99
      520,030            685,655             742,447          09/30/99
      217,565            747,650           1,781,319          12/02/99
     (280,201)           325,972             969,853          05/01/01
    4,084,763          5,472,297           8,299,802          11/30/98
      229,774          3,553,137           1,218,418          08/25/00
     (260,480)           481,117           4,592,873          12/31/00
     (104,887)           465,347             453,966          12/31/16
      258,199            833,952             866,687          12/01/00
      738,685            992,855           1,496,823          12/29/00
      663,589          1,878,059           4,715,532          02/07/01
     (305,563)         1,034,292           6,500,609               (21)
    1,380,498            995,483           1,992,593          10/31/98
       30,643            128,642             271,107          03/28/01
      421,343            814,710             933,181          11/01/22
    5,877,874          6,102,863           5,975,639          12/31/15
      244,966          2,372,008           6,257,369          09/30/03
   11,323,749         17,253,179          45,209,204          01/01/02
    1,028,143          1,703,755           1,703,755          03/31/02
    1,986,618          2,312,861           6,127,386          07/01/02
    3,673,462          3,740,136           7,274,234          09/30/02
    4,760,894          4,951,443          10,024,031          09/01/05
    7,374,894          7,464,646          12,260,126          09/01/05
      619,979            633,604           2,653,184          02/01/21
      400,000            398,422             398,697          10/01/02
      591,662            928,445           1,331,275          09/25/02
    3,053,846          3,110,677           4,514,732          12/31/11
      676,641          1,162,202           4,902,319          07/01/00
  -----------        -----------        ------------
  $56,420,976        $81,368,392        $174,671,639

45

    Loan          Type of
   Number         Property        Location
------------  ---------------  --------------

     Balance Forward
     038(9)   Office/Retail    Pennsylvania
     039      Hotel            Georgia
     040      Retail           Virginia
     041      Multifamily      Connecticut
     042      Multifamily      Pennsylvania
     043      Multifamily      Pennsylvania

                                                           Loan            Outstanding         Appraised Value
    Loan                                                 Acquired             Loan               of Property
   Number               Seller/Originator             (Fiscal Year)       Receivable(1)        Securing Loan(2)
------------  -------------------------------------  ---------------  --------------------  ---------------------
                                                                         $ 231,646,554         $  167,502,000
     038(9)   Resource Asset Investment Trust(30)         1997               8,351,314             10,600,000
     039      Resource America, Inc.(29)                  1998                 342,691(31)          4,100,000
     040      Lehman Brothers Holdings                    1998              45,005,722             47,000,000
     041      J.E. Roberts Companies                      1998              26,695,085             18,500,000(32)
     042      Fannie Mae(33)                              1998               4,290,337              5,000,000(32)
     043      Downingtown National Bank/D, Ltd.           1998               1,957,557(34)          2,275,000
                                                                         ----------------      -----------------
              Balance as of December 31, 1997                            $ 318,289,260         $  254,977,000
                                                                         ================      =================



(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.

                                             Monthly             Monthly          Debt Service
                      Monthly Cash       Debt Service on        Payment to       Coverage Ratio
Loan                   Flow from           Senior Lien        the Company's      on Senior Lien
Number               Property(1)(2)        Interests(3)          Interest          Interests
---------------   -------------------   -----------------   -----------------   ---------------
001                  $    41,717           $   26,425          $   15,292             1.58
002                        6,168                4,875               1,293             1.27
003                        6,874                6,058                 816             1.13
004                       10,949                7,280               3,669             1.50
005                       14,643                6,825               7,818             2.15
006                       28,504                8,021              20,483             3.55
007                       20,400               20,400                   0             1.00
008                       30,290               10,670              19,620             2.84
009                       26,012                7,359              18,653             3.53
010                        6,953                4,875               2,078             1.43
011                       11,179                5,566               5,613             2.01
012                       17,536               10,317               7,219             1.70
013                       20,011               15,833               4,178             1.26
014                       88,168               58,551              29,617             1.51
015 & 028(4)              27,492               26,113               1,379             1.05
016                       23,917               19,500               4,417             1.23
017                       10,690                9,190               1,500             1.16
018                       25,529(5)            15,998               9,531             1.60
019                       49,346               25,300              24,046             1.95
020                       39,742               19,527              20,215             2.04
021                       23,783               16,331               7,452             1.46
022                       26,767               24,365               2,402             1.10
023                        5,108                3,932               1,176             1.30
024                        6,435                    0               6,435             N/A
025                       48,838                    0              48,838             N/A
026                       37,357               10,800              26,557             3.46
027                      160,158               74,570              85,588(6)          2.15
029                       26,510                8,333(7)           18,177             3.18
030                       60,194                    0              60,194             N/A
031                       41,667                    0              41,667             N/A
032                      102,831                    0             102,831             N/A
033                       21,940               14,985               6,955             1.46
034                        5,112                    0               5,112             N/A
035                       27,954                8,333(7)           19,621             3.35
036                       23,950                    0              23,950             N/A
037                       25,000                    0              25,000             N/A
038                       69,013                    0              69,013(8)          N/A
                     -----------           ----------          ----------
                     $ 1,218,737(9)        $  470,332(9)       $  748,405(9)          2.59
                     -----------           ----------          ----------
039                  $     3,814(10)       $        0          $    3,814             N/A
040                      375,000(11)          249,497             125,503             1.50
041                      154,699(12)                0             154,699             N/A
042                       34,080(12)                0              34,080             N/A
043                       16,418(12)            8,333               8,085             1.97
                     -----------           ----------          ----------
                     $   584,011           $  257,830          $  326,181             2.27
                     -----------           ----------          ----------
Total (loans
1 through 43)        $ 1,802,748           $  728,162          $1,074,586             2.48
                     ===========           ==========          ==========

