UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-4408
RESOURCE AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-0654145
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1521 Locust Street
Suite 400
Philadelphia, PA 19102
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (215)546-5005
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
Name of each exchange on which registered: The Company's Common Stock trades on
the Nasdaq Stock Market under the symbol "REXI."
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing price of such stock on November 30, 1997, was
$200,277,600.
The number of outstanding shares of the registrant's Common Stock on November
30, 1997 was 4,749,463.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for registrant's 1998 Annual Meeting of
Shareholders to be held on February 17, 1998 are incorporated by reference in
Part III of this Form 10-K.
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RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
ON FORM 10-K
Page
PART I
Item 1: Business....................................................................... 4
Item 2: Properties..................................................................... 38
Item 3: Legal Proceedings.............................................................. 38
Item 4: Submission of Matters to a Vote of Security
Holders............................................................. 38
PART II
Item 5: Market for the Registrant's Common Equity and
Related Stockholder Matters......................................... 39
Item 6: Selected Financial Data........................................................ 40
Item 7: Management's Discussion and Analysis of
Financial Condition and Results of
Operations.......................................................... 40
Item 8: Financial Statements and Supplementary Data.................................... 51
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................. 85
PART III
Item 10: Directors, Executive Officers, Promoters and
Control Persons of the Registrant................................... 86
Item 11: Executive Compensation................................................ 86
Item 12: Security Ownership of Certain Beneficial Owners
and Management...................................................... 86
Item 13: Certain Relationships and Related Transactions........................ 86
PART IV
Item 14: Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................................. 87
SIGNATURES
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PART I
ITEM 1. BUSINESS
General
The Company is a specialty finance company engaged primarily in real
estate finance and equipment leasing. For approximately 25 years prior to 1991,
the Company was principally involved in the energy industry and it continues to
have 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 non-conforming
residential mortgage lending business. Within its equipment leasing business,
the Company focuses primarily on small ticket equipment lease financing,
although it also manages six publicly-owned equipment leasing partnerships and
has a lease finance placement and advisory business.
The Company's commercial mortgage loan acquisition and resolution
business involves the purchase at a discount of troubled commercial real estate
mortgage loans at prices generally ranging from $1 million to $10 million and
the restructuring and refinancing of those loans. These loans are generally
acquired from private market sellers, primarily financial institutions. Loans
acquired by the Company typically involve legal and other disputes among the
lender, the borrower and/or other parties in interest, and generally are secured
by properties which are unable to produce sufficient cash flow to fully service
the loans in accordance with the original lender's loan terms. Since fiscal 1991
(when it entered this business), and through September 30, 1997, the Company's
aggregate commercial mortgage loan portfolio has grown to 38 loans with an
outstanding loan balance (excluding discounts) of $233.7 million, acquired at an
investment cost (including subsequent advances, which had been anticipated by
the Company at the time of acquisition and were included in its analysis of loan
costs and yields) of $120.4 million. During the fiscal years ended September 30,
1997, 1996 and 1995, the Company's yield on its net investment in commercial
mortgage loans (including gains on sale of senior lien interests in, and gains,
if any, resulting from refinancings of commercial mortgage loans) equalled
34.7%, 36.2% and 34.6%, respectively, while its gross profit (that is, revenues
from loan activities minus costs attributable thereto, including interest and
provision for possible losses, and less depreciation and amortization, without
allocation of corporate overhead) from its commercial mortgage loan activities
for fiscal years 1997, 1996 and 1995 were $16.5 million, $6.3 million and $5.3
million, respectively.
The Company seeks to reduce the amount of its own capital invested in
commercial mortgage loans after their acquisition, and to enhance its returns,
through sale at a profit of senior lien interests in its loans (typically on a
recourse basis) or through borrower refinancing of the
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properties underlying its loans. At September 30, 1997, senior lenders held
outstanding obligations of $55.5 million, secured by properties with an
aggregate appraised value of $125.4 million, resulting in a ratio of senior lien
obligations-to-appraised value of property of 44%. For the three months ended
September 30, 1997, the operating cash flow coverage on the required debt
service on senior lien interests averaged 202%. Such calculation excludes (i)
proceeds from the sale of senior lien interests or from refinancings and (ii)
cash flows from and senior lien interests with respect to nine loans acquired
during the fourth quarter of fiscal 1997 as to which the Company had less than
three months' cash flow experience at September 30, 1997 (see "Commercial
Mortgage Loan Acquisition and Resolution: Loan Status"). If such nine loans had
been included (utilizing for this purpose their cash flows for periods
subsequent to September 30, 1997 as set forth in "- Real Estate Finance
- -Commercial Mortgage Loan Acquisition and Resolution: Loan Status"), the
operating cash flow coverage would have averaged 273%. The excess of operating
cash flow over required debt service on senior lien obligations is, pursuant to
agreements with the borrowers, retained by the Company as debt service on the
outstanding balance of the Company's loans.
The Company has sponsored a real estate investment trust (the "REIT")
and has undertaken to sell 10 loans to the REIT (including one loan consisting
of four related obligations). The Company will not retain a junior lien interest
in any of these loans. In addition, the Company has undertaken to sell a senior
participation in another of its loans to the REIT. The aggregate price to be
paid by the REIT for the loans and the senior participation will be $27.7
million. The Company's carried cost of investment in these loans was $22.2
million at September 30, 1997. The Company anticipates selling further loans to
the REIT. See "Sponsorship of Real Estate Investment Trust."
The Company's residential mortgage lending business provides first and
second mortgage loans on one- to four-family residences to borrowers who do not
conform to guidelines established by Fannie Mae because of past credit
impairment or other reasons. Through its subsidiaries, Fidelity Mortgage
Funding, Inc. ("FMF") and Tri-Star Financial Services, Inc. ("Tri-Star") (which
was acquired in November 1997 and which, following regulatory approvals, the
Company anticipates merging into FMF), the Company is licensed as a residential
mortgage lender in 19 states and is currently originating loans in eleven 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 targeted
average loan of approximately $75,000. The Company markets its services directly
to consumers and anticipates establishing "private label" lending programs (that
is, programs where the Company will process, fund and service loans originated
by an institution, under the institution's name) for institutions which, because
of a lack of expertise in the area or for other reasons, do not otherwise make
non-conforming loans.
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
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acquisition, the Company assumed the management of six publicly-held equipment
leasing partnerships involving $55.2 million (original equipment cost) in leased
assets at September 30, 1997. More importantly, through this acquisition the
Company acquired an infrastructure of operating systems, computer hardware and
proprietary software (generally referred to as a "platform"), as well as
personnel, which the Company utilized in fiscal 1996 as a basis for the
development of an equipment leasing business for its own account. As part of its
development of this business, in early 1996 the Company hired a team of four
experienced leasing executives, including the former chief executive officer of
the U.S. leasing subsidiary of Tokai Bank, a major Japanese banking institution.
The Company's operational strategy for equipment leasing is to focus on leases
with equipment costs of between $5,000 to $100,000 ("small ticket" leasing),
with a targeted average transaction of approximately $10,000 per lease. The
Company markets its equipment leasing products through vendor programs with
equipment manufacturers, distributors and other vendors such as Minolta
Corporation and Lucent Technologies, Inc. The Company believes that the small
ticket leasing market is under-served by equipment lessors, banks and other
financial institutions, affording the Company a niche market with significant
growth potential. During fiscal 1997, the Company received 8,344 lease proposals
involving equipment with an aggregate cost of $113.4 million, approved 5,054
such proposals involving equipment with an aggregate cost of $67.2 million and
entered into 3,214 transactions involving equipment with an aggregate cost of
$34.6 million. During fiscal 1997, the Company sold, on a servicing retained
basis, equipment leases with an aggregate net book value of approximately $30.2
million to third parties. The Company anticipates similar equipment lease sales
in the future. The Company's income from retained servicing was not material
during fiscal 1997.
The Company produces natural gas and, to a lesser extent, oil from
locations principally in Ohio, Pennsylvania and New York. At September 30, 1997,
the Company had a net investment of $11.4 million in its energy operations,
including interests in 1,129 individual wells (including overriding interests)
owned directly by the Company or through 64 partnerships and joint ventures
managed by the Company. While the Company has focused its business development
efforts on its specialty finance operations over the past several years, its
energy operations historically have provided a steady source of cash flow and
tax benefits.
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 to fully 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
commercial mortgage loans with purchase prices generally ranging from $1 million
to $10 million held by large private sector financial institutions. Due to the
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comparatively small size of these loans 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 "- Commercial Mortgage Loan Acquisition and
Resolution: Sale of Senior Lien Interests and Refinancings." The Company also
anticipates sales of whole loans to the REIT (see "- 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 "- Commercial Mortgage Loan Acquisition and
Resolution: Forbearance Agreements" and "- Loan Status."
Market for Commercial Mortgage Loan Acquisition and Resolution Services
The discounted loans acquired by the Company to date are secured by
commercial properties (generally multi-family housing, small office buildings,
hotels or single-user retail properties) which, while income producing, are
unable to meet fully debt service requirements of the original loan under its
then current terms. The loans are usually acquired from banks,
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insurance companies, investment bankers, mortgage bankers or other similar
financial organizations. Typically, the loans identified by the Company for
acquisition (and the properties securing them) have been the subject of complex
and/or contentious legal and other disputes, operational difficulties or other
problems demanding commitments of managerial and other resources that are
perceived by the selling institutions to be inordinate relative to the
comparatively small asset value of these loans in the institution's total
portfolio.
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 this market has 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
organizations 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 loans, 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 an immediate cash return on the Company's investment
of not less than 10% per annum, (ii) the
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ratio of the Company's initial investment to the appraised value of the property
underlying the loan (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 outstanding (see "- 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. The Company
currently has in its portfolio eight loans in which the ratio of the cost of
investment to the appraised value (both at the time of acquisition and at the
date of the most recent appraisal) of the underlying property exceeds 80%. The
Company has a policy that appraisals of properties underlying loans be updated
no less often than every three years. Also, the Company has acquired loans
outside of its targeted investment cost range of $1 million to $10 million and,
as opportunities arise, may do so in the future. Five of the Company's portfolio
loans were acquired at a lesser investment cost, while two loans were acquired
at a greater cost ($10.6 million and $19.2 million, respectively). 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 "- 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 "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations: Results of Operations: Commercial Mortgage Loan Acquisition and
Resolution."
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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 sixty 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 referred to above.
The Company may alter the foregoing procedures in appropriate
circumstances. Where a borrower has refinanced a loan held by the Company (or
where the Company has acquired a loan subject to existing senior debt), the
Company may agree that the revenues be paid to an account controlled by the
senior lienor, with the excess over amounts payable to the senior lienor being
paid directly to the Company. As of September 30, 1997, one of the Company's
loans (loan 17; see "- Commercial Mortgage Loan Acquisition and Resolution: Loan
Status") is subject to such a provision. Where the property is being managed by
Brandywine Construction & Management, Inc. ("BCMI"), a property manager
affiliated with the Company (see "- Commercial Mortgage Loan Acquisition and
Resolution: Forbearance Agreements"), the Company may direct that property
revenues be paid to BCMI, as the Company's managing agent. As of September 30,
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 substantially resolved, the Company may permit the
borrower to retain revenues and pay property expenses directly. The Company
currently permits borrowers with respect to three loans (loans 24, 27 and 37) to
do so.
Commercial Mortgage Loan Acquisition and Resolution: Sale of Senior Lien
Interests and Refinancings
In evaluating a potential 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
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interest. Typically, the interest rate on the senior lien interest is less than
the stated rate on the Company's loan. Senior lien interests with an aggregate
balance of $12.0 million at September 30, 1997, relating to nine 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 (two each in
1998, 1999, 2000 and 2001 and one in 2016). Three other senior lien interests,
with an aggregate balance of $10.3 million at September 30, 1997, 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. See
"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 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 constituting 8.3%, by
book value, of the Company's loans), 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 "- 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, an
affiliated property management company, has assumed responsibility for
supervisory and, in many cases, day to day management of the underlying
properties with respect to substantially all of the loans the Company currently
owns. In ten instances, the President of BCMI (or an entity affiliated with him)
has also acted as the
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general partner or trustee of the borrower. The minimum payments required under
a Forbearance Agreement (generally related to anticipated cash flow from the
property after operating expenses) are normally materially less than the debt
service payments called for by the original terms of the loan. The difference
between the minimum required payments under the Forbearance Agreement and the
payments called for by the original loan terms continues to accrue, but (except
for amounts recognized as an accretion of discount; see "- 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 with no
modifications when the Company sells a senior lien interest in a loan. In such
instance, the purchaser's interest is in the loan subject to the terms of the
Forbearance Agreement. However, when a borrower refinances a loan, the
Forbearance Agreement is thereby 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
the term specified therein, 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 September 30, 1997, the Company's loan portfolio consisted of 38
loans of which 28 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. At September 30, 1997,
the Company had sold a senior lien interest in 14 loans in its portfolio,
(including senior interests in five loans acquired by the Company as junior lien
loans) and borrowers with respect to 12 of the Company's loans have obtained
refinancing (including a refinancing of one loan acquired by the Company as a
junior lien loan). After such sales and refinancings, the Company holds
subordinated interests in 30 loans of which seven interests, constituting
approximately 8.3% of the book value of the Company's loan portfolio, are not
collateralized by recorded mortgages (see "- Commercial Mortgage Loan
Acquisition and Resolution: Sale of Senior Lien Interests and Refinancings").
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The Company anticipates that 10 of its loans, and a senior lien
interest in an eleventh loan will be sold to the REIT. See "- Sponsorship of
Real Estate Investment Trust" and Note 9 to the following table.
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The following table sets forth certain information relating to the
Company's investments in real estate loans at September 30, 1997.
Loan Outstanding
Loan Type of Acquired Loan
Number Property Location Seller/Originator (Fiscal Year) Receivable(1)
- ------ -------- -------- ----------------- ------------- -------------
001 Multifamily Pennsylvania Alpha Petroleum Pension Fund 1991 $ 8,471,635
002(9) Multifamily Pennsylvania CoreStates Bank(10) 1992 1,555,120
003 Multifamily New Jersey RAM Enterprises/Glenn Industries 1993 2,695,748
Pension Plan
004(9) Multifamily Pennsylvania St. Paul Federal Bank for Savings(12) 1993 1,481,638
005 Office Pennsylvania Shawmut Bank(10) 1993 6,273,329
006(9) Office/Retail Virginia Nationsbank(10) 1993 5,761,455
007 Single User Minnesota Prudential Insurance, Alpha 1993 4,441,379
(Retail) Petroleum Pension Fund
008(9) Multifamily Pennsylvania Nomura/Cargill/Eastdil Realty(13) 1994 5,389,823
009(9) Multifamily Pennsylvania Mellon Bank(10) 1995 1,638,263
010(9) Multifamily Pennsylvania RIVA Financial 1994 1,579,540
011 Office Washington, D.C. First Union Bank(10) 1995 1,410,289
012(9) Multifamily Pennsylvania CoreStates Bank(10)(12) 1995 3,036,879
013 Single User California California Federal Bank, FSB 1995 2,985,207
(Commercial)
014 Office Washington, D.C. Nomura/Cargill/Eastdil Realty(13) 1995/1997 14,786,192
015 Condo/ North Carolina First Bank, South Trust Bank(14) 1997 3,572,780
Multifamily
016 Single User California Mass Mutual, Alpha Petroleum 1995/1996 6,924,661
(Retail) Pension Fund
017 Single User West Virginia Triester Investments(10)(15) 1996 1,786,434
(Retail)
018 Single User California Emigrant Savings Bank, Walter 1996 2,933,154
(Retail) R. Samuels and Jay Furman(16)
019(9) Multifamily Pennsylvania Summit Bancorp(10) 1996 4,724,376
020 Office New Jersey Cargill/Eastdil Realty(13) 1996 7,026,381
021 Multifamily Pennsylvania Bruin Holdings/Berkeley Federal 1996/1997 9,743,475
Savings Bank
022 Multifamily Pennsylvania FirsTrust FSB 1996/1997 4,465,421
023(9) Multifamily Pennsylvania Jefferson Bank 1996 711,924 (20)
024 Multifamily Pennsylvania U.S. Dept. of Housing & Urban
Development 1996 3,427,673
025 Hotel/Commercial Georgia Bankers Trust Co. 1997 6,029,552
026 Office Pennsylvania FirsTrust FSB 1997 7,983,948
RESTUBBED FROM TABLE ABOVE
Appraised Value
Loan Type of of Property Cost of
Number Property Location Seller/Originator Securing Loan(2) Investment(3)
- ------ -------- -------- ----------------- ----------------- -------------
001 Multifamily Pennsylvania Alpha Petroleum Pension Fund $ 5,300,000 $ 4,628,323
002(9) Multifamily Pennsylvania CoreStates Bank(10) 900,000 547,813
003 Multifamily New Jersey RAM Enterprises/Glenn Industries 1,350,000 1,324,780
Pension Plan
004(9) Multifamily Pennsylvania St. Paul Federal Bank for Savings(12) 1,200,000 862,356
005 Office Pennsylvania Shawmut Bank(10) 1,700,000 1,242,218
006(9) Office/Retail Virginia Nationsbank(10) 2,800,000 2,388,018
007 Single User Minnesota Prudential Insurance, Alpha 2,515,000 1,354,382
(Retail) Petroleum Pension Fund
008(9) Multifamily Pennsylvania Nomura/Cargill/Eastdil Realty(13) 3,200,000 1,614,174
009(9) Multifamily Pennsylvania Mellon Bank(10) 2,700,000 1,362,884
010(9) Multifamily Pennsylvania RIVA Financial 800,000 456,356
011 Office Washington, D.C. First Union Bank(10) 2,000,000 1,180,030
012(9) Multifamily Pennsylvania CoreStates Bank(10)(12) 2,200,000 1,296,565
013 Single User California California Federal Bank, FSB 2,400,000 1,694,799
(Commercial)
014 Office Washington, D.C. Nomura/Cargill/Eastdil Realty(13) 11,000,000 10,566,013
015 Condo/ North Carolina First Bank, South Trust Bank(14) 3,702,000 2,787,774
Multifamily
016 Single User California Mass Mutual, Alpha Petroleum 3,000,000 2,083,399
(Retail) Pension Fund
017 Single User West Virginia Triester Investments(10)(15) 1,900,000 1,070,597
(Retail)
018 Single User California Emigrant Savings Bank, Walter 4,555,000 2,224,658
(Retail) R. Samuels and Jay Furman(16)
019(9) Multifamily Pennsylvania Summit Bancorp(10) 5,725,000 3,758,685
020 Office New Jersey Cargill/Eastdil Realty(13) 4,600,000 2,981,599
021 Multifamily Pennsylvania Bruin Holdings/Berkeley Federal 4,222,000 2,453,501
Savings Bank
022 Multifamily Pennsylvania FirsTrust FSB 4,110,000 2,409,598
023(9) Multifamily Pennsylvania Jefferson Bank 600,000 427,474
024 Multifamily Pennsylvania U.S. Dept. of Housing & Urban
Development 3,250,000 2,730,183
025 Hotel/Commercial Georgia Bankers Trust Co. 8,500,000 5,877,058
026 Office Pennsylvania FirsTrust FSB 5,000,000 3,581,137
-14-
Loan Outstanding
Loan Type of Acquired Loan
Number Property Location Seller/Originator (Fiscal Year) Receivable(1)
- ------ -------- -------- ----------------- ------------- -------------
027(9) Office Pennsylvania Lehman Brothers Holdings, Inc. 1997 $ 52,644,228
028 Condo/ North Carolina First Bank, SouthTrust Bank(23) 1997 1,678,680
Multifamily
029 Commercial/ Pennsylvania Castine Associates, L.P.(24) 1997 6,962,930
Retail
030 Hotel Nebraska CNA Insurance 1997 6,456,907
031 Multifamily Connecticut John Hancock Mutual Life 1997 6,251,307
Insurance Company
032 Multifamily New Jersey John Hancock Mutual Life 1997 12,210,777
Insurance Company
033 Single User/ Virginia Brambilla, Ltd. 1997 3,970,564
Retail
034 Multifamily Pennsylvania Resource America, Inc.(26) 1997 400,622
035 Office Pennsylvania Jefferson Bank 1997 2,321,627
036 Office North Carolina Union Labor Life Insurance Co. 1997 4,475,257
037 Multifamily Florida Howe, Soloman & Hall 1997 6,876,566
Financial, Inc.
