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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ------ to ------
Commission file Number 1-14760
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RESOURCE ASSET INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 23-2919819
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1845 WALNUT STREET, 10TH FLOOR
PHILADELPHIA, PA 19103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 861-7900
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON SHARES AMEX
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
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 shares held by non-affiliates of
the registrant, based upon the closing price of such shares on March 15, 1999
was approximately $2.3 million.
DOCUMENTS INCORPORTATED BY REFERENCE
Portions of the proxy statement for registrants Annual Meeting of
Shareholders to be held on April 14, 1999 are incorporated by reference in Part
III of this Form 10-K.
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PART I
Item 1. Business
General
Resource Asset Investment Trust ("RAIT"), together with its wholly-owned
subsidiaries, RAIT General, Inc. (the "General Partner"), RAIT Limited, Inc.
(the "Initial Limited Partner"), and RAIT Partnership, L.P. (the "Operating
Partnership"), in which the General Partner currently owns a 1% interest and
the Initial Limited Partner currently owns a 99% interest (the "Company"), is a
Maryland real estate investment trust ("REIT") that has elected to be taxed as
a REIT under the Internal Revenue Code (the "Code") for its taxable year ending
December 31, 1998. The Company's principal business activity is to provide or
acquire loans (or participation interests in such loans) secured by mortgages
on commercial real property or similar instruments (each a "Loan") in
situations that, generally, do not conform to the underwriting standards of
institutional lenders or sources that provide financing through securitization.
To a lesser extent, the Company also may acquire real property or interests in
real property ("Property Interests").
The Company was formed in August 1997. The Company commenced operations
upon completion of its initial public offering in January 1998, which resulted
in net proceeds to the Company of $44.0 million. The Company made a second
public offering in June 1998 which resulted in an additional $42.0 million of
net proceeds to the Company. Since its initial public offering, the Company has
been principally engaged in investing the proceeds of its public offerings in
Loans and Property Interests and managing these assets. At December 31, 1998,
the Company had total assets of $201.3 million including 25 Loans with a book
value of $126.3 million (less senior debt of $46.9 million) and two Property
Interests with a book value of $68.2 million (less senior debt of $67.3
million).
Investment Objectives and Policies
The Company originates and acquires Loans secured by mortgages on real
property or similar instruments in situations that do not conform to the
underwriting standards of institutional lenders or sources that provide
financing through securitization. The Company's Loans consist of direct Loans
to borrowers and the acquisition of existing Loans (or interests in either such
kinds of Loans). In acquiring Loans the Company focuses on Loans that can be
acquired at a discount to their outstanding balance and the appraised value of
the underlying property. The Company also acquires Property Interests. The
Company's investment in a Loan or a Property Interest will generally be between
$1.0 million and $10.0 million. The Company is not, however, limited in the
amount of any investment and may invest amounts that are larger or smaller than
its targeted size range. The Company also provides short-term bridge financing
to a borrower in excess of the targeted size range where the borrower has
committed to obtain take-out financing (or the Company believes that it or the
borrower can arrange such financing) to reduce the Company's investment to an
amount within the targeted size range. The Company seeks to generate income for
distribution to its shareholders from a combination of interest, rents,
distributions in respect of rents (where the Company owns an equity interest in
a real property), proceeds from Appreciation Interests (as discussed below, see
"Business - Types of Financing") and proceeds from the sale of portfolio
investments.
Types of Financing
The Company emphasizes subordinated (or "mezzanine") financing, including
wraparound Loans. The Company is not, however, limited as to the types of
financing it may provide, and it may acquire or provide first lien financing.
In originating new Loans, the Company endeavors to adapt the terms of its
financing to the needs of its borrowers, utilizing a variety of financing
techniques such as staged payments, event specific loan advances, different
rates of interest payment and interest accrual, deferred (or "balloon")
principal payments and similar techniques. It is not anticipated that the
Company's Loans will be insured by the Federal Housing Administration or
guaranteed by the Veterans Administration or otherwise guaranteed (except by
borrowers or their affiliates, in certain cases) or insured.