48


(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:

Number of Productive

                             Wells
                      --------------------
                       Gross(1)     Net(1)
                      ----------   -------
Oil Wells .........        161        62
Gas Wells .........        921       612
                           ---       ---
                         1,082       674
                         =====       ===

------------

(1) Includes the Company's equity interest in wells owned by 64 partnerships and joint ventures. Does not include royalty or overriding interests with respect to 182 wells held by the Company.

The following table sets forth net quantities of oil and natural gas produced, average sales prices, and average production (lifting) costs per equivalent unit of production, for the periods indicated, including the Company's equity interests in the production of 64 partnerships and joint ventures, for the periods indicated.

                                                                              Average
                                                                              Lifting
                             Production             Average Sales Price       Cost per
                     --------------------------   -----------------------    Equivalent
 Fiscal Period(1)     Oil(bbls)      Gas(mcf)       per bbl      per mcf       mcf(2)
------------------   -----------   ------------   -----------   ---------   -----------
       1998             11,450        386,171       $ 17.52       $ 2.63      $ 1.14
       1997             35,811      1,227,887       $ 19.68       $ 2.59      $ 1.13
       1996             33,862      1,165,477       $ 18.53       $ 2.34      $ 1.04
       1995             36,420      1,198,245       $ 16.74       $ 2.31      $ 1.06


(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.

                          Exploratory Wells                       Development Wells
                  ---------------------------------   -----------------------------------------
                    Productive            Dry             Productive                Dry
     Fiscal       ---------------   ---------------   -------------------   -------------------
   Period(1)       Gross     Net     Gross     Net     Gross       Net       Gross       Net
---------------   -------   -----   -------   -----   -------   ---------   -------   ---------
      1998          --       --       --       --       --         --          --         --
      1997          1.0      .50      --       --       --         --          --         --
      1996          3.0      .52      1.0      .29      2.0        1.50        --         --
      1995          3.0      .36      2.0      .36      1.0         .87        2.0        1.75


(1) All periods are fiscal years, except that 1998 is for the first fiscal quarter ended December 31, 1997.

All drilling has been on acreage held by the Company. The Company does not own its own drilling equipment; rather, it acts as a general contractor for well operations and subcontracts drilling and certain other work to third parties.

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Oil and Gas Reserve Information

An evaluation of the Company's estimated proved developed oil and gas reserves as of September 30, 1997, was verified by E.E. Templeton & Associates, Inc., an independent petroleum engineering firm. Such study showed, subject to the qualifications and reservations therein set forth, reserves of 15.2 million mcf of gas and 358,000 barrels of oil. See Note 13 to the Consolidated Financial Statements.

The following table sets forth information with respect to the Company's developed and undeveloped oil and gas acreage as of December 31, 1997. The information in this table includes the Company's equity interest in acreage owned by 64 partnerships and joint ventures.

                           Developed Acreage      Undeveloped Acreage
                         ---------------------   ---------------------
                           Gross        Net        Gross        Net
                         ---------   ---------   ---------   ---------
Arkansas .............      2,560        403          --          --
Kansas ...............        160         20          --          --
Louisiana ............      1,819        206          --          --
Mississippi ..........         40          3          --          --
New York .............     30,065     21,025      14,498      13,457
Ohio .................     61,224     36,652      18,489      17,450
Oklahoma .............      4,243        635          --          --
Pennsylvania .........      2,271      1,679          --          --
Texas ................      4,520        209          --          --
                           ------     ------      ------      ------
                          106,902     60,832      32,987      30,907
                          =======     ======      ======      ======

The terms of the oil and gas leases held by the Company for its own account and by its managed partnerships vary, depending upon the location of the leased premises and the minimum remaining terms of undeveloped leases, from less than one year to five years. Rentals of approximately $27,600 in fiscal 1997 and $16,400 for the quarter ended December 31, 1997 were paid to maintain leases on such acreage in force.