038(9) Office/Retail Pennsylvania Resource Asset Investment Trust(26) 1997 8,580,000
-------------
Balance as of September 30, 1997 $233,665,613
============
RESTUBBED FROM TABLE ABOVE
Appraised Value
Loan Type of of Property Cost of
Number Property Location Seller/Originator Securing Loan(2) Investment(3)
- ------ -------- -------- ----------------- ----------------- -------------
027(9) Office Pennsylvania Lehman Brothers Holdings, Inc. $ 34,000,000 $ 19,240,747
028 Condo/ North Carolina First Bank, SouthTrust Bank(23) 1,773,000 1,028,143
Multifamily
029 Commercial/ Pennsylvania Castine Associates, L.P.(24) 4,000,000 2,978,752
Retail
030 Hotel Nebraska CNA Insurance 4,000,000 3,740,922
031 Multifamily Connecticut John Hancock Mutual Life 7,500,000 4,678,000
Insurance Company
032 Multifamily New Jersey John Hancock Mutual Life 12,425,000 7,410,218
Insurance Company
033 Single User/ Virginia Brambilla, Ltd. 2,650,000 1,995,705
Retail
034 Multifamily Pennsylvania Resource America, Inc.(26) 450,000 400,000
035 Office Pennsylvania Jefferson Bank 2,550,000 1,582,088
036 Office North Carolina Union Labor Life Insurance Co. 4,150,000 3,050,200
037 Multifamily Florida Howe, Soloman & Hall 3,500,000 2,796,393
Financial, Inc.
038(9) Office/Retail Pennsylvania Resource Asset Investment Trust(26) 10,600,000 8,580,000
------------- -------------
Balance as of September 30, 1997 $176,827,000 $120,385,542
============ ============
-15-
Proceeds from Company's Net Maturity of Loan/
Ratio of Cost Refinancing or Interest In Expiration of
Loan of Investment to Sale of Senior Net Carried Cost Outstanding Loan Forbearance
Number Appraised Value Lien Interests Investment(4) of Investment(5) Receivables(6) Agreement(7)
- ------ --------------- -------------- ------------- ---------------- -------------- ------------
001 87% $ 2,570,000 (8) $ 2,058,323 $ 2,503,108 $ 5,945,935 12/31/02
002 61% 575,000 (11) (27,187) 185,295 955,120 10/31/98
003 98% 627,000 697,780 725,350 2,058,198 01/01/03
004 72% 871,000 (11) (8,644) 238,958 585,638 10/31/98
005 73% 940,000 (11) 302,218 785,814 5,433,329 02/07/01
006 85% 840,000 1,548,018 1,670,669 4,881,874 07/31/98
007 54% 2,099,000 (744,618) 555,149 2,295,519 12/31/14
008 50% 934,300 679,874 1,058,457 4,287,524 07/31/98
009 50% 654,600 708,284 579,159 750,691 11/01/99
010 57% 575,000 (11) (118,644) 133,073 979,540 09/02/99
011 59% 660,000 (11) 520,030 670,564 725,289 09/30/99
012 59% 1,079,000 217,565 747,650 1,778,063 12/02/99
013 71% 1,975,000 (11) (280,201) 328,767 985,207 05/01/01
014 96% 6,487,000 4,079,013 5,297,790 8,041,969 11/30/98
015 75% 2,558,000 (8) 229,774 3,572,780 1,211,780 08/25/00
016 69% 2,375,000 (11) (291,601) 469,130 4,524,661 12/31/00
017 56% 693,000 (8) 377,597 965,512 1,116,845 12/31/18
018 49% 1,969,000 (11) 255,658 886,261 964,154 12/01/00
019 66% 3,020,000 738,685 956,429 1,539,656 12/29/00
020 65% 2,562,000 419,599 1,856,859 4,623,458 02/07/01
021 60% 2,010,000 (11) 443,501 1,496,972 7,733,475 07/01/16 (17)
022 59% 2,636,000 (18)(19) (226,402) 862,459 1,795,337 10/31/98
023 71% 450,000 (21) (22,526) 128,641 263,041 03/28/01
024 84% 2,318,750 411,433 804,390 927,673 11/01/22
025 69% - 5,877,058 6,102,725 6,029,552 12/31/15
026 72% 2,240,000 (22) 1,341,137 2,312,620 5,738,258 09/30/03
-16-
Proceeds from Company's Net Maturity of Loan/
Ratio of Cost Refinancing or Interest In Expiration of
Loan of Investment to Sale of Senior Net Carried Cost Outstanding Loan Forbearance
Number Appraised Value Lien Interests Investment(4) of Investment(5) Receivables(6) Agreement(7)
- ------ --------------- -------------- ------------- ---------------- -------------- ------------
027 57% $7,920,000 (18) $11,320,747 $16,615,724 $44,644,228 01/01/02
028 58% - 1,028,143 1,678,680 1,678,680 03/31/02
029 75% 750,000 (25) 2,228,752 2,464,174 6,212,930 07/01/02
030 94% - 3,740,922 3,816,425 6,456,907 09/30/02
031 62% - 4,678,000 4,704,270 6,251,307 09/01/05
032 60% - 7,410,218 7,451,074 12,210,777 09/01/05
033 80% - 1,995,705 628,671 2,595,241 02/01/21
034 89% - 400,000 400,000 400,622 10/01/02
035 63% 750,000 (25) 832,088 1,081,234 1,571,627 09/25/02
036 76% - 3,050,200 3,074,544 4,475,257 12/31/11
037 80% - 2,796,393 2,826,741 6,876,566 07/01/00
038 81% - 8,580,000 8,580,000 8,580,000 03/31/02
----------- ------------ ------------ -------------
Balance as of September 30, 1997 $53,138,650 $67,246,892 $89,216,118 $178,125,928
=========== =========== =========== ============
-17-
(1) Consists of the stated, or face value of the obligation plus accrued
interest and penalties and the outstanding balance of the senior lien
interest at September 30, 1997.
(2) The Company's policy is to obtain an appraisal of a property underlying a
loan 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 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 $400,000. 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 the outstanding balance of senior lien interests at
September 30, 1997.
(7) With respect to loans 6, 7, 8, 14, 25, 27, 30, 31, 32, 34, 35 and 38, the
date given is for the maturity of the subordinate note for the residual
loan balance received by the Company in connection with the refinancing.
For the remaining loans, the date given is the expiration date of the
related Forbearance Agreement.
(8) Represents the amount of the senior lien interest in place on date of
acquisition.
(9) It is anticipated that these loans will be sold to the REIT. See "-
Sponsorship of Real Estate Investment Trust."
(10) Successor by merger to the Seller.
(11) 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.
(12) Seller was a wholly-owned subsidiary of this institution.
-18-
(13) Seller was a partnership of these entities.
(14) Original lending institutions. In March 1997, as a result of agreements
among the borrower, the Company and a third party, Concord Investment,
L.P. ("Concord"), the borrower's partnership interests were transferred
to the Company which resold them to Concord for a mortgage note (which
wrapped around certain senior indebtedness), and cash.
(15) The loan acquired consists of a series of notes becoming due yearly
through December 31, 2018. The notes are being paid in accordance with
their terms and, accordingly, a Forbearance Agreement was not required.
(16) Amounts advanced by the Company were used in part to repay the loan of
Emigrant Savings Bank; the balance was applied to purchase a note held by
Messrs. Samuels and Furman.
(17) 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.
(18) Two senior lien interests were sold to Commerce Bank, N.A. ("Commerce").
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.
(19) 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.
(20) Includes a note for $14,948 which is payable to the Company on demand.
(21) Senior lien interest sold to Crusader Bank. If not repaid at its maturity
date, the Company is required to repurchase the interest at a price equal
to its unpaid principal balance plus accrued interest.
(22) 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.
(23) Original lending institutions. In connection with the transactions
referred to in Note (14), Concord acquired other condominium units in the
same building. These units secured a loan in the original principal
amount of $910,000 held by the Company. As part of that acquisition, the
Company made an additional mortgage loan to Concord of $797,675.
(24) From 1993 to October 1997 an officer of the Company served as the General
Partner.
-19-
(25) Senior lien interest sold to Peoples Thrift Savings Bank.
(26) Consists of four related loans to one borrower secured by two properties.
-20-
The following table sets forth the average monthly cash flow from the
properties underlying loans 1 through 29, the average monthly debt service
payable to senior lienholders and refinance lenders and the average monthly
payment with respect to the Company's retained interest, based on three months
ended September 30, 1997:
Average Average Monthly Debt Average Monthly
Monthly Cash Service on Payment to
Loan Flow from Refinancing or the Company's
Number Property (1)(2) Senior Lien Interests(3) Interest (2)
------- --------------- ------------------------ ----------------
001 $ 37,581 $ 26,425 $ 11,156
002 7,646 4,875 2,771
003 6,629 6,058 571
004 10,718 7,280 3,438
005 12,262 6,825 5,437
006 24,964 8,021 16,943
007 21,300 20,400 900
008 27,839 10,670 17,169
009 21,646 7,359 14,287
010 8,467 4,875 3,592
011 11,843 5,566 6,277
012 19,517 10,317 9,200
013 27,821 15,833 11,988
014 156,369 58,551 97,818
015 & 028 (4) 33,834 26,113 7,721
016 23,917 19,500 4,417
017 10,690 9,190 1,500
018 24,827 (5) 15,998 8,829
019 58,364 25,300 33,064
020 41,732 19,527 22,205
021 19,204 16,331 2,873
022 30,731 24,365 6,366
023 6,065 3,932 2,133
024 28,066 17,474 10,592
025 45,967 - 45,967
026 26,537 10,800 15,737
027 224,958 102,713 122,245
029 20,997 6,250 (6) 14,747
---------- -------- --------
$ 990,491 (7) $490,548 (7) $499,943 (7)
========== ======== ========
-21-
(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 Note (4), monthly cash flow from each of the
properties has been calculated as the average monthly amount during the
three-month period ended September 30, 1997.
(3) Monthly debt service consists of required payments of principal, interest
and other regularly recurring charges payable to the holder of the
refinancing loan or senior lien interest.
(4) Loans 15 and 28 are secured by 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) Prior to September 29, 1997, this note was subordinate to a senior lien
interest of approximately $952,000 with monthly debt service of $8,990.
On September 29, 1997, the senior lien interest was repaid through sale
of a senior lien interest to another institution.
(7) Excludes amounts attributable to loans 30 through 38, which are referred
to in the table below. For certain information regarding the combined
results for all loans (including estimated results) see Note (4) to the
table below.
The loans in the following table have been recently acquired by the
Company and, accordingly, the table sets forth monthly cash flow, debt service
and payment to the Company's interest based upon the Company's experience with
such loans for periods after September 30, 1997, as noted. Except as set forth
in Note (3) below, "cash flow" and "monthly debt service" are as defined in
notes (1) and (3) to the previous table.
Monthly Debt Monthly
Monthly Cash Service on Payment to
Loan Flow from Refinancing or the Company's
Number Property Senior Lien Interests Interest
------ -------- --------------------- --------
030 $ 60,194 (1) $ - $ 60,194
031 41,445 (1) - 41,445
032 76,056 (1) - 76,056
033 21,940 (2) - 21,940
034 5,577 (1) - 5,577
035 25,131 (1) 6,250 18,881
036 31,598 (1) - 31,598
037 25,000 (1) - 25,000
038 77,400 (3) - 77,400 (3)
-------- ------ --------
$364,341 (4) $6,250 (4) $358,091 (4)
======== ====== ========
-22-
(1) Based upon cash flow for the three months ended November 30, 1997.
(2) Based upon cash flow for the two months ended November 30, 1997.
(3) Loan was originated by, and it is anticipated will be sold to, the REIT
and is a non- discounted loan. Accordingly "cash flow" consists of
required payments of principal and interest on the loan.
(4) Combined with the prior table, total monthly cash flow would be
$1,354,832 total monthly debt service on refinancings or senior lien
interests would be $496,798 and total monthly payment to the Company's
interest would be $858,034.
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 loan portfolio at cost,
which is significantly discounted from the face value of, and accrued interest
and penalties on, the notes. This discount (as adjusted to give effect to
refinancings and sales of senior lien interests) totaled $86.3 million, $40.0
million and $16.1 million at 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 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 loan portfolio. 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.
Commercial Mortgage Loan Acquisition and Resolution: Competition
-23-
Although the commercial mortgage loan acquisition and resolution
business is intensely competitive in virtually all of its aspects, the Company's
focus on the acquisition of relatively small troubled commercial mortgage loans
subject to complex and/or contentious situations is a niche in which the Company
believes there are relatively few, specialized investors. In the overall market
for the acquisition of real estate obligations, however, there are a substantial
number of competitors (including investment partnerships, financial
institutions, investment companies, public and private mortgage funds and other
entities), many of which possess far greater financial resources than the
Company. The Company's ability to add to its loan portfolio will depend on its
success in obtaining funding for the acquisition of additional mortgages. In
raising such funds in the financial capital markets, the Company will have to
compete for capital based largely on the Company's overall financial performance
and, more specifically, the performance of the Company's loan portfolio.
Residential Mortgage Loans
The Company's residential mortgage loan business focuses upon loans to
individuals secured by one- to four-family residences. 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). In addition, the Company originates "125
Loans" (that is, loans with a cumulative loan-to-value ratio of up to 125%)
provided that such loans are approved for acquisition by third-party purchasers
prior to funding. On November 5, 1997, the Company acquired Tri-Star, an
originator of non-conforming residential mortgage loans, which operates in six
states (Delaware, Maryland, New Jersey, Pennsylvania, Ohio and Virginia).
Tri-Star originated $46 million in mortgage loans in calendar year 1996 and, for
the first ten months of 1997, originated $51 million of residential mortgage
loans. FMF and Tri-Star, through which the Company conducts its residential
mortgage lending operations, are currently separate subsidiaries of the Company
which the Company anticipates merging upon completion of regulatory requirements
relating to transfer of residential mortgage lending licenses.
The Company 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 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. Although to date the Company has
funded substantially all of its loans through internally available resources,
the Company (through FMF) has arranged two warehouse
-24-
lines of credit, with an aggregate credit amount of $20 million, to fund its
lending operations. See "- Sources of Funds."
The Company anticipates that, in the first quarter of fiscal 1998, it
will commence sales or securitizations of residential mortgage loans held in its
portfolio. The Company (through FMF) is approved as a loan seller to six
investors (Unicor Mortgage, Inc., Industry Mortgage Company, Key Home Equity,
Delta Funding Corporation, Cityscape Corporation and The Money Store). The
Company anticipates that, initially, all loan sales will be on a
service-released basis. However, as FMF and Tri-Star develop their operations
and increase staffing, they may sell loans on a service-retained basis and may
retain certain loans for their portfolios.
Sponsorship of Real Estate Investment Trust
The Company is the sponsor of the REIT which has filed a registration
statement with the Securities and Exchange Commission for the public offer and
sale of its common shares of beneficial interest. The REIT's primary business
will be to acquire or originate mortgage loans in situations that, generally, do
not conform to the underwriting standards of institutional lenders or sources
that provide financing through securitization. Although the REIT may acquire
mortgage loans at a discount, it seeks to acquire such loans where the workout
process has been initiated and where, unlike the mortgage loans acquired by the
Company, there is no need for the REIT's active intervention. It is anticipated
that the REIT will commence operations in December, 1997.