1
Generally, mezzanine Loans, including wraparound Loans, will be secured by
mortgages on properties already subject to the liens of other mortgage loans. A
wraparound Loan is a junior lien Loan having a principal amount equal to the
sum of the outstanding principal balances of senior loans plus the net amount
advanced by the wraparound lender. From payments it receives on the wraparound
Loan, the wraparound lender pays principal and interest to the holders of the
senior loans, but ordinarily only to the extent that payments are received from
the borrower. Mezzanine Loans (including wraparound Loans) offer the potential
for higher yields than those ordinarily obtained in senior lien financing (and,
in the case of wraparound Loans, the possibility of increasing yields as the
principal amounts of senior loans are amortized). However, such Loans carry
greater credit risk, including substantially greater risk of non-payment of
interest or principal, than senior lien financing.
The Company may acquire Loans that are not secured by recorded or
perfected liens. Of the 25 Loans in the Company's portfolio as of December 31,
1998, five loans (8.7% by book value of the Company's portfolio) are not so
secured. Management believes that, with respect to any such Loans (including
existing Loans), the following matters serve to mitigate the Company's risks as
an unsecured lender. First, rents and other cash flow from the underlying
properties generally will be deposited directly to a bank account controlled by
the Company. Second, future liens encumbering the underlying properties are
generally prohibited by the senior lenders. Finally, the Company generally will
hold a deed-in-lieu of foreclosure that may enable it to enforce its rights
against the underlying property in an expedited fashion. However, none of these
factors will assure that these Loans are collected. Moreover, filing a
deed-in-lieu of foreclosure with respect to these Loans may (and, with respect
to the existing Loans, will) constitute an event of default under related
senior debt. Any such default would require the Company to acquire or pay off
the senior debt in order to protect its investment.
The Company seeks to originate or acquire Loans that not only have current
cash returns higher than those obtained in typical first lien institutional
financing but that also have various features designed to increase the return
over the term of the Loans. In particular, the Company seeks to include
provisions allowing it to participate in any appreciation of the value of
properties underlying the Loans or in any increase in property revenues from
rents ("Appreciation Interests"). The Company typically seeks an Appreciation
Interest at a rate of not less than 25%, and may seek to obtain either or both
types of Appreciation Interests. The Company believes that obtaining
Appreciation Interests may be advantageous to it because the Company will thus
have the opportunity of participating in the growth in value of the real
property being financed (and, therefore, the opportunity of gaining additional
compensation). However, obtaining Appreciation Interests may limit or,
possibly, reduce the amount of interest that the Company might otherwise be
able to obtain on a Loan. There can be no assurance that the Company will be
able to obtain an Appreciation Interest in any Loan, or as to the final terms
(including rate) under which it may be obtained. Moreover, because Appreciation
Interests are more usually associated with subordinated loans in order to
compensate the lender for its subordinated position, the Company may not be
able to find borrowers willing to give Appreciation Interests in first mortgage
loans (to the extent originated by the Company) on terms acceptable to the
Company. 17 of the Loans in the Company's portfolio as of December 31,1998 have
Appreciation Interests.
Loan Origination Sources
To generate loan originations, the Company relies primarily upon the
relationships senior management has developed as a result of their experience
in the mortgage lending, real estate and real estate finance industries with
developers, commercial real estate brokers, mortgage bankers, real estate
investors and other direct borrowers or referral sources, including lenders
providing financing through securitization (with respect to financing not
meeting their standard criteria). With respect to Loan acquisition, the Company
also relies on senior management's existing knowledge of and relationships with
institutional holders (primarily banks and insurance companies) who may wish to
dispose of underperforming loans in their existing portfolios that meet the
Company's financing criteria. These institutional lenders may also refer to the
Company loan opportunities presented to them that they do not wish to
underwrite.