The Company believes that the partnership, joint venture and Company properties have satisfactory title. The developed oil and gas properties are subject to customary royalty interests generally contracted for in connection with the acquisition of the properties, burdens incident to operating agreements, current taxes and easements and restrictions (collectively, "Burdens"). Presently, the partnerships, joint ventures and the Company are current with respect to all such Burdens.

At December 31, 1997, the Company had no individual interests in any oil and gas property that accounted for more than 10% of the Company's proved developed oil and gas reserves, including the Company's interest in reserves owned by 64 partnerships and joint ventures.

Pipeline Operation

The Company operates, on behalf of three limited partnerships of which it is both a general and limited partner (in which it owns 20%, 46% and 25% interests), and for its own account, various gas gathering pipeline systems totaling approximately 590 miles in length. The pipeline systems are located in Ohio, New York and Pennsylvania.

Well Services

The Company provides a variety of well services to wells of which it is the operator and to wells operated by independent third party operators. These services include well operations, petroleum engineering, well maintenance and well workover and are provided at rates in conformity with general industry standards.

Sources and Availability of Raw Materials

The Company contracts for drilling rigs and purchases tubular goods necessary for the drilling and completion of wells from a substantial number of drillers and suppliers, none of which supplies a significant portion of the Company's annual needs. During fiscal 1997, and 1996, the Company faced no shortage of such goods and services. The duration of the current supply and demand situation cannot be predicted with any degree of certainty due to numerous factors affecting the oil and gas industry, including selling prices, demand for oil and gas, and governmental regulations.

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Major Customers

The Company's natural gas and oil is sold to various purchasers. In fiscal 1998 through January 31, 1998, gas and oil sales to three purchasers accounted for 36%, 14% and 11%, respectively, of the Company's total production revenues. For the years ended September 30, 1997 and 1996, gas sales to two purchasers accounted for 29% and 12%, and 29% and 13%, respectively, of the Company's total production revenues. Gas sales to one purchaser individually accounted for approximately 15% of total revenues from energy production for fiscal 1995.

Competition

The oil and gas business is intensely competitive in all of its aspects. The oil and gas industry also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual customers. Domestic oil and gas sales are also subject to competition from foreign sources. Moreover, competition is intense for the acquisition of leases considered favorable for the development of oil and gas in commercial quantities. The Company's competitors include other independent oil and gas companies, individual proprietors and partnerships. Many of these entities possess greater financial resources than the Company. While it is impossible for the Company to accurately determine its comparative industry position with respect to its provision of products and services, the Company does not consider its oil and gas operations to be a significant factor in the industry.

Markets

The availability of a ready market for oil and gas produced by the Company, and the price obtained therefor, will depend upon numerous factors beyond the Company's control including the extent of domestic production, import of foreign natural gas and/or oil, political instability in oil and gas producing countries and regions, market demands, the effect of federal regulation on the sale of natural gas and/or oil in interstate commerce, other governmental regulation of the production and transportation of natural gas and/or oil and the proximity, availability and capacity of pipelines and other required facilities. Currently, the supply of both crude oil and natural gas is more than sufficient to meet projected demand in the United States. These conditions have had, and may continue to have, a negative impact on the Company through depressed prices for its oil and gas reserves.

Governmental Regulation

The exploration, production and sale of oil and natural gas are subject to numerous state and federal laws and regulations. Compliance with the laws and regulations affecting the oil and gas industry generally increases the Company's costs of doing business in, and the profitability of its energy operations. Inasmuch as such regulations are frequently changing, the Company is unable to predict the future cost or impact of complying with such regulations. The Company is not aware of any pending or threatened matter involving a claim that it has violated environmental regulations which would have a material effect on its operations or financial position.

Sources of Funds

Historically, the Company has relied upon internally generated funds to finance its growth. During fiscal 1997, the Company augmented its internally generated funds by a $5.0 million credit facility (increased to $20.0 million in the first quarter of fiscal 1998) for its residential mortgage lending operations and a $5.0 million credit facility for oil and gas asset acquisitions and completed two capital markets transactions: a public offering of its Common Stock resulting in $19.5 million in net proceeds to the Company, and a private placement of $115.0 million of the Senior Notes due 2004 to a small group of institutional investors, resulting in $109.7 million of net proceeds to the Company. In addition, during fiscal 1997 the Company entered into an initial $20.0 million credit facility for its equipment leasing operations. In the first quarter of fiscal 1998, the Company entered into a $50.0 million forward sales commitment and an additional $15.0 million warehouse credit facility for its residential mortgage lending operations. See Note 6 to Consolidated Financial Statements. See also "Business -- Recent Developments."