As sponsor of the REIT, the Company will acquire 9.8% of the REIT's
common shares of beneficial interest upon completion of the REIT offering, at an
anticipated cost of approximately $11.4 million, and have the right to purchase
up to 15% of the REIT's common shares. So long as the Company owns 5% or more of
the REIT's common shares, the Company will have the right to nominate one person
to the REIT's board of trustees. The Company will sell 10 of its mortgage loans
and a senior lien interest in an eleventh loan (representing a net investment by
the Company at September 30, 1997 of $22.2 million) to the REIT, as part of the
REIT's initial investments, for $27.7 million. The Company may sell further
loans to the REIT, to a maximum of 30% of the REIT's investments (on a cost
basis), excluding the initial investments. Betsy Z. Cohen, spouse of the
Company's Chairman and Chief Executive Officer, is the Chairman and Chief
Executive Officer of the REIT. Jonathan Z. Cohen, the son of Mrs. Cohen and
Edward E. Cohen, Chairman and Chief Executive Officer of the Company, is the
Company's nominee to the REIT's board of trustees. To mitigate potential
conflicts of interest, the Company has agreed to certain restrictions for a
period of two years following completion of the REIT's offering of common
shares, including agreements not to sponsor another mortgage REIT and to provide
certain rights of first refusal on originated mortgage loans (but not mortgage
loans acquired from third parties) and on mortgage loans that the Company seeks
to sell.
-25-
Equipment Leasing
General
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 six 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 June
1996. FLPM's operations will be reduced over the next several years as
partnership assets are sold and cash is distributed back to the investors. FLPM
does not anticipate forming new limited partnerships in the future. FLFS will
continue to operate its lease finance placement and advisory business which,
while profitable, is not expected to constitute a material source of revenues
for the Company.
Strategy
Focus on Small Ticket Leasing. The Company focuses on leasing equipment
costing between $5,000 and $100,000. 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 business, a
segment of the end-user market the Company believes is under-served by equipment
lessors, banks and other financial institutions, thereby affording the Company a
niche market with significant growth potential (see "Strategy - Focus on Leasing
to Small Businesses," below). 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, Inc.) accounted for
23% and 6.6%, respectively, of the equipment (by cost) leased by the Company
during fiscal 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
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employees). The Company has acquired and developed credit evaluation and scoring
systems (based upon credit evaluation services provided by Dunn & Bradstreet)
which it believes significantly reduce the credit risk in dealing with small
business end-users (see "- 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. The principal benefit from this lease format is the
repayment to the Company during the lease term of its invested capital plus an
amount sufficient to cover its transaction costs and, typically, a minimum
return on its 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.
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. 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. 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
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equipment purchased by the Company, by product type and percentage of dollar
volume of equipment purchased, during fiscal years 1997 and 1996.
Equipment Volume by Product Type
(% by dollar volume of equipment purchased)
Fiscal Year Ended September 30,
1997 1996
---- ----
Document processing and storage......... 49% 73%
Telecommunications...................... 37% 21%
Computer systems........................ 8% 6%
Other................................... 6% -
---- ---
Total................................. 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, 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 "- Strategy: Focus on Vendor Programs."
The Company has currently entered into vendor program relationships with nine
vendors: Minolta Corporation (copiers), Celsis Incorporated (microbial testing
systems), American Marbacom Communications (Teleco) (telephone systems), CSi
(test equipment), Telrad Communications (telephone systems), CT
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Solutions (computer telephony), ATI Communications (telephone systems), the
National Association of College Stores (affinity program) and Millipore Corp.
(test equipment). In addition, Lucent Technologies (telecommunications
equipment) has designated the Company as an authorized lessor for its dealer
distribution channel. 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 a
significant portion of the Company's revenues from leasing operations will be
derived from residuals. The Company anticipates that residuals will principally
involve the original end-users; however, equipment not sold or re-leased to
end-users will be disposed of in the secondary market. While residual
realization is generally higher with original end-users than in the secondary
market, the secondary market (essentially, networks of distributors and dealers
in various equipment categories) is well developed in the product categories the
Company currently pursues and transactions in these product categories have
historically resulted in residual recoveries, on average, equal to the book
value of the equipment. Equipment reacquired by the Company prior to lease
termination (through lease default or otherwise) will be sold in the secondary
market.
Partnership Management
The Company acts as the general partner and manager of six public
limited partnerships formed between 1985 and 1990 with total assets at September
30, 1997 of $36.1 million, including $19.5 million (book value) of equipment
with an original cost of $55.2 million. The partnerships primarily lease
computers and related peripheral equipment to investment grade, middle market,
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.
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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 5% (one partnership), 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 $657,000 and
$650,000 during fiscal years 1997 and 1996, respectively.
Competition
The Company believes that, although the small ticket leasing business
has experienced substantial consolidation in the past few years, the business of
equipment leasing remains highly competitive. The Company believes, however,
that small ticket leasing, to be viable, requires the financing and monitoring
of large amounts of equipment and related assets. Because of the complexity and
cost of developing and maintaining the platforms and vendor programs to handle
such high volumes, the Company believes that there are substantial barriers to
others entering into this business. Accordingly, the Company believes that its
principal competitors are and will be primarily major financial institutions and
their affiliates. The Company also believes that the scale on which these
competitors generally operate inhibits their attention to the needs of the
Company's targeted market of small manufacturers and regional distributors and
provides the Company with an under-served market niche.
Energy Operations
General
The Company produces natural gas and, to a lesser extent, oil from
locations principally in Ohio, Pennsylvania and New York. At September 30, 1997,
the Company had (either directly or through partnerships and joint ventures
managed by it) interests in 1,129 wells, including overriding interests (of
which the Company operates 799 wells), 530 miles of natural gas
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pipelines and 81,000 acres of mineral rights, including the Company's
acquisition in June 1997 from a third party of wells, pipelines and acreage.
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 Appalachian crude oil.
Well Operations
The following table sets forth information as of September 30, 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......................... 157 60
Gas Wells......................... 810 526
--- ---
Total.......................... 967 586
=== ===
- ----------
(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 162 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 Year Oil(bbls) Gas(mcf) per bbl per mcf mcf(1)
----------- --------- -------- ------- ------- ------
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) Oil production is converted to mcf equivalents at the rate of six
mcf per barrel.
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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 fiscal years 1997, 1996 and
1995, regardless of when drilling was initiated.
Exploratory Wells Development Wells
----------------- -----------------
Productive Dry Productive Dry
Fiscal ---------------- --------------- -------------- -------------
Year Gross Net Gross Net Gross Net Gross Net
---- ----- --- ----- --- ----- --- ----- ---
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
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.
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 at September 30, 1997. See Note 13 to the
Consolidated Financial Statements.
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The following table sets forth information with respect to the
Company's developed and undeveloped oil and gas acreage as of September 30,
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........................... 12,772 10,649 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 - -
------ ------ ------ ----
89,609 50,456 32,987 30,907
====== ====== ====== ======
The terms of the oil and gas leases held by the Company's managed
partnerships and by the Company for its own account 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
were paid in fiscal 1997 to maintain leases on such acreage in force.
The Company believes that the partnership, joint venture and Company
properties have satisfactory title. The developed oil and gas properties are
subject to customary royalty interests generally contracted for in connection
with the acquisition of the properties, burdens incident to operating
agreements, current taxes and easements and restrictions (collectively,
"Burdens"). Presently, the partnerships, joint ventures and the Company are
current with respect to all such Burdens.
At September 30, 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 13%, 46% and 22%
interests), and for its own account, various gas gathering pipeline systems
totaling approximately 530 miles in length. Such pipeline systems are located in
Ohio, New York and Pennsylvania.
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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.
Major Customers
The Company's natural gas is sold under contract to various purchasers.
For the years ended September 30, 1997 and 1996, gas sales to two purchasers
accounted for 29% and 12%, and 29% and 13%, 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
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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. Since fiscal 1992, internally generated funds have been
augmented by sales of senior lien interests and refinancings by borrowers of the
Company's portfolio loans (see "- Commercial Mortgage Loan Acquisition and
Resolution: Sale of Senior Lien Interests and Refinancings"), by the issuance,
in May 1994, of an $8 million principal amount 9.5% Senior Note (which has since
been repaid) and, for the acquisition of one loan, purchase money financing of
$13.4 million (which has since been repaid). During fiscal 1997, the Company
entered into an initial $20 million credit facility for its equipment leasing
operations 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 million of its 12% Senior Notes due 2004 ("Senior
Notes") to a small group of institutional investors, resulting in $110.6 million
of net proceeds to the Company. In addition, in fiscal 1997 the Company sold
equipment leases with an the aggregate book value of $30.2 million for $33.9
million (including notes in aggregate face amount of $13.3 million).
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
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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.
Senior Lien Interests. In fiscal years 1994 and 1995, Physicians
Insurance Company of Ohio ("PICO") provided refinancing of $12 million with
respect to the Company's portfolio loans through the purchase of senior lien
interests in such loans. See "- Commercial Mortgage Loan Acquisition and
Resolution: Sale of Senior Lien Interests and Refinancings" and "- Loan Status."
If a borrower defaults in the payment of debt service on any of these senior
lien interests, the Company is required to replace the defaulted obligation with
a performing obligation. The Company receives an annual mortgage servicing fee
of 0.25% of the principal amount of any senior lien interests sold to PICO. In
connection with the sale of these senior lien interests and the issuance of the
9.5% Senior Note, PICO was issued warrants to purchase 983,150 shares of the
Company's common stock. PICO exercised these warrants in July 1997, from which
the Company realized $3.66 million. The 983,150 shares were subsequently resold
by PICO in a separate private placement to a small group of institutional
investors.
In fiscal 1996 and 1997, Commerce Bank, Philadelphia, Pennsylvania,
purchased senior lien interests in four of the Company's loans for $13.8 million
(of which two senior lien interests, for $4.0 million, have since been repaid).
The remaining senior lien interests must be repaid before June 27, 2002 ($1.8
million) and September 29, 2002 ($8 million). If either interest is not repaid
by its maturity date, the Company is required to repurchase it from Commerce for
a price equal to its unpaid principal balance plus accrued interest.
In fiscal 1997, Crusader Bank, Philadelphia, Pennsylvania ("Crusader")
purchased a senior lien interest in one of the Company's loans for $450,000. The
interest must be repaid before
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May 21, 2002. If not repaid by its maturity date, the Company is required to
repurchase the interest for a price equal to its unpaid principal balance plus
accrued interest.
In fiscal 1997, People's Thrift Savings Bank, Norristown, Pennsylvania
("People's Thrift") purchased senior lien interests in two of the Company's
loans, each in the amount of $750,000.
Each interest must be repaid before September 30, 2002.
The Company receives no servicing fees from the Commerce Bank, Crusader
Bank or People's Thrift Savings Bank senior lien interests.
Lease Financing Credit Facility. FLI entered into an initial $20
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 lines will have an interest rate equal to an adjusted London
Interbank Offered Rate ("LIBOR") plus 175 basis points, while term loans will
have an interest rate equal to an adjusted LIBOR plus 225 basis points; (ii) the
loans will be 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 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 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 shareholders' equity of $40 million. The facility expires on
March 31, 1998 but may be renewed annually by the lenders. 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.
Residential Mortgage Loan Credit Facilities. On September 23, 1997, FMF
entered into a $5 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 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.
On October 16, 1997, FMF established a $15 million warehouse credit
facility with Morgan Stanley Mortgage Capital, Inc., bearing interest at LIBOR
or, if unavailable, the
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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 million), and a ratio of total
indebtedness to tangible net worth of 10.0 to 1.0. The facility expires on
October 16, 1998.
Oil and Gas Credit Facility. On October 9, 1997, the Company obtained a
$5 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
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.
Employees
As of September 30, 1997, the Company employed 137 persons, including 8
in general corporate, 37 in real estate finance, 63 in equipment leasing and 29
in energy.
ITEM 2. 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 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 June 30, 1998 and June 30,
2007. 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 and an equipment lease
brokerage office in California at an aggregate rent of $46,000 per year.
Aggregate rent for all of the Company's offices was $238,600 for fiscal 1997.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq Stock Market under
the symbol "REXI." The following table sets forth the high and low sale prices,
as reported by Nasdaq, on a quarterly basis for the Company's last two full
fiscal years and the 1998 fiscal year through November 30, 1997:
High Low
---- ---
Fiscal 1998
First Quarter (through November 30, 1997) $56.50 $44.50
Fiscal 1997
Fourth Quarter.................................... 51.50 25.00
Third Quarter..................................... 26.25 19.00
Second Quarter.................................... 26.50 17.75
First Quarter..................................... 19.00 12.25
Fiscal 1996
Fourth Quarter.................................... 17.50 12.00
Third Quarter..................................... 21.19 12.83
Second Quarter ................................... 16.23 7.43
First Quarter..................................... 8.63 6.58
As of November 30, 1997, there were 4,749,463 shares of Common Stock
outstanding held by 800 holders of record.
The Company paid regular quarterly cash dividends on its Common Stock
of $.10 per share for each quarter in fiscal 1997 and for the last two quarters
of fiscal 1996. The Company paid dividends of $.094 and $.089 per share during
the second and first fiscal quarters of 1996.
The Company declared and paid 6% stock dividends in January 1996 and
April 1996, and effected a five-for-two stock split in the form of a 150% stock
dividend in May 1996. Under the terms of the Senior Notes, the payment of
dividends on the Company's Common Stock is restricted unless certain financial
tests are met. See "- Sources of Funds: Senior Notes."
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ITEM 6. SELECTED FINANCIAL DATA
Selected financial data as of and for the five years ended September
30, 1997 are as follows (all amounts in thousands except per share data):
For the Years Ended September 30,
---------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues
Real estate finance $19,144 $ 7,171 $ 6,114 $ 2,522 $ 606
Equipment leasing 7,162 4,466 - - -
Energy production 3,936 3,421 3,452 3,442 3,409
Energy services 1,672 1,736 1,879 2,080 2,445
Interest 930 197 149 136 106
------- ------- ------- ------- ------
Total revenues 32,844 16,991 11,594 8,180 6,566
Income from continuing operations
before income taxes 14,931 7,353 3,344 1,209 634
Provision (benefit) for income taxes 3,980 2,206 630 (100) 44
Income from continuing operations 10,951 5,147 2,714 1,309 590
Net income per share (primary) 2.51 1.88 1.23 .64 .30
Cash dividends per common share .40 .38 .09 - -
Balance Sheet Data
Total assets 195,119 43,959 37,550 34,796 25,231
Long-term debt less current maturities 118,786 8,966 8,523 8,627 813
Stockholders' equity 64,829 31,123 26,551 24,140 22,861
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company's operating results and financial condition reflect an
acceleration of its shift in focus to a specialty finance company from an energy
company following substantial increases in working capital due to the sale, in
December 1996, of 1.7 million common shares (from which it received net proceeds
of $19.5 million) and the issuance, in July 1997, of $115 million of senior
unsecured notes (from which it received net proceeds of $110.6 million). These
capital market transactions were primarily responsible for increasing the
Company's capitalization (stockholders' equity plus long-term debt) to $183.6
million in fiscal 1997 from $40.1 million in fiscal 1996, an increase of $143.5
million (358%). The Company's gross revenues were $32.8 million in fiscal 1997,
an increase of $15.8 million (93%) from $17.0 million in fiscal 1996, as
compared to an increase in fiscal 1996 of $5.4 million (47%) from $11.6 million
in fiscal 1995.
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As of September 30, 1997, total assets were $195.1 million, an increase of
$151.1 million (343%), from $44.0 million at September 30, 1996, as compared to
an increase of $6.4 million (17%) from $37.6 million at September 30, 1995. Of
the increases in total revenue during that period, the revenues from the
Company's commercial real estate mortgage loan acquisition and resolution
business were $19.1 million in fiscal 1997, an increase of $12.0 million (167%)
from $7.2 million in fiscal 1996, as compared to an increase of $1.1 million
(17%) in fiscal 1996 from $6.1 million in fiscal 1995. In addition, leasing
revenues were $7.2 million in fiscal 1997, an increase of $2.7 million (60%)
from $4.5 million in fiscal 1996, the year in which leasing operations
commenced. Energy revenues remained relatively constant at $5.6 million, $5.2
million and $5.3 million in fiscal 1997, 1996 and 1995, respectively. Specialty
finance revenues (real estate finance and equipment leasing) were 80%, 68% and
53% of total revenues in fiscal 1997, 1996 and 1995, respectively. Energy
revenues were 17%, 30% and 46% of total revenues at September 30, 1997, 1996 and
1995, respectively. Specialty finance assets were 53%, 57% and 51% of total
assets in fiscal 1997, 1996, and 1995, respectively. Energy assets were 8%, 29%
and 37% of total assets at September 30, 1997, 1996 and 1995, respectively.
Results of Operations: Commercial Mortgage Loan Acquisition and Resolution
The following table sets forth certain information relating to the
revenue recognized on the Company's commercial loan portfolio during the periods
indicated:
Years Ended September 30,
-------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Interest........................................ $ 4,877 $ 1,899 $ 2,246
Accreted discount............................... 4,124 954 1,176
Fees............................................ 2,556 675 963
Gains on refinancings and sale
of senior lien interests...................... 7,587 3,643 1,729
------- ------- -------
Total........................................... $19,144 $7,171 $6,114
------- ------ ------
Average balance of investments, net............. $55,307 $19,804 $17,683
Yield on net average balance.................... 34.7% 36.2% 34.6%
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
During fiscal 1997, the Company purchased or originated eighteen loans,
for a total cost of $71.7 million, as compared to the purchase of nine loans for
a total of $15.1 million in fiscal 1996. The average investment in the eighteen
loans was $4.0 million and ranged from a high of $19.2 million to a low of
$400,000, whereas in fiscal 1996, the average investment in the nine loans was
$1.7 million and ranged from a high of $3.8 million to a low of $100,000. In
addition, the Company increased its investment in certain existing loans by an
aggregate of $1.9 million in fiscal 1997, and an aggregate of $2.6 million in
fiscal 1996 for purposes of paying for
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property improvement costs, unpaid taxes and similar items relating to
properties underlying portfolio loans. The increased investments had been
anticipated by the Company at the time of loan acquisition and were included in
its analysis of loan costs and yields.