Certain Financial Guidelines
The Company has established financial guidelines for use in evaluating
financing proposals. The Company may depart from one or more of the guidelines
in underwriting any particular Loan, provided that the Company's Loan
portfolio, in the aggregate, is in compliance. The guidelines provide as
follows: (i) the property
2
underlying the Loan will have a current appraised value of not less than 25%
below the property's estimated replacement cost, (ii) the size of the Loan will
be between $1.0 million and $10.0 million, (iii) the ratio of current cash flow
to debt service on senior lien loans with respect to the underlying property
will be at least 1.25 to 1, (iv) the ratio of current cash flow to debt service
on both senior loans and the Company's Loan will be at least 1.1 to 1, (v) the
cash flow from the underlying property will be sufficient to yield a current
return on the Company's investment of no less than 10% per year, (vi) the
aggregate of all outstanding senior debt may not exceed 75% of the appraised
value of the underlying property, and (vii) the aggregate of outstanding senior
debt plus the amount of the Company's Loan may not exceed 90% of the appraised
value of the underlying property. The "appraised value" of a property for
purposes of the guidelines is the estimate by an independent real estate
appraiser of the fair market value of the property, taking into account
standard valuation methodologies. The Company's estimate as to replacement cost
is generally based upon information developed by the Company from developers,
contractors and other persons regarding construction costs both generally and
with respect to similar properties in the area. Except for six Loans that
exceed a loan-to-value ratio of 90% (constituting 5.6% of the Company's total
assets, by book value) each of the Company's Loans at December 31, 1998
conforms to the guidelines. The Company's Loan portfolio, in the aggregate,
conforms to the guidelines.
In departing from a particular guideline for any Loan, the Company
typically considers factors that would cause the underlying property to be in
compliance with the guidelines within a reasonable time following initial
funding of the Loan. For example, the Company may depart from the cash flow
guidelines where the borrower can demonstrate (through new lease placements or
otherwise) that historical cash flow will not be representative of cash flow
during the term of the Loan, and may depart from loan-to-value guidelines where
the borrower can demonstrate that the application of the Loan proceeds will
result in an increase in property value. Notwithstanding the foregoing, these
guidelines may be changed by the Board of Trustees without notice to or
approval by the shareholders.
Location of Properties Relating to Loans
The Company generally finances properties located in metropolitan areas of
the United States where there is a significant amount of small, multi-family
residential, office and other commercial properties. Initially, the Company has
focused its financing activities in Philadelphia, Pennsylvania and the
Baltimore/Washington corridor, with a particular emphasis on the Philadelphia
metropolitan area as a result of senior management's existing experience and
relationships. Of the 25 Loans in the Company's portfolio as of December 31,
1998, 18 relate to properties located in the Philadelphia metropolitan area,
and four are located in the Baltimore/Washington corridor. The Company is not,
however, limited as to the geographic areas in which it may provide Loans and,
accordingly, it may provide Loans in metropolitan areas other than Philadelphia
and the Baltimore/Washington corridor, in metropolitan areas that do not
readily fit the Company's targeted characteristics, or in geographic areas that
are outside of metropolitan areas, as appropriate opportunities are identified,
and such Loans may (although it is not currently anticipated that they will)
constitute a material portion of the Company's investment portfolio.
Types of Properties Relating to Loans
The Company will focus its financing activities on multi-family
residential, office and other commercial properties with property values
generally between $2.0 million and $30.0 million. The Company may, in
appropriate circumstances as determined by the Board of Trustees, provide
financing to properties with values outside this range, as is the case with two
of the Loans in the Company's portfolio as of December 31, 1998. It is not
anticipated, however, that a significant number of properties will be outside
the targeted range. The Company does not normally finance undeveloped property
or make loans in situations where construction is involved except where the
underlying property (and any additional real property collateral which the
Company may require as security), as it exists at the time of the Company's
financing, meets the Company's loan-to-value guidelines. In situations where a
loan is made with respect to a property that does not meet the Company's cash
flow guidelines, the Company will typically require that the developers and
their controlling persons personally guarantee the Loan, and that some or all
of such persons, individually or in the aggregate, have net worth sufficient to
repay the Loan in the event of default. Any such Loan may also condition
funding upon the satisfaction of certain property income or occupancy criteria.