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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.

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Properties

The Company's executive office is located in Philadelphia, and is leased under an agreement providing for rents of $65,000 per year through May 2000. The Company's small ticket equipment leasing and residential mortgage loan headquarters are located in Ambler, Pennsylvania, and are leased by the Company under agreements providing for rents of $355,000 per year (including space leased beginning July 1, 1997). The agreements terminate on June 30, 1998 and June 30, 2007. The Company leases space for management operations with respect to its five public leasing partnerships in Philadelphia for $87,000 per year. That lease expires on January 24, 2003. The Company owns a 9,600 square foot office building and related land in Akron, Ohio, housing its energy and accounting operations. The Company also maintains two energy field offices in Ohio and New York, as month to month tenancies, for which aggregate rent for fiscal 1997 was $24,000. The Company also maintains a brokerage office in California for which the rent is $25,000 per year through July 1999. Aggregate rent for all of the Company's offices was $238,600 for fiscal 1997.

Legal Proceedings

The Company is party to various routine legal proceedings arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the financial condition or operations of the Company.

Recent Developments

Commercial Loan Purchase. On March 13, 1998, the Company and RAIT jointly purchased the Loan, in the original principal amount of $80.0 million (plus accrued fees, restructuring charges, interest and costs), for a purchase price of $85.5 million. The Company contributed $75.5 million of the purchase price and RAIT contributed $10.0 million. The rights and interests of the Company and RAIT with respect to the Loan are set forth in a Participation Agreement, the terms of which are described below. The Company holds legal title to the Loan. There can be no assurance that the Company will realize the full outstanding amount of the Loan. See "Business -- Commercial Mortgage Loan Acquisition and Resolution: Accounting for Discounted Loans."

The Loan is secured by a first priority mortgage lien on an office building known as the "Evening Star Building" located at 1101 Pennsylvania Avenue, N.W., Washington, D.C. (the "Property"). The Property has been valued by an independent valuation firm at not less than $90.0 million. Such valuation is only an estimate of value and should not be relied upon as a precise measure of market value. As part of the purchase of its interest in the Loan, the Company received an assignment of all of the seller's rights against the borrower under the Loan (the "Bankruptcy Rights") pursuant to the bankruptcy plan of reorganization (the "Plan") governing the Property. The Bankruptcy Rights include the right to appoint a liquidating agent to manage, control and take possession of the Property; the right to receive all net cash flow from the Property, the right to approve leases and all other material contracts related to the Property; and the right, but not the obligation, to cause title to the Property to be transferred on or before June 30, 1998.

In addition to paying its portion of the purchase price of the Loan, the Company incurred closing costs of approximately $3.0 million, comprised of certain expenses that the Plan required the holder of the Loan to pay. Approximately $1.5 million of these closing costs was paid into an escrow account. In the event title is transferred, the $1.5 million will be delivered to the borrower pursuant to the Plan.

Financing for the Company's purchase of its interest in the Loan was provided by a loan, in the principal amount of $55.0 million, from Merrill Lynch Capital Mortgage Inc. (the "Senior Financing"). The Senior Financing bears interest at LIBOR plus 2.5% until September 9, 1998, and at LIBOR plus 4.0% from September 10, 1998 until July 1, 1999, when the Senior Financing matures. The Company is currently seeking 10-year, fixed rate financing to replace the Senior Financing, and anticipates (although there can be no assurance) closing on such financing before September 10, 1998. The Company incurred fees and expenses of approximately $950,000 in connection with the Senior Financing.

RAIT's participation interest in the Loan entitles it to receive (i) distributions from the monthly net cash flow of the Property, after monthly debt service payments on the Senior Financing, in an amount sufficient to pay interest on its $10.0 million investment at 10% per annum and (ii) the first $10.0 million of principal payments from the Loan after the prior repayment of the Senior Financing. In addition, RAIT received advance interest of approximately $510,000.

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Commercial Mortgage Loan Credit Facility. In March 1998, the Company, through certain operating subsidiaries, established an $18.0 million revolving credit facility with Jefferson Bank for its commercial mortgage loan operations. The credit facility bears interest at the prime rate reported in the Wall Street Journal plus .75%, and is secured by the borrowers' interests in certain commercial loans and by a pledge of their outstanding capital stock. In addition, repayment of the credit facility is guaranteed by the Company. The facility expires on April 1, 1999. No borrowings have been made under this facility to date. See "Management -- Certain Relationships and Related Party Transactions."

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BROKERAGE PARTNERS