Revenues from commercial mortgage loan acquisition and resolution
operations increased to $19.1 million in fiscal 1997 from $7.2 million in fiscal
1996, an increase of 167%. The increase in fiscal 1997 was attributable to (i)
an increase of $6.1 million (215%) in interest income (including accretion of
discount) resulting from an increase in the average amount of loans outstanding
during fiscal 1997 as compared to the prior fiscal year and (ii) gains
recognized on the refinancing of loans and sale of senior lien interests in
loans held by the Company which increased to $7.6 million in fiscal 1997 from
$3.6 million in fiscal 1996, an increase of $4.0 million (108%). Fees increased
to $2.6 million in fiscal 1997 from $675,000 in fiscal 1996 an increase of $1.9
million (279%) due to the Company's increased ability to utilize its expertise
in financial, partnership and income tax structuring; services related to
bankruptcy issues of borrowers; and real estate management oversight services.
Fees vary from transaction to transaction and there may be significant
variations in the Company's fee income from period to period. The Company sold
senior lien interests in or refinanced eight loans during each of fiscal 1997
and fiscal 1996, realizing proceeds of $16.5 million and $18.0 million,
respectively. Real estate costs and expenses increased 25% in fiscal 1997
compared to fiscal 1996. The increase was primarily a result of higher personnel
costs associated with the expansion of this operation. As a consequence of the
foregoing, the Company's gross profit from commercial mortgage loan acquisition
and resolution operations increased to $16.5 million in fiscal 1997 from $6.3
million in fiscal 1996 (163%).
Year Ended September 30, 1996 Compared to Year Ended September 30, 1995
Revenues from commercial mortgage loan acquisition and resolution
operations increased to $7.2 million in fiscal 1996 from $6.1 million in fiscal
1995. This increase was attributable to increases of 111% in gains recognized on
the refinancing of loans and sale of senior lien interests in loans held by the
Company. Fees decreased 30% in fiscal 1996 as compared to fiscal 1995 due to a
reduction in the number of refinancings of, and sales of senior lien interests
in, certain of the Company's portfolio loans occurring during fiscal 1996 as
compared to fiscal 1995. The Company sold senior lien interests in or refinanced
eight and eleven loans during fiscal years 1996 and 1995, respectively,
realizing proceeds of $18.0 million and $10.2 million, respectively.
During fiscal 1996, the Company purchased or originated nine real
estate loans, for a total cost of $15.1 million, as compared to seven loans for
a total of $13.6 million in fiscal 1995. In addition, the Company increased its
investment in certain existing loans by $2.6 million in fiscal 1996 and $1.3
million in fiscal 1995 for purposes of paying for property improvement costs,
unpaid taxes and similar items relating to properties underlying portfolio
loans. The increased investments had been anticipated by the Company at the time
of loan acquisition and were included in its analysis of loan costs and yields.
In addition, in fiscal 1996 the Company increased its investment in loans by
$535,000 in connection with its repurchase of certain senior lien interests to
facilitate borrower refinancings and received a note for $317,000 (thus
increasing
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its investment in loans) in connection with granting its consent to the sale
(subject to the Company's existing mortgage loan) of another property by a
borrower. Real estate costs and expenses increased 6% in fiscal 1996 as compared
to fiscal 1995. The increase was primarily a result of higher personnel costs
associated with the expansion of these operations. It should be noted that
certain reclassifications have been made to the consolidated financial
statements for fiscal years 1996 and 1995 to conform to the fiscal 1997
presentation.
As a consequence of the foregoing, the Company's gross profit from
commercial mortgage loan acquisition and resolution operations increased to $6.3
million for fiscal 1996 from $5.3 million for fiscal 1995 (19%).
Results of Operations: Equipment Leasing
The following table sets forth certain information relating to the
revenue recognized in the Company's equipment leasing operations during the
periods indicated:
Years Ended
September 30,
------------------
1997 1996
---- ----
(in thousands)
Small ticket leasing
Gain on sale of leases........................ $3,711 $ -
Interest and fees............................. 1,081 7
Partnership management........................... 1,713 3,809
Lease finance placement and
advisory services.............................. 657 650
------ ------
Total......................................... $7,162 $4,466
====== ======
The following table sets forth certain information relating to expenses
recognized in the Company's equipment leasing operations during the periods
indicated:
Years Ended
September 30,
------------------
1997 1996
---- ----
(in thousands)
Small ticket leasing.............................. $2,051 $ 425
Partnership management............................ 1,243 1,471
Lease finance placement and
advisory services............................... 528 443
------ ------
Total.......................................... $3,822 $2,339
====== ======
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In June 1996, the Company entered the "small ticket" leasing business
and began writing leases in August 1996. In fiscal 1997, the Company acquired
equipment for lease with a cost of $34.6 million. During the year ended
September 30, 1997, the Company sold leases with a book value of approximately
$30.2 million to special-purpose financing entities in return for cash of $20.6
million and notes with face values of $13.3 million, resulting in gains on sale
of $3.7 million. During fiscal 1997, the Company collected $8.5 million in
principal payments on the notes.
Small ticket leasing expenses increased as a result of the start-up of
small ticket leasing activities in June 1996. Partnership management expenses
decreased as a result of the liquidation of one partnership. Lease placement and
advisory expenses increased as a result of an increase in commissions paid.
The decrease in partnership management revenue in fiscal 1997 as
compared to the prior year period was the result of the liquidation, in
accordance with the terms of its partnership agreement, of one leasing
partnership in the first quarter of fiscal 1996. Partnership management revenue
in fiscal 1996 includes the settlement of the Company's general partner share of
revenues from prior fiscal periods. The Company now acts as general partner for
six limited partnerships which held a total of $55.2 million (original equipment
cost) in leased assets at September 30, 1997.
Results of Operations: Energy
Oil and gas revenues from production sales increased 16% in fiscal 1997
as compared to fiscal 1996, which remained essentially constant from fiscal
1995.
A comparison of oil and gas sales revenue, daily production volumes,
and average sales prices for the years indicated is as follows:
Years Ended September 30,
-------------------------
1997 1996 1995
---- ---- ----
Sales (in thousands)
Gas(1)....................................... $ 3,178 $ 2,722 $ 2,762
Oil........................................... $ 705 $ 627 $ 610
Production volumes (in thousands)
Gas (mcf/day)(1).............................. 3,364 3,184 3,283
Oil (bbls/day)................................ 98 93 100
Average sales prices
Gas (per mcf)................................. $ 2.59 $ 2.34 $ 2.31
Oil (per bbl).............................. $ 19.68 $ 18.53 $ 16.74
- ----------
(1) Excludes sales of residual gas and sales to landowners.
-44-
Natural gas revenues from production sales increased 17% in fiscal 1997
from fiscal 1996 due to a 6% increase in production volumes and an 11% increase
in the average price per mcf of natural gas. In fiscal 1996, natural gas
revenues decreased 1% from fiscal 1995 as a result of a 3% decrease in
production volumes partially offset by a 1% increase in the average price per
mcf of natural gas. Oil revenues increased by 12% in fiscal 1997 from fiscal
1996 due to a 6% increase in the average price per barrel and a 5% increase in
production volumes. Primarily as a result of these changes, the Company's
operating profit from energy production (energy production revenues less energy
production and exploration costs) increased to $1.6 million in fiscal 1997 from
$1.4 million in fiscal 1996 and $1.1 million in fiscal 1995.
The Company continues to experience normally declining production from
its properties located in New York State. This decline has been offset by the
acquisition of additional well interests in Ohio in June 1997. The Company
participated in the drilling of three successful exploratory wells and two
successful developmental wells during 1996. The impact on revenues from these
wells were realized in the Company's financial statements in fiscal 1997. In
fiscal 1995, the Company participated in the drilling of three successful
exploratory wells and recompleted one successful development well.
A comparison of the Company's production costs as a percentage of oil
and gas sales, and the production cost per equivalent unit for oil and gas for
fiscal years 1997, 1996 and 1995, is as follows:
Years Ended September 30,
-------------------------
1997 1996 1995
---- ---- ----
Production Costs
As a percent of sales........................ 42% 42% 44%
Gas (mcf).................................... $1.13 $1.04 $1.06
Oil (bbl).................................... $6.80 $6.23 $6.36
Production costs increased $215,000 (15%) in fiscal 1997 from fiscal
1996 as a result of a increase in the number of wells requiring cleanout and
workover operations. These operations are conducted on an as-needed basis and,
accordingly, costs incurred by the Company may vary from year to year.
Production costs also increased in fiscal 1997 as the result of the acquisition
of interests in 288 wells in Ohio. Production costs decreased $81,000 (5%) in
fiscal 1996 from fiscal 1995, a result of a decrease in the number of wells
requiring cleanout and workover operations.
Exploration costs increased $26,000 (16%) in fiscal 1997 and decreased
$69,000 (30%) in fiscal 1996 from the previous fiscal periods. The fiscal 1997
increase was the result of an increase in delay rentals paid on lease acreage
held by the Company. During fiscal 1997, the Company participated in one
successful exploratory well and had lease value impairments totalling $6,000.
The 1996 decrease resulted from a decrease in delay rentals and impairment of
lease costs which resulted from a termination of certain leases in New York
State in fiscal
-45-
1995 and reduced costs relating to dry holes. During fiscal 1996 the Company
participated in one exploratory dry hole and had lease impairments totaling
$50,000. During fiscal 1995, the Company's participation in two exploratory dry
holes and lease impairments and delay rentals totaled $145,000.
Amortization of oil and gas property costs as a percentage of oil and
gas revenues was 18% in fiscal 1997, 23% in fiscal 1996 and 27% in fiscal 1995.
The variance from year to year is directly attributable to changes in the
Company's oil and gas reserve quantities, product prices and fluctuations in the
depletable cost basis of oil and gas properties. See Note 2 to the Consolidated
Financial Statements.
Results of Operations: Other Income (Expense)
General and administrative expense increased by $1.1 million (62%) for
fiscal 1997 as compared to fiscal 1996 primarily as a result of costs associated
with the Company's residential mortgage loan business, higher legal and
professional fees and the payment of incentive and retirement compensation to
executive officers. General and administrative expense decreased $509,000 (22%)
for the year ended September 30, 1996 as compared to the same period in fiscal
1995 primarily as a result of a decrease in executive compensation due to the
death of a senior officer in July 1995 and the reclassification of wages which
were previously in general and administrative expense to real estate expense.
Interest expense increased to $5.3 million in fiscal 1997 from $872,000
in fiscal 1996, an increase of $4.4 million (505%) reflecting the increases in
borrowings to fund the growth of the Company's real estate finance and small
ticket leasing operations. In July 1997, the Company issued $115 million of its
Senior Notes and in December 1996, the Company incurred purchase money financing
of $13.4 million to fund the acquisition of a series of mortgage loans on a
property located in Philadelphia, Pennsylvania (see Note 6 to Consolidated
Financial Statements). This borrowing was repaid in July 1997. Interest expense
decreased $219,000 during fiscal 1996 as a result of a decrease in average debt
outstanding during the period due to loan repayments.
The effective tax rate decreased to 27% in fiscal 1997 from 30% in
fiscal 1996 which increased from 19% in fiscal 1995. The fiscal 1997 decrease
resulted from the purchase of real estate loans which generate tax exempt
interest as well as the investment in several low-income housing partnerships
and the low income housing tax credits associated with such investments. The
increase from fiscal 1995 to fiscal 1996 was the result of a continuing decrease
in the generation of depletion (for tax purposes) and tax credits in relation to
net income.
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Liquidity and Capital Resources
Sources and uses of cash and cash equivalents for the three years ended
September 30, 1997, 1996 and 1995 are as follows:
1997 1996 1995
---- ---- ----
(in thousands)
Provided by operating activities................ $ 4,091 $2,959 $1,578
Used in investing activities.................... (63,139) (1,060) (6,113)
Provided by (used in) financing
activities................................... 124,173 (202) 4,395
-------- ------- ------
$ 65,125 $1,697 $ (140)
======== ====== ======
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
As discussed above, the Company was able to raise net proceeds of $19.5
million from its equity offering and $110.6 million from its offering of Senior
Notes during fiscal 1997. These activities, coupled with the Company's increased
profitability, resulted in the Company having $69.3 million in cash and cash
equivalents on hand at September 30, 1997, as compared to $4.2 million at
September 30, 1996. The Company's ratio of current assets to current liabilities
was 6.7 to 1.0 at September 30, 1997 and 3.7 to 1.0 at September 30, 1996. The
Company's ratio of earnings to fixed charges was 3.8 to 1.0 at September 30,
1997 and 9.4 to 1.0 at September 30, 1996. Working capital at September 30, 1997
was $61.4 million as compared to $4.4 million at September 30, 1996, as the
Company had not fully deployed the proceeds from the Senior Notes offering.
Cash provided by operating activities increased $1.1 million, or 38%,
during fiscal 1997, as compared to fiscal 1996. The fiscal 1997 increase was
primarily the result of an increase in operating income in the commercial real
estate mortgage loan acquisition and resolution and equipment leasing
businesses.
The Company's cash used in investing activities increased $62.1 million
in fiscal 1997 as compared to fiscal 1996. The increase resulted primarily from
increases in the amount of cash used to fund commercial mortgage loan
acquisition and resolution activities. The Company invested $71.7 million and
$15.1 million in the acquisition of eighteen and nine loans in fiscal years 1997
and 1996, respectively. In addition, the Company advanced funds on existing
loans of $1.9 million and $2.6 million in fiscal years 1997 and 1996,
respectively.
Proceeds received upon refinancings or the sale of senior lien
interests amounted to $16.5 million and $18.5 million in fiscal years 1997 and
1996, respectively. Cash used for capital expenditures increased $694,000, or
63%, during fiscal year 1997 over fiscal 1996. The 1997
-47-
increase includes $507,000 in capital expenditures relating to the Company's
residential mortgage loan business. During fiscal 1997, the Company invested
$1.2 million in 288 wells, operating rights and pipelines located in Ohio. The
cost of equipment acquired for lease was $34.6 million in fiscal 1997 as
compared to $731,000 in fiscal 1996, an increase of $33.9 million, as a result
of the full year's activity for the small ticket leasing business in fiscal 1997
as compared to two months in fiscal 1996.
The Company's cash flow provided by financing activities increased
$124.4 million during fiscal 1997, as compared to fiscal 1996 as a result of the
additional borrowings discussed above.
Year Ended September 30, 1996 Compared to Year Ended September 30, 1995
The Company had $4.2 million in cash and cash equivalents on hand at
September 30, 1996, as compared to $2.5 million at September 30, 1995. The
Company's ratio of current assets to current liabilities was 3.7 to 1.0 at
September 30, 1996 and 3.0 to 1.0 at September 30, 1995. Working capital at
September 30, 1996 was $4.4 million as compared to $2.6 million at September 30,
1995.
Cash provided by operating activities increased $1.4 million, or 88%
during fiscal 1996, as compared to fiscal 1995. This increase was primarily the
result of an increase in operating income in the commercial mortgage loan
acquisition and resolution and equipment leasing businesses.
The Company's cash used in investing activities decreased $5.1 million
or 83% during fiscal 1996, as compared to fiscal 1995. The change resulted
primarily from changes in the amount of cash used to fund commercial mortgage
loan acquisition and resolution activities. The Company invested $15.1 million
and $13.6 million in the acquisition of nine and seven loans in fiscal years
1996 and 1995, respectively. In addition, the Company advanced funds on existing
loans of $2.6 million and $1.3 million in fiscal years 1996 and 1995,
respectively, and in fiscal 1996 increased its investment in certain existing
loans by $852,000.
Proceeds received upon refinancings or the sale of senior lien
interests amounted to $18.5 million and $10.2 million in fiscal years 1996 and
1995, respectively. Cash used for capital expenditures increased $280,000, or
34% during fiscal year 1996 over the previous period. This increase includes
$506,000 in capital expenditures relating to the start-up of small ticket
leasing operations. Cost of equipment acquired for lease represents the
equipment cost and initial direct costs associated with the start up of small
ticket leasing operations. The Company commenced leasing operations for its own
account in June 1996 and began to write leases in August 1996.
Cash flow provided by financing activities decreased $4.6 million
during fiscal 1996, as compared to fiscal 1995. During fiscal 1995, the Company
(i) sold a $2.0 million senior lien interest, (ii) borrowed $2.5 million and
(iii) was able to release for corporate investment purposes $4.9 million of
restricted cash as a result of the purchase of loans for the Company's
portfolio.
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Dividends
In fiscal years 1997, 1996 and 1995, $1.4 million, $757,000 and
$161,000 were paid in dividends, respectively. The Company has paid regular
dividends since August 1995.
The determination of the amount of future cash dividends, if any, to be
declared and paid is in the sole discretion of the Company's Board of Directors
and will depend on the various factors affecting the Company's financial
condition and other matters the Board of Directors deems relevant.
Inflation and Changes in Prices
Inflation affects the Company's operating expenses and increases in
those expenses may not be recoverable by increases in finance rates chargeable
by the Company. Inflation also affects interests rates and movements in rates
may adversely affect the Company's profitability.
The Company's revenues and the value of its oil and gas properties have
been and will continue to be affected by changes in oil and gas prices. Oil and
gas prices are subject to fluctuations which the Company is unable to control or
accurately predict.
Computer Systems and Year 2000 Issue
The "year 2000 issue" is the result of computer programs being written
using two digits, rather than four digits, to identify the year in a date field.