The Company is not limited in the amount or percentage
3
of its assets it may lend against any category of property. The Company
generally seeks to make loans or investments (including Property Interests) the
amount of which (together with all other loans or investments by the Company)
do not exceed (i) with respect to any one property, 5% of the Company's total
assets, or (ii) with respect to any one person or its affiliates, 10% of the
Company's total assets. Certain Loans the Company acquired as its initial
investments in connection with its initial public offering (the "Initial
Investments") were specifically excluded from these guidelines. The Company is
not limited, however, in the amount it may invest in any one property and may
exceed the guidelines where the Board of Trustees determines that the
investment characteristics of the Loan are otherwise appropriate for the
Company. At December 31, 1998, five of the Company's Loans constituting 35.0%
of the Company's total assets, exceed the guideline amount.
Acquisition of Loans at Discount
In acquiring Loans from third parties, the Company focuses on Loans that,
because of one or more past defaults under the original loan terms (due to lack
of a strong operating history for the underlying property, historical credit or
cash flow problems of the borrower or with respect to the underlying property,
or other factors), can be acquired at a discount to their outstanding balances
and the appraised value of their underlying properties. The Company will not
acquire any such loan, however, unless the prior loan holder, property owner or
some other party or parties, have taken material steps to resolve the problems
to which the loan and its underlying property have been subject and where
completion of the resolution process will not involve active intervention by
the Company. The Company seeks to acquire loans for which completion of the
resolution process will enhance the Company's total return through increased
yields or realization of some portion or all of the discount at which they were
acquired.
The Company has historically obtained some portion of the Loans it
acquires from RAI. The Company may seek to acquire additional Loans from RAI in
the future. However, the investments that may be acquired from RAI are limited
to a maximum of 30% of the Company's investments based upon the Company's cost,
excluding the Initial Investments (17.0% of the Company's total assets). As of
December 31, 1998, aside from the Initial Investments, the Company had
purchased three loan participations from RAI, participated with RAI in two
Loans, and sold one loan participation to RAI.
Lending Procedures
Prior to making or acquiring any Loan, the Company conducts an acquisition
review. The value of the underlying property is estimated by the Company based
upon a recent independent appraisal obtained by the borrower, an independent
appraisal obtained by the Company, or valuation information obtained by the
Company and thereafter confirmed by an independent appraisal. The Company makes
an on-site inspection of the property and, where appropriate, the Company
requires 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 and prepares cash flow and debt service analyses. For acquired loans,
the Company also evaluates the adequacy of the loan documentation (for example,
the existence and adequacy of notes, mortgages, collateral assignments of rents
and leases, and title policies insuring lien positions) and other available
information (such as credit and collateral files), and evaluates the status and
efficacy of programs to resolve problems to which the loan or its underlying
property may have been subject. The amount that the Company is willing to lend,
or the amount of the Company's offer to purchase, is based upon the foregoing
evaluations and analyses. The Company may modify these procedures as it deems
appropriate in particular situations.
After originating or acquiring any Loan, the Company follows specified
procedures to monitor Loan performance and compliance. The Company generally
requires that all revenues from the underlying property be deposited into an
operating account on which the Company is the sole signatory. On a monthly
basis, the Company pays the senior debt service (if any), collects its debt
service payments and all required reserves, and then transfers the balance of
the funds to the borrower. In some situations, all expenditures with respect to
a property (including debt service, taxes, operational expenses and maintenance
costs) are required to be paid from that account and are subject to review and
approval by the Company prior to payment. The borrower is required to supply
monthly operating statements and yearly certification of compliance with the
terms of the Loan. The
4
Company may also require that its approval be obtained before any material
contract or commercial lease with respect to the property is executed and that
the borrower prepare a budget for the property not less than 60 days prior to
the beginning of a year, which must be reviewed and approved by the Company.
Acquisition of Property Interests
As appropriate, either as part of the Company's investment strategy or for
tax planning purposes, the Company also acquires Property Interests. The
Company believes that acquiring Property Interests is advantageous for three
primary reasons. First, it gives the Company flexibility in addressing the
financial needs and tax situations of borrowers in situations where debt
financing may not be appropriate. Second, it provides the Company with the
possibility of capital appreciation in addition to the current income realized
from its loan portfolio. Third, it assists the Company in its tax planning.