Any computer programs using such a system, and which have date sensitive
software, will not be able to distinguish between the year 2000 and the year
1900. This could result in miscalculations or an inability to process
transactions, send invoices or engage in similar normal business activities.
Based upon a recent assessment by the Company, the Company has in place
year 2000 capable systems for its equipment leasing and residential mortgage
loan operations. The Company's commercial mortgage loan acquisition and
resolution operations will be required to purchase year 2000 capable computer
software, but believes that its requirements can be met by commercially
available software. The Company has determined that it will be required to
modify and, possibly, replace material portions of the software relating to its
energy operations, and has commenced the remediation process. With respect to
both its commercial mortgage loan acquisition and resolution operations and its
energy operations, the Company anticipates that remediation will be completed on
or before March 31, 1999 and that the aggregate costs of such remediations will
not be material.
The Company has made inquiries concerning the year 2000 issue to its
significant suppliers of services (including BCMI) and, with respect to its
energy operations, the two largest purchasers of its products. Based thereon,
the Company believes that it will not be materially adversely impacted by year
2000 issues pertaining to such entities. However, there can be no assurance that
the systems of third parties will be year 2000 compatible in a timely fashion,
or
-49-
that failure to achieve compatibility by such entities will not have a material
adverse effect on the Company.
Environmental Regulation
A continued trend to greater environmental and safety awareness and
increasing environmental regulation has resulted in higher operating costs for
the oil and gas industry and the Company. The Company monitors environmental and
safety laws and believes it is in compliance with such laws and applicable
regulations thereunder. To date, compliance with environmental laws and
regulations has not had a material impact on the Company's capital expenditures,
earnings or competitive position. The Company believes, however, that
environmental and safety costs will increase in the future. There can be no
assurance that compliance with such laws will not, in the future, materially
impact the Company.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Certified Public Accountants
Stockholders and Board of Directors
RESOURCE AMERICA, INC.
We have audited the accompanying consolidated balance sheets of
Resource America, Inc. and subsidiaries as of September 30, 1997 and 1996, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years in the period ended September 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Resource America, Inc. and subsidiaries as of September 30, 1997 and 1996, and
the consolidated results of their operations and cash flows for each of the
three years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles.
We have also audited Schedule IV as of September 30, 1997. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ Grant Thornton LLP
- --------------------------------
Grant Thornton LLP
Cleveland, Ohio
November 6, 1997
-51-
RESOURCE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
1997 1996
--------- ---------
(in thousands)
ASSETS
Current Assets
Cash and cash equivalents ................................... $ 69,279 $ 4,154
Accounts and notes receivable ............................... 2,414 1,479
Prepaid expenses and other current assets ................... 576 473
--------- ---------
Total current assets ................................. 72,269 6,106
Investments in Real Estate Loans (less allowance for
possible losses of $400 and $0) ............................. 88,816 21,798
Notes Secured by Equipment Leases ............................. 4,761 --
Net Investment in Direct Financing Leases
(less allowance for possible losses of $248 and $7) .. 3,391 729
Property and Equipment
Oil and gas properties and equipment (successful efforts) ... 24,939 24,035
Gas gathering and transmission facilities ................... 1,606 1,536
Other ....................................................... 2,874 1,666
--------- ---------
29,419 27,237
Less accumulated depreciation, depletion, and amortization .. (15,793) (14,857)
--------- ---------
13,626 12,380
Other Assets (less accumulated amortization of $1,014 and $885) 12,256 2,946
--------- ---------
$ 195,119 $ 43,959
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt ........................ $ 708 $ 105
Accounts payable ............................................ 1,339 585
Accrued interest ............................................ 2,734 253
Accrued liabilities ......................................... 1,967 344
Estimated income taxes ...................................... 4,093 377
--------- ---------
Total current liabilities ............................ 10,841 1,664
Long-Term Debt, less current maturities ....................... 118,786 8,966
Other Long-Term Liabilities ................................... 663 --
Deferred Income Taxes ......................................... -- 2,206
Commitments and Contingencies
Stockholders' Equity
Preferred Stock, $1.00 par value; 1,000,000 authorized shares -- --
Common Stock, $.01 par value; 8,000,000 authorized shares ... 54 20
Additional paid-in capital .................................. 56,787 21,761
Retained earnings ........................................... 22,005 12,458
Less treasury stock, at cost ................................ (13,664)
Less loan receivable from Employee Stock Ownership Plan ..... (353) (417)
--------- ---------
Total stockholders' equity ........................... 64,829 31,123
--------- ---------
$ 195,119 $ 43,959
========= =========
See accompanying notes to consolidated financial statements.
-52-
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
(in thousands, except per share data)
REVENUES
Real Estate Finance ....................... $ 19,144 $ 7,171 $ 6,114
Equipment Leasing ......................... 7,162 4,466 --
Energy: Production ........................ 3,936 3,421 3,452
Services ........................ 1,672 1,736 1,879
Interest .................................. 930 197 149
----------- ----------- -----------
32,844 16,991 11,594
COSTS AND EXPENSES
Real Estate Finance ....................... 1,069 852 801
Equipment Leasing ......................... 3,822 2,339 --
Energy: Exploration and Production ........ 1,823 1,582 1,733
Services ........................ 909 869 1,026
General and Administrative ................ 2,851 1,756 2,265
Depreciation, Depletion and Amortization .. 1,614 1,368 1,335
Interest .................................. 5,273 872 1,091
Provision for Possible Losses ............. 653 7 --
Other - Net ............................... (27) -- (2)
----------- ----------- -----------
17,987 9,645 8,249
----------- ----------- -----------
Income from Operations ........... 14,857 7,346 3,345
OTHER INCOME (EXPENSE)
Gain (Loss) on Sale of Property ........... 74 7 (1)
----------- ----------- -----------
Income Before Income Taxes ................ 14,931 7,353 3,344
Provision for Income Taxes ................ 3,980 2,206 630
----------- ----------- -----------
Net Income ................................ $ 10,951 $ 5,147 $ 2,714
=========== =========== ===========
Net Income Per Common Share - Primary ..... $ 2.51 $ 1.88 $ 1.23
----------- ----------- -----------
Weighted Average Common Shares Outstanding 4,358,400 2,756,900 2,235,400
=========== =========== ===========
Net Income Per Common Share - Fully Diluted $ 2.50 $ 1.87 $ 1.18
----------- ----------- -----------
Weighted Average Common Shares Outstanding 4,385,200 2,763,000 2,292,700
=========== =========== ===========
See accompanying notes to consolidated financial statements.
-53-
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(dollar amounts in thousands)
Additional ESOP Total
Common Stock Paid-In Retained Treasury Stock Loan Stockholders'
Shares Amount Capital Earnings Shares Amount Receivable Equity
------ ------ ------- -------- ------ ------ ---------- ------
Balance, October 1, 1994 817,912 $ 8 $ 19,136 $ 7,979 (131,402) $ (2,437) $(546) $24,140
Treasury shares acquired (21,298) (284) (284)
Cash dividends ($.09 per share) (161) (161)
Warrants issued 78 78
Repayment of ESOP loan 64 64
Net income 2,714 2,714
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 817,912 $ 8 $ 19,214 $10,532 (152,700) $(2,721) $(482) $26,551
Treasury shares issued (24) 1,889 39 15
6% stock dividends 82,688 1 2,453 (2,453) 1
5 for 2 stock split effected
in the form of a 150%
stock dividend 1,136,609 11 (11)
Issuance of common stock 10,000 77 77
Treasury shares acquired (1,637) (17) (17)
Cash dividends ($.38 per share) (757) (757)
Warrants issued 41 41
Repayment of ESOP loan 65 65
Net income 5,147 5,147
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 2,047,209 $20 $21,761 $12,458 (152,448) $(2,699) $(417) $31,123
Treasury shares issued (34) 23,023 483 449
Issuance of common stock 3,363,436 34 35,060 35,094
Treasury shares acquired (579,623) (11,448) (11,448)
Cash dividends ($.40 per share) (1,404) (1,404)
Repayment of ESOP loan 64 64
Net income 10,951 10,951
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 5,410,645 $54 $56,787 $22,005 (709,048) $(13,664) $(353) $64,829
========= === ======= ======= ======== ======== ===== =======
See accompanying notes to consolidated financial statements
-54-
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 10,951 $ 5,147 $ 2,714
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ...................... 1,614 1,368 1,335
Amortization of discount on senior note and deferred
finance costs .................................... 657 75 74
Provision for losses ............................... 653 7 --
Deferred income taxes .............................. (2,206) 1,059 473
Accretion of discount .............................. (4,124) (954) (1,176)
Gain on asset dispositions ......................... (11,375) (3,650) (1,727)
Property impairments and abandonments .............. 38 71 56
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable ......... (935) (175) 81
(Increase) decrease in prepaid expenses
and other current assets ......................... (103) (310) 88
Increase (decrease) in accounts payable ............ 754 (137) (291)
Increase (decrease) in accrued income taxes ........ 3,716 377 (100)
Increase in other liabilities ...................... 4,451 81 51
--------- --------- ---------
Net cash provided by operating activities ............. 4,091 2,959 1,578
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, less cash acquired ........... (1,226) -- (877)
Cost of equipment acquired for lease .................. (34,567) (731) --
Capital expenditures .................................. (1,791) (1,097) (817)
Principal payments on notes receivable ................ 8,514 -- --
Proceeds from sale of assets .......................... 37,713 18,577 10,348
Increase in other assets .............................. (3,319) (152) (59)
Investments in real estate loans ...................... (69,857) (17,650) (14,708)
Payments received (revenue recognized) in excess of
revenue recognized (cash received) on leases ........ 1,394 (7) --
--------- --------- ---------
Net cash used in investing activities ................. (63,139) (1,060) (6,113)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings .................................. 129,320 536 2,000
Dividends paid ........................................ (1,404) (756) (161)
(Increase) decrease in other assets ................... (5,376) (31) 4,864
Principal payments on debt ............................ (22,148) (27) (4,524)
Purchase of treasury stock ............................ -- (17) (284)
Increase in short term borrowings ..................... -- -- 2,500
Proceeds from issuance of stock ....................... 23,781 93 --
--------- --------- ---------
Net cash provided by (used in) financing activities ... 124,173 (202) 4,395
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ...... 65,125 1,697 (140)
Cash and cash equivalents at beginning of year ........ 4,154 2,457 2,597
--------- --------- ---------
Cash and cash equivalents at end of year .............. $ 69,279 $ 4,154 $ 2,457
========= ========= =========
See accompanying notes to consolidated financial statements
-55-
NOTE 1-NATURE OF OPERATIONS
Resource America, Inc. (the "Company") is a specialty finance company
engaged in three lines of business: (1) the financing of mortgage loans,
including the acquisition and resolution of commercial real estate loans and,
beginning in the fiscal year ending September 30, 1998, the origination,
acquisition and sale of residential loans; (2) commercial equipment leasing, and
(3) energy operations, including natural oil and gas production. Based on net
assets and net income, the financing of mortgage loans is the dominant current
business line.
The markets for the Company's business lines are as follows: in the
financing of mortgage loans, the Company obtains its commercial mortgage loans
on properties located throughout the United States from various financial
institutions and other organizations, while its residential mortgage loans will
be obtained through direct mail supported by outbound telemarketing and several
wholesale channels to potential borrowers throughout the United States; in
commercial equipment leasing, the Company markets its equipment leasing products
nationwide through equipment manufacturers, regional distributors and other
vendors; and in energy, gas is sold to a number of customers such as gas brokers
and local utilities; oil is sold at the well site to regional oil refining
companies in the Appalachian basin.
The Company's ability to acquire and resolve commercial mortgage loans,
obtain residential mortgage loans and to fund equipment lease transactions will
be dependent on the continued availability of funds. The availability of
third-party financing for each of these specialty finance businesses will be
dependent upon a number of factors over which the Company has limited or no
control, including general conditions in the credit markets, the size and
liquidity of the market for the types of real estate loans or equipment leases
in the Company's portfolio and the respective financial performance of the loans
and equipment leases in the Company's portfolio.
The Company's growth will also depend on its continued ability to
generate attractive opportunities for acquiring commercial mortgage loans at a
discount and to originate equipment leases. The availability of loans for
acquisition on terms acceptable to the Company will be dependent upon a number
of factors over which the Company has no control, including economic conditions,
interest rates, the market for and value of properties securing loans which the
Company may seek to acquire, and the willingness of financial institutions to
dispose of troubled or under-performing loans in their portfolios.
Mortgage loans and equipment leases are subject to the risk of default
in payment by borrowers and lessees. Mortgage loans are further subject to the
risk that declines in real estate values could result in the Company being
unable to realize the property values projected.
-56-
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company, and its wholly owned subsidiaries and its pro rata share of the assets,
liabilities, income, and expenses of the oil and gas partnerships in which the
Company has an interest. All material intercompany transactions have been
eliminated. All per share amounts and references to numbers of shares give
effect to 6% stock dividends paid in both January and April 1996 and a
five-for-two stock split (effected in the form of a 150% stock dividend) in May
1996.
Use of Estimates
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. If it is determined that an asset's estimated future cash flows
will not be sufficient to recover its carrying amount, an impairment charge will
be recorded to reduce the carrying amount for that asset to its estimated fair
value.
Stock-Based Compensation
The Company adopted the disclosure only option under Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock Based
Compensation, effective January 1, 1997. As such, the Company recognizes
compensation expense with respect to stock option grants to employees using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25.
Accordingly, SFAS No. 123 had no impact on the Company's financial position or
results of operations (see Note 9).
Transfers of Financial Assets
The Company adopted SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities effective
January 1, 1997. This statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. Earlier or retroactive application was
not permitted. The adoption of SFAS 125 did not have a material impact on the
Company's financial position or results of operations.
-57-
Oil and Gas Properties
The Company follows the successful efforts method of accounting.
Accordingly, property acquisition costs, costs of successful exploratory wells,
all development costs, and the cost of support equipment and facilities are
capitalized. Costs of unsuccessful exploratory wells are expensed when such
wells are determined to be nonproductive. The costs associated with drilling and
equipping wells not yet completed are capitalized as uncompleted wells,
equipment, and facilities. Geological and geophysical costs and the costs of
carrying and retaining undeveloped properties, including delay rentals, are
expensed as incurred.
Production costs, overhead, and all exploration costs other than costs
of exploratory drilling are charged to expense as incurred.
Unproved properties are assessed periodically to determine whether
there has been a decline in value and, if such decline is indicated, a loss is
recognized. The Company compares the carrying value of its oil and gas producing
properties to the estimated future cash flow, net of applicable income taxes,
from such properties in order to determine whether their carrying values should
be reduced. No adjustment was necessary during the fiscal years ended September
30, 1997, 1996 or 1995.
On an annual basis, the Company estimates the costs of future
dismantlement, restoration, reclamation, and abandonment of its gas and oil
producing properties. Additionally, the Company evaluates the estimated salvage
value of equipment recoverable upon abandonment. At both September 30, 1997 and
1996 the Company's evaluation of equipment salvage values was greater than or
equal to the estimated costs of future dismantlement, restoration, reclamation,
and abandonment.
Depreciation, Depletion and Amortization
Proved developed oil and gas properties, which include intangible
drilling and development costs, tangible well equipment, and leasehold costs,
are amortized on the unit-of-production method using the ratio of current
production to the estimated aggregate proved developed oil and gas reserves.
Depreciation of property and equipment, other than oil and gas
properties, is computed using the straight-line method over the estimated
economic lives, which range from 3 to 25 years.
Other Assets
Included in other assets are intangible assets that consist primarily of
contracts acquired through acquisitions recorded at fair value on their
acquisition dates, the excess of the acquisition cost over the fair value of the
net assets of a business acquired (goodwill) and deferred financing costs. The
contracts acquired are being amortized on a declining balance
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method over their respective estimated lives, ranging from five to thirteen
years, goodwill is being amortized on a straight-line basis over fifteen years,
deferred financing costs are being amortized over the terms of the related loans
(two to seven years) and other costs are being amortized over varying periods of
up to five years.
Other assets at September 30, 1997 and 1996 were:
September 30,
-------------
1997 1996
---- ----
(in thousands)
Contracts acquired............................ $ 1,636 $ 549
Goodwill...................................... 709 518
Deferred financing costs...................... 5,240 512
Investment in real estate partnerships........ 1,827 22
Restricted cash............................... 1,052 935
Other ........................................ 1,792 410
------- ------
Total.................................... $12,256 $2,946
======= ======
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating the fair value of each class of financial instruments for which it is
practicable to estimate fair value.
For cash and cash equivalents, receivables and payables, the carrying
amounts approximate fair value because of the short maturity of these
instruments. For long-term debt, including current maturities, the fair value of
the Company's long-term debt approximates historically recorded cost since
interest rates approximate market.
Based upon available market information and appropriate valuation
methods, the Company believes the carrying cost of investments in direct
financing leases approximates fair value.
For investments in real estate loans, the Company believes the carrying
amounts of the loans are reasonable estimates of their fair value considering
the nature of the loans and the estimated yield relative to the risks involved.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of periodic temporary
investments of excess cash. The Company places its temporary excess cash
investments in high quality short-term money
-59-
market instruments, principally at Jefferson Bank (see Note 3), and other high
quality financial institutions. The amounts of these instruments may at times
be in excess of the FDIC insurance limit. At September 30, 1997, the Company
had $67.7 million in deposits at Jefferson Bank, of which $66.6 million is over
the FDIC insurance limit. No losses have been experienced on such investments.
Revenue Recognition
Real Estate Finance
The difference between the Company's cost basis in a loan and the sum
of projected cash flows from, and the appraised value of, the underlying
property (up to the amount of the loan) is accreted into interest income over
the estimated life of the loan using a method which approximates the level
interest method. Projected cash flows and appraised values of the property are
reviewed on a regular basis and changes to the projected amounts reduce or
increase the amounts accreted into interest income over the remaining life of
the loan.
Gains on the sale of a senior lien interest in a loan (or gains, if
any, from the refinancing of a loan) are recognized based on an allocation of
the Company's cost basis between the portion of the loan sold or refinanced and
the portion retained based upon the fair value of those respective portions on
the date of sale or refinance. Any gain recognized on a sale of a senior lien
interest or a refinancing is brought into income at the time of such sale or
refinancing.
Equipment Leasing
Direct finance leases, as defined by SFAS No. 13, Accounting for
Leases, are accounted for by recording on the balance sheet the total future
minimum lease payments receivable plus the estimated unguaranteed residual value
of leased equipment less the unearned lease income. Unearned lease income
represents the excess of the total future minimum lease payments plus the
estimated unguaranteed residual value expected to be realized at the end of the
lease term over the cost of the related equipment. Unearned lease income is
recognized as revenue over the term of the lease by the effective interest
method. Initial direct costs incurred in consummating a lease are capitalized as
part of the investment in direct finance leases and amortized over the lease
term as a reduction in the yield.
Gains arising from the sale of direct financing leases and notes
secured by equipment leases occur when the Company obtains permanent funding
through the sale of a pool of leases to a third party. Subsequent to a sale, the
Company has no remaining interest in the pool of leases or equipment except (i)
if a note is delivered as part of the sale proceeds, a security interest in the
pool, and (ii) the obligation of the Company under certain circumstances to
replace non-performing leases in the pool. Upon consummation of the sale
transaction, the Company records a provision for anticipated losses under its
guaranty. At
-60-
September 30, 1997 the Company had guaranteed approximately $5.5 million of
lease receivables with respect to leases sold.
Equipment leasing revenues also consist of management fees, brokerage
fees and a share of net income from partnerships in which a subsidiary of the
Company serves as general partner. Management fees are earned for management
services provided to the partnerships. Such fees are recognized as earned (see
Limited Partnerships, below).
Energy Operations
Working interest, royalties and override revenues are recognized as
production and delivery takes place. Well service income is recognized as
revenue as services are performed.
-61-
Cash Flow Statements
The Company considers temporary investments with a maturity at the date
of acquisition of 90 days or less to be cash equivalents.
Supplemental disclosure of cash flow information:
Year Ended September 30,
------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Cash paid during the year for:
Interest........................................... $ 2,727 $797 $1,104
Income taxes....................................... 2,094 770 255
Non-cash activities include the following:
Sales of leases in exchange for notes.............. $13,275 $- $ -
Debt assumed upon acquisition of real
estate loan...................................... 2,381 - -
Receipt of note in satisfaction of
real estate sale................................. 3,500 - -
Note payable issued in acquisition................. 925 - -
Stock issued in acquisition........................ 315 - -
Details of acquisition:
Fair value of assets acquired...................... $ 2,466 $- $1,189
Debt issued........................................ (925) - -
Stock issued....................................... (315) - -
Liabilities assumed................................. - - (312)
-------- ------- --------
Net cash paid........................................ $ 1,226 $ - $ 877
======= ====== ======
Limited Partnerships
The Company conducts certain energy and leasing activities through, and
a portion of its revenues and are attributable to, limited partnerships
("Partnerships"). The Company serves as general partner of the Partnerships and
assumes customary rights and obligations for the Partnerships. As the general
partner, the Company is liable for Partnership liabilities and can be liable to
limited partners if it breaches its responsibilities with respect to the
operations of the Partnerships.
-62-
The Company is entitled to receive management fees, reimbursement for
administrative costs incurred, and to share in the Partnerships' revenue and
costs and expenses according to the respective Partnership agreements. Such fees
and reimbursements are recognized as income and are included in energy services
and equipment leasing revenue. Amounts reimbursed for costs incurred as operator
of certain oil and gas partnership properties and as the general partner in
certain equipment leasing partnerships for the years ended September 30, 1997,
1996 and 1995 approximated $1.8 million, $1.6 million, and $.5 million,
respectively. The Company includes in its operations the portion of the oil and
gas Partnerships' revenues and expenses applicable to its interests therein.
Income Taxes
The Company records deferred tax assets and liabilities, as
appropriate, to account for the estimated future tax effects attributable to
temporary differences between the financial statement and tax bases of assets
and liabilities and the value at currently enacted tax rates, of operating loss
carryforwards. The deferred tax provision or benefit each year represents the
net change during that year in the deferred tax asset and liability balances.
Earnings Per Share
Earnings per common share-primary are determined by dividing net income
by the weighted average number of common shares and common share equivalents
outstanding during the period. Common share equivalents include shares issuable
under the terms of various stock option and warrant agreements net of the number
of such shares that could have been reacquired (at the weighted average price of
the Company's Common Stock during the period) with the proceeds received from
the exercise of the options and warrants (see Notes 8 and 9). Fully diluted
earnings per share reflect the additional dilution resulting from using in the
computation the higher period-ending market price of the Company's shares.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128 "Earnings per Share." Under this statement the calculation
of primary earnings per share ("EPS") is changed to exclude the dilutive effect
of stock options and is referred to as Basic EPS. This statement is effective
for financial statements issued for periods ending after December 15, 1997;
earlier adoption is not permitted. If SFAS No. 128 had been adopted for fiscal
1997, 1996 and 1995 it would have resulted in the following EPS:
Year Ended September 30,
------------------------
1997 1996 1995
---- ---- ----
Basic EPS.................... $3.15 $2.72 $1.43
Diluted EPS.................. 2.51 1.88 1.23
-63-
Reclassifications
Certain reclassifications have been made to the fiscal years 1996 and
1995 consolidated financial statements to conform with the fiscal 1997
presentation.
NOTE 3-TRANSACTIONS WITH RELATED PARTIES
Until April 1996, the Chairman of the Company was of counsel to
Ledgewood Law Firm, P.C. ("LLF") which provides legal services to the Company.
LLF was paid $803,000, $402,000 and $562,000 during fiscal 1997, 1996 and 1995,
respectively, for legal services rendered to the Company. The Chairman of the
Company receives certain debt service payments from LLF related to the
termination of his affiliation with such firm and its redemption of his interest
therein.
The Company holds commercial real estate loans of borrowers whose
underlying properties are managed by Brandywine Construction & Management, Inc.
("BCMI"). The Chairman of the Company is Chairman of the Board of Directors and
a minority shareholder (approximately 8%) of BCMI. The Company has advanced
funds to certain of these borrowers for improvements on their properties which
have been performed by BCMI. In several instances, the President of BCMI has
also acted as the general partner of the borrower or as an officer of a
corporate general partner. BCMI has subordinated receipt of its management fees
to receipt by the Company from the properties of minimum debt service payments
required under the obligations held by the Company.
The Company also maintains normal banking and borrowing relationships
with Jefferson Bank, a subsidiary of JeffBanks, Inc. The Chairman of the Company
is an officer and director of JeffBanks, Inc. and, together with his spouse, is
a principal shareholder thereof; his spouse is Chairman and Chief Executive
Officer of Jefferson Bank. Another officer and director of the Company is a
director of Jefferson Bank. The Company anticipates that it may, in the future,
effect borrowings from Jefferson Bank; it anticipates that any such borrowings
will be on terms similar to those which could be obtained by an unrelated
borrower. Jefferson Bank is also a tenant at two properties which secure loans
held by the Company. Management believes that the terms of the leases with
Jefferson Bank are typical of similar leases for similar space.
In August 1997, the Company, through a subsidiary, acquired a loan with
a face amount of $2.3 million from Jefferson Bank at a cost of $1.6 million. The
loan is secured by a property owned by a partnership in which an officer of the
Company and the Chairman of the Company, together with his wife, are limited
partners. The Company leases its headquarters space at such property. LLF and
BCMI are also tenants at such property (see Note 10). In September 1997, the
Company sold a senior lien interest in this loan to an unrelated party,
recognizing a gain of $224,000.
In June 1997, the Company acquired two loans with an aggregate face
amount of $7.0 million from a partnership in which an officer of the Company and
the Chairman of the Company, together with his wife, are limited partners. The
officer of the Company was
-64-
previously the general partner of such partnership. The Company acquired such
loan at a cost of $3.0 million. In September 1997, the Company sold a senior
lien interest in one loan to an unrelated third party and was paid off with
respect to the other loan, recognizing an aggregate gain of $804,000.
In June 1997 the Company sold two senior lien interests to two
different limited partnerships for $875,000 and $2.25 million, realizing gains
of $310,000 and $811,000, respectively. Officers and directors of the Company
hold beneficial interests in these partnerships totalling 21.3% and 18.3%,
respectively.
In December 1996, the Company, through a subsidiary, acquired a loan
with a face amount of $52.7 million from an unaffiliated third party at a cost
of $19.3 million. The property securing such loan is owned by two partnerships:
1845 Associates (the "Building Partnership"), which owns the office building and
Mutual Associates (the "Garage Partnership"), which owns the parking garage.
Pursuant to a loan restructuring agreement entered into in 1993, prior to the
Company having any interest in the loan, an affiliate of the holder of the loan
is required to hold, as additional security for the loan, general partnership
interests in both the Building Partnership and the Garage Partnership. The
partnership interest in the Building Partnership was assigned to a limited
partnership of which another subsidiary of the Company is general partner and
RPI Partnership is limited partner. The partnership interest in the Garage
Partnership was assigned to a limited partnership of which a third subsidiary of
the Company is general partner and RPI Partnership is limited partner. RPI
Partnership is a limited partnership in which officers of the Company, including
the Chairman, are limited partners. Although the Company does not anticipate any
economic benefit to RPI Partnership, any which may be received will be assigned
and transferred to the Company.
Management believes that any other such commercial real estate
transactions and balances involving parties that may be considered to be related
parties are not material.
The Company administers the activities of certain energy partnerships
that it sponsors (see Note 2). Energy service revenues primarily represent
services provided to Partnerships and joint ventures managed by the Company. In
accordance with industry practice, the Company charges each producing well in
the Partnerships and joint ventures a fixed monthly overhead fee and a
proportionate share of certain lease operating expenses. These charges are to
reimburse the Company for certain operating and general and administrative
expenses.
NOTE 4-INVESTMENTS IN REAL ESTATE LOANS
The Company has focused its real estate activities on the purchase of
income producing mortgages at a discount from both the face value of such
mortgages and the appraised value of the properties underlying the mortgages.
Cash received by the Company for payment on each mortgage is allocated between
principal and interest with the interest portion of the cash received being
recorded as income to the Company. Additionally, the
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Company records as income the accretion of a portion of the discount to the
underlying collateral value. This accretion of discount amounted to $4.1 million
and $1.0 million during the years ended September 30, 1997 and 1996,
respectively. As the Company sells senior lien interests or receives funds from
refinancings in such mortgages, a portion of the cash received is employed to
reduce the cumulative accretion of discount included in the carrying value of
the Company's investment in real estate loans.
At September 30, 1997 and 1996, the Company held real estate loans
having aggregate face values of $233.7 million and $79.1 million, respectively,
which were being carried at aggregate costs of $88.8 million and $21.8 million,
including cumulative accretion. Amounts receivable, net of senior lien
interests, were $178.1 million and $61.8 million at September 30, 1997 and 1996,
respectively. The following is a summary of the changes in the carrying value of
the Company's investments in real estate loans for the years ended September 30,
1997 and 1996:
Year Ended September 30,
------------------------
1997 1996
------ ------
(in thousands)
Balance, beginning of year................. $21,798 $17,991
New loans.................................. 71,720 15,127
Additions to existing loans................ 1,860 2,564
Reserve for possible losses................ (400) -
Accretion of discount...................... 4,124 954
Collections of principal................... (517) (9,377)
Cost of loans sold......................... (9,769) (5,461)
------- -------
Balance, end of year....................... $88,816 $21,798
======= =======
A summary of activity in the Company's allowance for possible losses
related to real estate loans for the year ended September 30, 1997 is as
follows:
Balance, beginning of year................. $ -
Provision for possible losses.............. 400,000
Writeoffs.................................. -
--------
Balance, end of year....................... $400,000
========
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NOTE 5-INVESTMENT IN DIRECT FINANCING LEASES
Components of the net investment in direct financing leases as of
September 30, 1997 and 1996, as well as future minimum lease payments
receivable, including residual values, are as follows:
September 30,
-------------
1997 1996
---- ----
(in thousands)
Total minimum lease payments receivable.............. $4,186 $847
Initial direct costs, net of amortization............ 75 67
Unguaranteed residual................................ 310 75
Unearned lease income................................ (932) (253)
Allowance for possible losses........................ (248) (7)
------- -----
Net investment in direct financing leases............ $3,391 $729
====== ====
At September 30, 1997, minimum lease payments for each of the five
succeeding fiscal years are as follows: 1998 - $1.4 million; 1999 - $1.0
million; 2000 - $914,000; 2001 - $502,000; and 2002 - $365,000.
A summary of activity in the Company's allowance for possible losses
related to direct financing leases for the years ended September 30, 1997 and
1996 are as follows:
Year Ended September 30,
------------------------
1997 1996
---- ----
(in thousands)
Balance, beginning of year........................... $ 7 $ -
Provision for possible losses........................ 253 7
Write offs........................................... (12) -
----- ---
Balance, end of year................................. $248 $ 7
==== ===
Unguaranteed residual value represents the estimated amount to be
received at contract termination from the disposition of equipment financed
under direct financing leases. Amounts to be realized at contract termination
depend on fair market value of the related equipment and may vary from the
recorded estimate. Residual values are reviewed periodically to determine if the
equipment's fair market is below its recorded value.
Certain of the leases include options to purchase the underlying
equipment at the end of the lease term at fair value or the stated residual
which is not less that the book value at termination.
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NOTE 6-LONG-TERM DEBT
Long-term debt consists of the following:
September 30,
-------------
1997 1996
---- ----
(in thousands)
12% senior unsecured notes payable, interest due semi-annually, principal due
August 2004........................................................................ $115,000 $ -
9.5% senior secured note payable, repaid in July 1997.............................. - 7,902
Loan payable to a bank, secured by a certificate of deposit, 20 equal semiannual
installments of $32,143 through February, 2003, and quarterly payments of
interest at 1/2% above the prime rate through 2003 (See Note 9).................... 353 418
Unsecured loan, monthly installments of approximately $5,200 including interest
at 2.25% above the prime rate (but not less than 7% nor greater than 14.25%)
through April 2004 at which time the unpaid balance is due. This loan was
refinanced in December 1996 ....................................................... - 536
Loans payable, secured by real estate, monthly installments totaling
approximately $39,000 including interest ranging from prime (8.5% at September
30, 1997) to 10.25%, due at various times from December 2001 through
January 2019....................................................................... 3,216 215
Unsecured note payable, due in two equal annual Installments of principal and
interest beginning March 1998, interest at LIBOR (6 9/32% at
September 30, 1997)................................................................ 925 -
-------- -------
119,494 9,071
Less current maturities............................................................ 708 105
-------- -------
$118,786 $ 8,966
======== =======
As of September 30, 1997 the long-term debt maturing over the next five
years is as follows: 1998 - $708,000; 1999 - $727,000; 2000 - $285,000; 2001 -
$309,000; and 2002 - $712,000.
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In July 1997, the Company issued $115 million of 12% Senior Unsecured
Notes (the "12% Notes") due August 2004 in a private placement. Provisions of
the 12% Notes limit dividend payments, mergers and indebtedness, place
restrictions on liens and guarantees and require the maintenance of certain
financial ratios. At September 30, 1997, the Company was in compliance with such
provisions. In November 1997, the Company filed a registration statement with
the Securities and Exchange Commission offering to exchange the privately placed
12% Notes with a like amount of fully registered 12% Notes.
In May 1994, the Company privately placed with an insurance company a
9.5% senior secured note in the principal amount of $8 million together with an
immediately exercisable detachable warrant to purchase, at any time through May
24, 2004, 449,440 shares, subject to adjustment, of the Company's common stock
at an exercise price of $3.38 per share. The value assigned to the warrant
($100,000) was accounted for as paid-in capital, resulting in a discount which
was being amortized on a straight-line basis over the life of the note. The
senior note was collateralized by substantially all of the Company's oil and gas
properties and certain of the Company's real estate loans. This note was paid in
full in July 1997 from proceeds of the offering of the 12% Notes. The warrants
were exercised in July 1997. (See Note 8.)
In December 1996, FLI, the Company's equipment leasing subsidiary,
entered into a secured revolving credit and term loan facility with a maximum
borrowing limit of $20 million with two banking institutions. Interest on the
revolving credit and term loan borrowings is payable at a rate equal to the
London Interbank Offered Rate ("LIBOR") plus 1.75% and LIBOR plus 2.25% per
annum, respectively. The credit facility expires on March 31, 1998 and is
renewable annually at the lender's discretion. A commitment fee of 3/8% per
annum is assessed on the unused portion of the borrowing limit. Borrowings under
this facility are collateralized by the leases and the underlying equipment
being financed and are guaranteed by the Company. The agreement contains certain
covenants pertaining to FLI and the Company including the maintenance of certain
financial ratios and restrictions on changes in the FLI's ownership and a key
management position. During fiscal 1997, the maximum borrowing under this
facility was $7.1 million, all of which was repaid prior to fiscal year end.
In September 1997, FMF, the Company's residential mortgage lending
business, entered into a secured credit facility with a maximum borrowing limit
of $5 million with a banking institution. Interest on each draw under this
facility is payable at FMFs election, at either the institution's prime rate, or
at the federal funds rate plus 2.5%, or at an adjusted LIBOR plus 1.5%. The
credit facility expires in September 1998 unless renewed by the parties.
Borrowings under this facility are collateralized by the mortgage loans and the
underlying property being financed. The agreement contains certain covenants
pertaining to FMF and the Company including the maintenance of certain financial
ratios. During fiscal 1997, there were no borrowings under this facility.