Certain of the Company's current Loans (and, it is anticipated, some of its
future Loans) may result in timing differences between (i) the actual receipt
of income and the actual payment of deductible expenses and (ii) the inclusion
of that income and deduction of such expenses in arriving at its REIT taxable
income. This would increase the amount that the Company must distribute to its
shareholders to avoid corporate income tax in such year, although there may be
no contemporaneous corresponding receipt of cash by the Company. Depreciation
deductions associated with the Company's investments in Property Interests,
however, should help offset such adverse tax effects.
The Company is not limited in the amount it may invest in Property
Interests; however, the Company's acquisition of Property Interests is
generally subject to (and included within) the asset concentration guidelines
regarding Loans.
The Company conducts an acquisition review with respect to Property
Interests similar to the review the Company conducts in acquiring or
originating Loans. The Company also requires satisfactory evidence (generally
in the form of title insurance) that the Company (if the Company is acquiring
the Property Interest directly), or the entity owning the property in which the
Company is acquiring an interest, has or will acquire good and marketable title
to the property subject only to such encumbrances as are acceptable to the
Company.
The Company's current Property Interests are located in the same
geographic area, and are of the same type, as the properties underlying its
Loans. The Company is not limited, however, as to the geographic areas in which
it may acquire Property Interests. The Property Interests will involve the same
types of properties as those for which the Company intends to provide
financing. The Company does not manage any Property Interests, but retains the
services of third-party management companies, including (subject to approval by
a majority of the Independent Trustees) Brandywine Construction & Management
("Brandywine"), an affiliate of RAI.
In addition to acquiring a property directly, the Company may also acquire
interests in a property, typically in the form of an interest in a partnership,
joint venture or limited liability company owning the property. One of the
Company's current Property Interests is in the form of an 89% partnership
interest in a partnership that owns a property. These interests will be
acquired either to provide financing in situations where further debt financing
cannot be used, where further debt financing is inappropriate (as, for example,
where senior lienors have imposed covenants against further borrowing or
against the imposition of junior liens), or where the Company is seeking an
equity interest in a property (similar to an Appreciation Interest) as part of
a financing package. Where the Company does not own substantially all of the
interest, it will typically require that its interests be preferred over the
interests of other owners both as to current distributions and repayment of
invested capital. The Company also typically requires that the owners incur no
further debt and issue no equity interest of equal rank with or senior to the
Company's interest without the Company's consent. However, the Company is not
limited in the kinds of equity interests that it may acquire and can,
accordingly, acquire interests that are not preferred or permit co-owners of
the properties to incur further debt without the Company's consent. The Company
endeavors to structure these investments so that they qualify as real estate
assets within the meaning of the Code and so that the income therefrom
qualifies as income from interests in real estate within the meaning of the
Code. The Company will closely monitor any such investment that does not
qualify as a real estate asset so that the Company's qualification as a REIT
will not be jeopardized. The Company also closely monitors any such investments
so that the Company will not jeopardize its exemption from the registration
requirements of the Investment Company Act.
5
Leverage
Although the Company is permitted to incur recourse debt to fund its
investment in Loans or Property Interests, the Company generally will not do so
unless it does not have immediately available capital sufficient to enable it
to acquire a particular investment. The Company may also incur recourse debt in
order to prevent default under loans senior to the Company's Loan or to
discharge senior loans entirely if this becomes necessary to protect the
Company's Loan. This may occur if foreclosure proceedings are instituted by the
holder of a mortgage interest which is senior to the Company's Loan or if
filing a deed-in-lieu of foreclosure upon default of the Company's Loan would
constitute a default under a related senior loan. The Company may incur
recourse indebtedness in order to assist in the operation of any property
financed by the Company and as to which the Company has subsequently taken over
operations as a result of default, or to protect its Loan. The Company may also
borrow to the extent the Company deems it necessary to meet REIT distribution
requirements imposed by the Code. Some or all of the Company's assets may
collateralize debt incurred by the Company. The Company anticipates that, in
normal operations, it will not exceed a debt to equity ratio of 0.5 to 1.0. For
purposes of calculating this ratio, the Company's indebtedness will be equal to
all recourse indebtedness of the Company, and equity will be equal to the fair
market value of the Company's net assets based upon the most recent appraised
value of the properties underlying the portfolio. However, where the Company's
Loan is in the form of wraparound financing, the stated principal amount of the
Loan for book purposes is increased by the amount of the senior debt to which
the underlying property is subject, and the Company records a corresponding
liability, even where the sole recourse for the senior debt is to the
underlying property. Any such senior debt is not included in calculating the
Company's debt to equity ratio. The Company is not limited as to the amount of
debt that it may incur, and may have a debt to equity ratio that may from time
to time vary substantially from 0.5 to 1.0, if appropriate investment
opportunities are presented. At December 31, 1998, the Company had no debt for
purposes of the above calculation.