In October 1997, FMF established a $15 million warehouse credit
facility with a financial institution, bearing interest at LIBOR or, if
unavailable, the interbank eurodollars market rate, plus 90 basis points. The
facility is collateralized by a first lien interest in the loans being financed
by facility draws. The facility expires in October 1998. The agreement contains
certain covenants pertaining to FMF, including the maintenance of certain
financial ratios.
In October 1997, the Company obtained a $5 million credit facility from
a banking institution for purposes of acquiring oil and gas assets. The credit
facility permits draws based on a percentage of reserves of oil and gas
properties pledged as security for the facility. Draws under the facility bear
interest at the institution's prime rate plus 25 basis points. The facility
terminates in June 1999. The agreement contains certain covenants pertaining to
the Company, including the maintenance of certain financial ratios.
-69-
NOTE 7-INCOME TAXES
The following table details the components of the Company's income tax
expense for the fiscal years 1997, 1996 and 1995.
Year Ended September 30,
------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Provision for federal income tax:
Current................................... $6,186 $1,147 $157
Deferred.................................. (2,206) 1,059 473
------- ------ ----
$3,980 $2,206 $630
====== ====== ====
A reconciliation between the statutory federal income tax rate and the
Company's effective federal income tax rate is as follows:
Year Ended September 30,
------------------------
1997 1996 1995
---- ---- ----
Statutory tax rate................................ 34% 34% 34%
Statutory depletion............................... (2) (4) (4)
Non-conventional fuel and low-income
housing credits................................. (3) - (1)
Tax-exempt interest............................... (2) - -
Adjustment to valuation allowance
for deferred tax assets......................... - - (7)
Other............................................. - - (3)
----- ---- ----
27% 30% 19%
===== ==== ====
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The components of the net deferred tax liability are as follows:
September 30,
-------------
1997 1996
---- ----
(in thousands)
Deferred tax assets:
Tax credit carryforwards............................ $ 507 $ -
Alternative minimum tax credit
carryforwards...................................... - 61
Interest receivable................................. 1,490 45
Net operating loss carryforwards.................... 357 -
Provision for losses................................ 220 -
------ -------
2,574 106
Deferred tax liabilities:
Fixed asset basis difference........................ (2,290) (2,160)
ESOP benefits....................................... (120) (140)
Other items, net.................................... (164) (12)
------ --------
(2,574) (2,312)
------ -------
Net deferred tax liability......................... $ - $(2,206)
======== ========
NOTE 8-STOCKHOLDERS' EQUITY
In July 1997, the Company issued 983,150 unregistered shares of the
Company's common stock pursuant to the exercise of warrants held by the holder
of the Company's 9.5% senior secured note payable due 2004, realizing proceeds
of $3.66 million. The 983,150 shares were subsequently sold by the holder in a
separate private placement to a small group of institutional investors.
In December 1996, the Company closed a public offering of 1.66 million
shares of its Common Stock. The Company received proceeds of $19.99 million,
before offering expenses of $515,000, from the offering.
In September 1996, the Company's shareholders authorized an amendment
to the Certificate of Incorporation of the Company to increase the total
authorized capital stock to 9 million shares, of which 8 million shares were
Common Stock and 1 million shares were Preferred Stock.
On December 20, 1995 and March 12, 1996, the Board of Directors
declared 6% stock dividends on the Common Stock. Furthermore, on May 9, 1996 the
Board of Directors authorized a five-for-two stock split effected in the form of
a 150% stock dividend . These
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stock dividends resulted in the issuance of 1.2 million additional shares of
Common Stock. Earnings per share and weighted average shares outstanding reflect
the above transactions.
NOTE 9-EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan
The Company sponsors an Employee Stock Ownership Plan ("ESOP"), which
is a qualified non-contributory retirement plan established to acquire shares of
the Company's Common Stock for the benefit of all employees who are 21 years of
age or older and have completed 1,000 hours of service for the Company.
Contributions to the ESOP are made at the discretion of the Board of Directors.
The ESOP has borrowed funds to purchase shares from the Company, which borrowed
the funds for the loan to the ESOP from a bank.
The Common Stock purchased by the ESOP with the money borrowed is held
by the ESOP trustee in a suspense account. On an annual basis, a portion of the
Common Stock is released from the suspense account and allocated to
participating employees. Any dividends on ESOP shares are used to pay principal
and interest on the loan. As of September 30, 1997, there were 113,930 shares
allocated to participants which constitute substantially all shares in the plan.
Compensation expense related to the plan amounted to $50,400, $50,300 and
$91,000 for the years ended September 30, 1997, 1996 and 1995, respectively.
The loan from the bank to the Company is payable in semiannual
installments through February 1, 2003. The loan from the Company to the ESOP was
fully repaid in August 1996. Both the loan obligation and the unearned benefits
expense (a reduction in shareholders' equity) will be reduced by the amount of
any loan principal payments made by the Company.
Employee Savings Plan
The Company sponsors an Employee Retirement Savings Plan and Trust
under Section 401(k) of the Internal Revenue Code which allows employees to
defer up to 10% of their income (subject to certain limitations) on a pretax
basis through contributions to the savings plan. The Company matches up to 100%
of each employee's contribution. Included in general and administrative expenses
are $131,900, $44,700 and $28,100 for the Company's contributions for the years
ended September 30, 1997, 1996 and 1995, respectively.
Stock Options
The Company has three employee stock option plans, those of 1984, 1989
and 1997. The 1984 and 1989 plans authorize the granting of up to 56,180 and
589,890 (as amended during the fiscal year ended September 30, 1996) shares,
respectively, of the Company's common stock in the form of incentive stock
options ("ISO's"), non-qualified stock options and stock appreciation rights
("SAR's"). No further grants may be made under these two plans.
-72-
In April 1997, the stockholders approved the Resource America, Inc.,
1997 Key Employee Stock Option Plan ("Employee Plan"). This plan, for which
275,000 shares were reserved, provides for the issuance of ISO's and
non-qualified stock options. In fiscal 1997, options for 25,000 shares were
issued under this plan.
Options under the 1984, 1989 and 1997 plans become exercisable as to
25% of the optioned shares each year after the date of grant, and expire not
later than ten years after grant. The Company received $506,400 from the
exercise of stock options in fiscal 1997.
Transactions for all three stock option plans are as follows:
Year Ended September 30,
------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding - beginning of year 348,316 $ 6.21 202,248 $2.88 202,248 $2.88
Granted 25,000 $ 39.50 202,248 $8.58 - $ -
Exercised (144,663) $ 3.50 (28,090) $2.76 - $ -
Cancelled - $ - (28,090) $2.76 - $ -
-------- ------- -------
Outstanding - end of year 228,653 $ 11.56 348,316 $6.21 202,248 $2.88
======== ======= =======
Exercisable, at end of year 63,554 $ 7.06 109,551 $2.92 101,124 $2.88
======== ======= =======
Available for grant 250,000 - 5,618
======== ======= =======
Weighted average fair
value per share of options
granted during the year $35.93 $6.51 -
====== ===== ===
Outstanding Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Range of Contractual Average Average
Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price
- --------------- ------ ------------ -------------- ------ --------------
$2.76 - $3.04 16,854 5.56 $ 2.76 16,854 $ 2.76
$8.19 - $9.01 186,799 5.66 $ 8.61 46,700 $ 8.61
$39.50 - $39.50 25,000 9.91 $ 39.50 - $39.50
------- --------
228,653 63,554
======= ======
In addition, a key employee of Fidelity Leasing, Inc. ("FLI"), a wholly
owned subsidiary of the Company, has received options to purchase 10% of the
common stock of FLI (1 million shares) at an aggregate price of $220,000 and,
should FLI declare a dividend, will receive payments on the options in an amount
equal to the dividends that would have been paid on the shares subject to the
options had they been issued. In the event that, prior to becoming a public
company, FLI issues stock to anyone other than the Company or the key
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employee, the employee is entitled to receive such additional options as will
allow him to maintain a 10% equity position in FLI upon exercise of all options
held by such employee (excluding shares issuable pursuant to the employee option
plan referred to below), at an exercise price equal to the price paid or value
received in the additional issuance. FLI does not anticipate making any such
issuances.
The options issued to the key employee vest 25% per year beginning in
March 1997 (becoming fully invested in March 2000), and terminate in March 2005.
The options become fully vested and immediately exercisable in the event of a
change in control of FLI. The key employee has certain rights, commencing after
March 5, 2000, to require FLI to register his option shares under the Securities
Act of 1933. In the event FLI does not become a public company by March 5, 2001,
the key employee may require that FLI thereafter buy, for cash, FLI shares
subject to his options at a price equal to ten times FLI's net earnings (as
defined in the agreement) per share for the fiscal year ended immediately prior
to the giving of notice of his exercise of this right. FLI is required to
purchase 25% of such employee's shares in each year following such employee's
exercise of this right.
FLI has also established another option plan providing for the granting
of options, at the discretion of FLI's board of directors, for up to 500,000
shares of common stock to other employees of FLI. As of September 30, 1997,
options for 393,000 shares had been issued to certain employees.
Transactions for both FLI stock option plans are as follows:
Year Ended September 30,
-----------------------------------------------------
1997 1996
-------------------------- -------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Outstanding - beginning of year 1,000,000 $.22 - $ -
Granted 393,000 $.22 1,000,000 $.22
Exercised - $ - - $ -
Cancelled - $ - - $ -
--------- ---------
Outstanding - end of year 1,393,000 $ - 1,000,000 $.22
========= =========
Exercisable, at end of year 250,000 $.22 - $ -
========= =========
Available for grant 107,000 500,000
========= =========
Weighted average fair
value per share of options
granted during the year $ .11 $ .10
========= =========
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Outstanding Exercisable
------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Range of Contractual Average Average
Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price
- --------------- ------ ------------ -------------- ------ --------------
$.22 - $.22 1,393,000 8.79 $.22 250,000 $.22
========= =======
Fidelity Mortgage Funding, Inc. ("FMF"), another wholly-owned
subsidiary of the Company (and in which the Company owns 17 million shares of
common stock), has established an option plan pursuant to which 3 million shares
of FMF's common stock (representing 15% of FMF's common stock on a fully-diluted
basis) have been reserved for options which may be issued to key employees.
Under the program, a director and officer of the Company who is also the
Chairman of FMF has received options to purchase 2 million shares (representing
10% of FMF's common stock on a fully-diluted basis) at an aggregate price of
$235,294 ($.118 per share) and, should FMF declare a dividend, will receive
payments on the options in an amount equal to the dividends that would have been
paid on the shares subject to the options had they been issued. The options
generally will have the same terms as those relating to the FLI options, except
that (i) the option term and vesting period commenced in April 1997 and (ii) the
period during which the officer/director may sell FMF shares to FMF will
commence in April 2002. The options become fully vested and immediately
exercisable in the event of a change in control or potential change in control
of FMF or the Company. In addition, as part of the program, at September 30,
1997, FMF had granted options to (i) its President and Chief Operating Officer
to purchase 800,000 shares at an aggregate price of $100,000 ($.125 per share)
(representing 4% of FMF's common stock on a fully-diluted basis), and (ii) to
certain other of its employees to purchase 145,000 shares at an aggregate price
of $18,125 ($.125 per share), leaving 55,000 shares reserved for issuance of
options under the plan at September 30, 1997.
-75-
Transactions for the FMF stock option plan are as follows:
Year Ended September 30, 1997
-----------------------------
Weighted
Average
Shares Exercise Price
------ --------------
Outstanding - beginning of year - -
Granted 2,945,000 $.120
Exercised - -
Cancelled - -
----------
Outstanding - end of year 2,945,000 $.120
Exercisable, at end of year - -
==========
Available for grant 55,000
==========
Weighted average fair
value per share of options
granted during the year $ .06
==========
Outstanding Exercisable
------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Contractual Average Average
Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price
- --------------- ------ ------------ -------------- ------ --------------
$.118 - $.125 2,945,000 9.63 $.120 - -
As discussed in Note 2, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for these employee stock arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share as if the Company had
adopted the fair value method for stock options granted after June 30, 1996. No
such options were granted in fiscal 1996. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions: expected life, 5 or 10 years
following vesting; stock volatility, 96%, 87% and 144% in 1997, 1996 and 1995
respectively; risk free interest rate, 6.6%, 6.0% and 6.0% in 1997, 1996 and
1995 respectively; and no dividends during the expected term. The
-76-
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
awards had been amortized to expense over the vesting period of the awards, pro
forma net income would have been $10.5 million ($2.40 per share) in fiscal 1997.
In addition to the various stock option plans, in May 1997 the
stockholders approved the Resource America, Inc. Non-Employee Director Deferred
Stock and Defined Compensation Plan (the "Director Plan") for which 25,000
shares were reserved for issuance. Each director vests in shares granted under
the Director Plan on the fifth anniversary of the date of grant. If a director
terminates service prior to such fifth anniversary, all of the shares granted
are forfeited. In May 1997, 1,000 shares were granted under the Director Plan to
each of the Company's four non-employee directors. The fair value of the grants
($22.50 per share, $90,000 in total) is being charged to operations over the
five year vesting period.
NOTE 10-COMMITMENTS
The Company leases office space under leases with varying expiration
dates through 2002 (see Note 3). Rental expense was $238,600, $188,900 and
$60,500 for the years ended September 30, 1997, 1996 and 1995, respectively. At
September 30, 1997, future minimum rental commitments for the next five fiscal
years were as follows:
1998...................... $445,300
1999...................... 437,000
2000...................... 437,000
2001...................... 415,100
2002...................... 399,800
As of September 30, 1997, the Company had outstanding commitments to
fund the purchase of equipment which it intends to lease, with an aggregate cost
of $11.4 million. The Company believes, based on its past experience, that
approximately $4.0 million will be funded.
As of September 30, 1997, subsidiaries of the Company had two warehouse
lines of credit which allow them to borrow up to $25 million. As of September
30, 1997, no funds were outstanding with respect to these lines of credit.
The Company has an employment agreement with its Chairman pursuant to
which the Company has agreed to provide him with a supplemental employment
retirement plan ("SERP") and with certain financial benefits upon termination of
his employment. Under the SERP, he will be paid an annual benefit of 75% of his
Average Income after he has reached Retirement Age (each as defined in the
employment agreement). Upon termination, he is entitled to receive lump sum
payments in various amounts of between 25% and five times Average Compensation
(depending upon the reason for termination) and, for termination due to
disability, a monthly benefit equal to the SERP benefit (which will terminate
upon
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commencement of payments under the SERP). During fiscal 1997, the Company
accrued $240,000 with respect to these commitments.
NOTE 11-ACQUISITIONS
In June 1997, the Company acquired equity interests in 288 wells
(representing 78 wells net to the Company's interest) and operating rights to an
additional 62 wells, together with 220 miles of natural gas pipelines and 21,830
gross acres (9,340 net acres) of mineral rights, for $1.25 million in cash,
$925,000 by a note and 17,000 shares of the Company's Common Stock. The
acquisition was accounted for as a purchase and, accordingly, the assets and
liabilities acquired have been recorded at their estimated fair market values at
the date of acquisition. The purchase price resulted in an excess of costs over
net assets acquired (goodwill) of approximately $400,000, which is being
amortized on a straight line basis over 15 years.
In April 1997, the Company acquired all the outstanding shares of Bryn
Mawr Resources, Inc. ("BMR") for 579,623 shares of common stock. BMR's only
asset was 579,623 shares of the Company's Common Stock held by subsidiaries of
BMR (excluding 3,807 shares of the Company's Common Stock attributable to
minority interests held by third parties in BMR's subsidiaries).
These acquisitions were immaterial to the results of operations of the
Company, and therefore pro forma information is excluded.
-78-
NOTE 12-INDUSTRY SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company operates in three principal industry segments - real
estate, leasing and energy. Segment data for the years ended September 30, 1997,
1996 and 1995 are as follows:
Year Ended September 30,
--------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Revenue:
Real estate $ 19,144 $ 7,171 $ 6,114
Leasing 7,162 4,466 -
Energy 5,608 5,157 5,332
Corporate 930 197 148
-------- ------- -------
$ 32,844 $16,991 $11,594
======== ======= =======
Depreciation, Depletion and
Amortization:
Real estate $ 36 $ 38 $ 37
Leasing 398 204 -
Energy 1,202 1,061 1,254
Corporate (22) 65 44
-------- ------- -------
$ 1,614 $ 1,368 $ 1,335
======== ======= =======
Operating Profit (Loss):
Real estate $ 16,546 $ 6,281 $ 5,276
Leasing 2,457 1,916 -
Energy 1,699 1,646 1,317
Corporate (5,845) (2,497) (3,248)
--------- -------- --------
$ 14,857 $ 7,346 $ 3,345
======== ======= =======
Identifiable Assets:
Real estate $ 92,287 $22,087 $18,225
Leasing 10,647 3,019 991
Energy 15,016 12,675 13,790
Corporate 77,169 6,178 4,544
-------- ------- -------
$195,119 $43,959 $37,550
======== ======= =======
Capital Expenditures:
Real Estate $ 59 $ 17 $ 172
Leasing 585 531 -
Energy 1,513 501 637
Corporate 507 48 8
-------- -------- ---------
$ 2,664 $ 1,097 $ 817
======== ======= ========
-79-
Operating profit (loss) represents total revenue less costs
attributable thereto, including interest and provision for possible losses, and
less depreciation, depletion and amortization, excluding general corporate
expenses.
The Company's natural gas is sold under contract to various purchasers.
For the years ended September 30, 1997 and 1996, gas sales to two purchasers
accounted for 29% and 12% and 29% and 13% of the Company's total production
revenues, respectively. Gas sales to one purchaser individually accounted for
15% of total revenues for the year ended September 30, 1995.
In commercial mortgage loan acquisition and resolution, interest and
fees earned from a single borrower in the fiscal year ended September 30, 1997
approximated 20%, while for the fiscal year ended September 30, 1996 interest
and fees from a (different) single borrower approximated 24% of total revenues.
No single borrower generated revenues in excess of 10% in fiscal 1995.
NOTE 13-SUPPLEMENTAL OIL AND GAS INFORMATION
Results of operations for oil and gas producing activities:
Year Ended September 30,
----------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Revenues................................. $3,936 $3,421 $3,452
Production costs......................... (1,636) (1,421) (1,502)
Exploration expenses..................... (187) (161) (230)
Depreciation, depletion, and
amortization.......................... (712) (781) (922)
Income taxes............................. (197) (96) -
------- ------- ------
Results of operations for
producing activities.................. $1,204 $ 962 $ 798
====== ====== ======
-80-
Capitalized Costs Related to Oil and Gas Producing Activities
The components of capitalized costs related to the Company's oil and
gas producing activities (less impairment reserve of $28,000 in fiscal 1997,
$22,000 in fiscal 1996 and $30,000 in fiscal 1995), are as follows:
September 30,
------------------------------------------
1997 1996 1995
(in thousands)
Proved properties........................ $23,254 $22,549 $22,416
Unproved properties...................... 846 482 650
Pipelines, equipment and other
interests............................. 2,445 2,540 2,488
------- ------- -------
Total.................................... 26,545 25,571 25,554
Accumulated depreciation, depletion
and amortization....................... (15,145) (14,306) (13,590)
------- ------- -------
Net capitalized costs................ $11,400 $11,265 $11,964
======= ======= =======
Costs Incurred in Oil and Gas Producing Activities
The costs incurred by the Company in its oil and gas activities during
fiscal years 1997, 1996 and 1995 are as follows:
Year Ended September 30,
--------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Property acquisition costs:
Unproved properties....................... $321 $ 2 $ 5
Proved properties......................... 782 157 388
Exploration costs........................... 238 317 317
Development costs........................... 144 176 211
Oil and Gas Reserve Information (unaudited)
The Company's estimates of net proved developed oil and gas reserves
and the present value thereof have been verified by E.E. Templeton & Associates,
Inc., an independent petroleum engineering firm. The Company does not estimate
the value of its proven undeveloped reserves.
The Company's oil and gas reserves are located within the United
States. There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting
-81-
future net revenues and the timing of development expenditures. The reserve data
presented represent estimates only and should not be construed as being exact.
In addition, the standardized measures of discounted future net cash flows may
not represent the fair market value of the Company's oil and gas reserves or the
present value of future cash flows of equivalent reserves, due to anticipated
future changes in oil and gas prices and in production and development costs and
other factors for which effects have not been provided.
The standardized measure of discounted future net cash flows is
information provided for the financial statement user as a common base for
comparing oil and gas reserves of enterprises in the industry.
Gas Oil
(mcf) (bbls)
----- ------
Balance at September 30, 1994........................ 12,112,116 296,859
Purchases of reserves in-place....................... 893,104 23,284
Current additions.................................... 430,330 3,641
Sales of reserves in-place........................... (79,294) (628)
Revisions to previous estimates...................... 624,471 14,423
Production........................................... (1,198,245) (36,420)
---------- -------
Balance at September 30, 1995........................ 12,782,482 301,159
Purchase of reserves in-place........................ 293,602 8,880
Current additions.................................... 237,070 726
Sales of reserves in-place........................... (18,645) (1,885)
Revision to previous estimates....................... 723,242 35,002
Production........................................... (1,165,477) (33,862)
---------- -------
Balance at September 30, 1996........................ 12,852,274 310,020
Purchase of reserves in-place........................ 1,903,853 45,150
Current additions.................................... 15,984 0
Sales of reserves in-place........................... (1,393) 0
Revision to previous estimates....................... 1,614,704 38,654
Production........................................... (1,227,887) (35,811)
---------- -------
Balance at September 30, 1997........................ 15,157,535 358,013
========== =======
-82-
Presented below is the standardized measure of discounted future net
cash flows and changes therein relating to proved developed oil and gas
reserves. The estimated future production is priced at year-end prices. The
resulting estimated future cash inflows are reduced by estimated future costs to
develop and produce the proved developed reserves based on year-end cost levels.
The future net cash flows are reduced to present value amounts by applying a 10%
discount factor.
Year Ended September 30,
------------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Future cash inflows............................ $42,634 $ 34,516 $ 30,257
Future production and
development costs........................... (21,585) (16,764) (15,200)
Future income tax expense...................... (2,740) (2,732) (1,260)
------- -------- --------
Future net cash flows.......................... 18,309 15,020 13,797
Less 10% annual discount for
estimated timing of cash flows............... (8,186) (6,671) (5,987)
------- -------- --------
Standardized measure of discounted
future net cash flows........................ $10,123 $ 8,349 $ 7,810
======= ======== ========
-83-
The following table summarizes the changes in the standardized measure
of discounted future net cash flows from estimated production of proved
developed oil and gas reserves after income taxes.
Year Ended September 30,
------------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Balance, beginning of year...................... $ 8,349 $7,810 $7,961
Increase (decrease) in discounted
future net cash flows:
Sales and transfers of oil and gas
net of related costs.......................... (2,411) (1,928) (1,870)
Net changes in prices and production
costs......................................... 512 1,392 (187)
Revisions of previous quantity
estimates..................................... 2,483 697 418
Extensions, discoveries, and improved
recovery less related costs................... 10 145 253
Purchases of reserves in-place.................. 1,474 242 612
Sales of reserves in-place, net of
tax effect.................................... (1) (26) (46)
Accretion of discount........................... 997 851 842
Net change in future income taxes............... (14) (924) (240)
Other........................................... (1,276) 90 67
--------- ------- -------
Balance, end of year............................ $10,123 $8,349 $7,810
======= ====== ======
NOTE 14 - FORMATION OF RESOURCE ASSET INVESTMENT TRUST
The Company is the sponsor of Resource Asset Investment Trust (the
"REIT"), a recently formed real estate investment trust. The REIT has been
formed to acquire and provide mortgage financing in situations that generally do
not conform to the debt underwriting standards of institutional lenders or
sources that provide financing through securitization.
The REIT has filed a Registration Statement with the Securities and
Exchange Commission with respect to the public offer and sale of its common
shares of beneficial interest ("Common Shares"). The Company plans to acquire
815,000 Common Shares upon the completion of the offering at a cost anticipated
to be $13.95 per share (representing the anticipated initial public offering
price net of underwriting discounts or commissions). After acquisition of such
shares, the Company would own approximately 9.8% of the REIT's outstanding
Common Shares (8.6% assuming exercise by the underwriters of their
over-allotment option).
-84-
The chairman of the REIT is the spouse of the chairman of the Company;
their son, who is not otherwise an officer or director of the Company, is the
Company's representative on the REIT's board of trustees. The Company has
undertaken to sell certain of its loans, or interests therein, to the REIT, and
will be reimbursed for certain of its costs in connection with its sponsorship
of the REIT, upon completion of the public offering.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-85-
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS OF THE REGISTRANT
The information required by this item is set forth under the caption
"Directors and Executive Officers" of the Company's definitive proxy statement,
with respect to its 1998 annual meeting of shareholders, to be filed on or
before January 28, 1998 (the "Proxy Statement"), and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Compensation of Executive Officers and Directors" in the Proxy Statement, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the captions
"Security Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Party Transactions" in the Proxy Statement, and are
incorporated herein by reference.
-86-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements
Report of Independent Certified
Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in
Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
a. Inapplicable
b. Schedule IV - Mortgage Loans on Real Estate
All other schedules are not applicable or are omitted
since either (i) the required information is not
material or (ii) the information required is included
in the consolidated financial statements and the
Notes thereto.
3. Exhibit No. Description
2. Agreement and Plan of Merger among
Tri-Star Financial Services, Inc.,
Frank Pellegrini, Resource Tri-Star
Acquisition Corp. and the Registrant
3.1 Restated Certificate of
Incorporation of the Registrant.(1)
3.2 Bylaws of the Registrant, as
amended.(1)
4.1 Indenture with respect to 12% Senior
Notes due 2004 (including form of
note).(2)
10.1 1984 Key Employee Stock Option Plan,
as amended.(3)
10.2 1989 Key Employee Stock Option Plan,
as amended.(3)
10.3 Employee Stock Ownership Plan.(4)
10.4 1997 Key Employee Stock Option
Plan.(5)
10.5 1997 Stock Option Plan for
Directors.(5)
10.6 1997 Non-Employee Director Deferred
Stock and Defined Compensation
Plan.(5)
10.7 Employment Agreement between Edward
E. Cohen and Registrant(6)
-87-
10.8 Contribution Agreement between
Resource Leasing, Inc. and Abraham
Bernstein.(1)
10.9 Employment Agreement between
Fidelity Leasing, Inc. and Abraham
Bernstein.(1)
10.10 Employment Agreement between
Fidelity Mortgage Funding, Inc. and
Daniel G. Cohen.(6)
10.11 Loan and Security Agreement between
CoreStates Bank, N.A. and First
Union National Bank, and
Registrant.(7)
10.12 Warehousing Agreement between
Fidelity Mortgage Funding, Inc. and
CoreStates Bank, N.A.
10.13 Master Loan and Security Agreement
between Fidelity Mortgage Funding,
Inc. and Morgan Stanley Mortgage
Capital Inc.
10.14 Loan Agreement between Registrant
and KeyBank, N.A.
11.1 Calculation of Primary and Fully
Diluted Earnings per Share.
21.1 List of Subsidiaries.
23.1 Consent of E. E. Templeton &
Associates, Inc.
27 Financial Data Schedule.
- ----------
(1) Filed previously as an Exhibit to the Company's Registration Statement
on Form S-1 (Registration No. 333-13905) and by this reference
incorporated herein.
(2) Filed previously as an Exhibit to the Company's Registration Statement
on Form S-4 (Registration No. 333-40231) and by this reference
incorporated herein.
(3) Filed previously as an Exhibit to the Company's Registration Statement
on Form S-8 May 2, 1996 and by this reference incorporated herein.
(4) Filed previously as an Exhibit to the Company's Annual Report on Form
10-K for the year ended September 30, 1989 and by this reference
incorporated herein.
(5) Filed previously as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
(6) Filed previously as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
-88-
(7) Filed previously as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1996.
-89-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RESOURCE AMERICA, INC. (Registrant)
December 17, 1997 By: /s/ Edward E. Cohen
-----------------------
Chairman of the Board, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of December 17, 1997.
/s/ Edward E. Cohen Chairman of the Board, Chief Executive
- ------------------------------ Officer and President
EDWARD E. COHEN
/s/ Scott F. Schaeffer Executive Vice President and Director
- ------------------------------
SCOTT F. SCHAEFFER
/s/ Daniel G. Cohen Executive Vice President and Director
- ------------------------------
DANIEL G. COHEN
/s/ Michael L. Staines Senior Vice President, Secretary and
- ------------------------------ Director
MICHAEL L. STAINES
/s/ Carlos C. Campbell Director
- ------------------------------
CARLOS C. CAMPBELL
/s/ Andrew M. Lubin Director
- ------------------------------
ANDREW M. LUBIN
/s/ Alan D. Schrieber Director
- ------------------------------
ALAN D. SCHRIEBER
/s/ John S. White Director
- ------------------------------
JOHN S. WHITE
/s/ Steven J. Kessler Senior Vice President and Chief Financial
- ------------------------------ Officer
STEVEN J. KESSLER
/s/ Nancy J. McGurk Vice President-Finance and Treasurer
- ------------------------------ (Chief Accounting Officer)
NANCY J. McGURK
-90-
SCHEDULE IV
RESOURCE AMERICA, INC. & SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
September 30, 1997
Final Periodic Face
Maturity Payment Prior Amount of
Description Interest Rate Date Terms Liens Mortgages
- ----------- ------------- --------- -------- ----- ---------
First Mortgages
Hotel/Commercial Office, GA Fixed rate of 14% 12/31/15 (a) $ - $ 5,800,000
Hotel, NE Fixed rate of 14.5% 09/30/02 (a) - 6,005,000
Apartment Building, FL Fixed rate of 13% 07/01/00 (a) - 4,100,000
Office Building, NC Fixed rate of 11.5% 12/31/11 (a) - 3,500,000
Apartment Building, NJ Fixed rate of 11.25% 09/01/05 (a) - 11,615,000
Apartment Building, CT Fixed rate of 10.85% 09/01/05 (a) - 7,520,000
Apartment Building, PA Fixed rate of 14% 10/01/02 (a) - 400,000
Office/Retail Building, PA Fixed rate of 14% 12/31/02 (a) - 8,580,000
4 loans, amounts ranging Two loans with fixed rates
of from $100,000 to $7,580,000 16%; remaining loan rates from
9.7% to 10.6%
Junior Lien Loans
Rental Apartments, 14 loans, Five loans with fixed rates atFrom 06/01/88 - 19,321,800 32,638,000
original loan amounts ranging 12%, all remaining loans have to 10/01/07
from $618,000 to $7,193,000 varying rates from 7.3% to 16%
in PA, NJ and NC One loan with interest at 85% of
the 30-day rate on $100,000
CDs as published by the Wall
Street Journal plus 2.75%
Condominium Units, NC Fixed rate of 8.0% 03/31/02 (a) $ 2,361,000 3,550,000
Office buildings, 8 loans, original Fixed rate from 9% to 12% From 07/31/98 (a) 7,803,300 19,836,000
amounts ranging from $900,000 prime plus 3.5% and prime to 09/30/03
to $20,000,000 in PA, VA, plus 5%
NJ and Washington, D.C. 09/30/99 (a)
Office Building, PA Fixed rate of 8% 01/01/02 (a) 8,000,000 40,644,000
Office Building, Washington, D.C.,
2 loans Fixed rate of 12% 11/30/98 (a) 6,744,200 13,283,000
RESTUBBED FROM TABLE ABOVE
Principal
Final Periodic Carrying Subject to
Maturity Payment Amount of Delinquent
Description Interest Rate Date Terms Mortgages Interest
- ----------- ------------- --------- -------- --------- ----------
First Mortgages
Hotel/Commercial Office, GA Fixed rate of 14% 12/31/15 (a) $ 6,102,725 -
Hotel, NE Fixed rate of 14.5% 09/30/02 (a) 3,816,425 $ -
Apartment Building, FL Fixed rate of 13% 07/01/00 (a) 2,826,741 -
Office Building, NC Fixed rate of 11.5% 12/31/11 (a) 3,074,544 -
Apartment Building, NJ Fixed rate of 11.25% 09/01/05 (a) 7,451,074 -
Apartment Building, CT Fixed rate of 10.85% 09/01/05 (a) 4,704,270 -
Apartment Building, PA Fixed rate of 14% 10/01/02 (a) 400,000 -
Office/Retail Building, PA Fixed rate of 14% 12/31/02 (a) 8,580,000 -
4 loans, amounts ranging Two loans with fixed rates
of from $100,000 to $7,580,000 16%; remaining loan rates from
9.7% to 10.6%
Junior Lien Loans
Rental Apartments, 14 loans, Five loans with fixed rates atFrom 06/01/88 - 12,098,621 80,860
original loan amounts ranging 12%, all remaining loans have to 10/01/07
from $618,000 to $7,193,000 varying rates from 7.3% to 16%
in PA, NJ and NC One loan with interest at 85% of
the 30-day rate on $100,000
CDs as published by the Wall
Street Journal plus 2.75%
Condominium Units, NC Fixed rate of 8.0% 03/31/02 (a) 3,572,780 -
Office buildings, 8 loans, original Fixed rate from 9% to 12% From 07/31/98 (a) 8,377,760 114,932
amounts ranging from $900,000 prime plus 3.5% and prime to 09/30/03
to $20,000,000 in PA, VA, plus 5%
NJ and Washington, D.C. 09/30/99 (a)
Office Building, PA Fixed rate of 8% 01/01/02 (a) 16,615,724 -
Office Building, Washington, D.C.,
2 loans Fixed rate of 12% 11/30/98 (a) 5,297,790 -
Final Periodic Face
Maturity Payment Prior Amount of
Description Interest Rate Date Terms Liens Mortgages
- ----------- ------------- --------- -------- ----- ---------
Industrial Building, Pasadena, CA 2.75% over the average cost of 05/01/01 (a) $ 2,000,000 $ 3,000,000
funds to FSLIC-insured savings
and loan institutions
Retail Buildings, 6 loans, Fixed rates from 8.5% to 13.6% From 11/01/98 - 9,309,800 19,945,000
original loan amounts ranging One loan with variable interest to 12/31/19
from $1,776,000 to $5,198,000 in 90% of prime plus 5%
CA, MN, PA, VA and WV ----------- ------------
$55,540,100 $180,416,000
=========== ============
RESTUBBED FROM TABLE ABOVE
Principal
Final Periodic Carrying Subject to
Maturity Payment Amount of Delinquent
Description Interest Rate Date Terms Mortgages Interest
- ----------- ------------- --------- -------- --------- ----------
Industrial Building, Pasadena, CA 2.75% over the average cost of 05/01/01 (a) $ 328,767 $ -
funds to FSLIC-insured savings
and loan institutions
Retail Buildings, 6 loans, Fixed rates from 8.5% to 13.6% From 11/01/98 - 5,968,897 -
original loan amounts ranging One loan with variable interest to 12/31/19
from $1,776,000 to $5,198,000 in 90% of prime plus 5%
CA, MN, PA, VA and WV ----------- --------
$89,216,118 $195,792
=========== ========
Reconciliation of the total carrying amount of real estate loans for
the year follows:
Balance at October 1, 1996 $21,797,768
Additions during the period:
New mortgage loans $71,720,511
Amortization of discount 4,123,670
Additions of existing loans 1,860,117 77,704,298
----------- -----------
$99,502,066
Deductions during the period:
Collections of principal 517,136
Cost of mortgages sold 9,768,812 10,285,948
----------- -----------
Balance at September 30, 1997 $89,216,118
===========
(a) All net cash flows from the property
(b) Cost for Federal income tax purposes equals $90,054,045
-2-