In addition to indebtedness that may be incurred by the Company, the
properties underlying financing provided by the Company (or the Property
Interests acquired by the Company) may be subject to indebtedness existing at
the time of the Company's financing or created in connection with the Company's
financing. Provided that such indebtedness is without recourse to the Company
(but subject to the Company's financial guidelines; see "Investment Objectives
and Policies - Certain Financial Guidelines"), the Company is not subject to
limitations in connection with the amount of non-recourse debt financing
pertaining to properties underlying its Loans or Property Interests.
Portfolio Turnover
The Company does not purchase investments with the intention of engaging
in short-term trading. The Company may, however, sell any particular investment
and reinvest proceeds (subject to distribution requirements and limitations on
asset sales imposed on a REIT by the Code), when it is deemed prudent by the
Company's management, regardless of the length of the holding period. In
addition, the Company may provide bridge loan financing requiring repayment
within a substantially shorter period of time than the Company's other Loans.
The Company may reinvest the proceeds of such Loans into new loans or may roll
over such bridge loans to permanent financing. As of December 31, 1998, the
Company had sold a junior participation in one loan to RAI for $4.0 million.
Existing Investments
At December 31, 1998, the Company's investments consisted of two Property
Interests and 25 loans or loan participations.
Property Interests
On March 17, 1998, the Company purchased a property in Rohrerstown,
Pennsylvania for $1,655,000. The property, which consists of a 12,630 square
foot building on 2.193 acres, is currently being used as a diagnostic imaging
center by a subsidiary of a large health care provider. The tenant has occupied
the property since December 1997 and pays rent of $169,242 per year
(approximately $13.40 per square foot) under a "triple net" lease that
terminates on February 28, 2008. Subsequent to its purchase of the property,
the Company obtained
6
non-recourse, third party financing for the property with a mortgage loan in
the original principal amount of $1.1 million ($1.09 million at December 31,
1998) bearing interest at 7.33%. The mortgage is payable on a 25-year
amortization schedule (requiring monthly debt service payments of $8,008) and
becomes due on August 1, 2008.
On July 21, 1998, the Company purchased an 89% interest in a partnership
that owns a property in Philadelphia, Pennsylvania for $750,000. The property
is subject to senior lien interests existing at the time of the Company's
acquisition of its interest aggregating approximately $65 million. The property
consists of 456,000 square feet of retail/office space that was 97% occupied as
of December 31, 1998 at an average rental of $19.39 per square foot plus
certain expenses. The property's long-term debt is made up of the following
loans: (1) a first mortgage with a balance of $43.9 million at December 31,
1998, bearing interest at 6.85%, amortizing on a 30-year schedule, requiring
monthly debt service payments of $288,314, and due August 1, 2008; (2) a second
mortgage with a balance of $4.4 million at December 31, 1998, bearing interest
at 10%, with interest payments due monthly from the net cash flow (as defined)
of the property, which is due August 1, 2008; and (3) a promissory note with a
balance of $17.9 million at December 31, 1998, bearing interest at 12%, with a
pay rate of a minimum of 8.19%, which is due on September 1, 2008. The Company
receives certain payments, after payments due on the first mortgage, which are
equivalent to a 12% return on the Company's investment.
Loans. The following table sets forth certain information regarding the
Loans as of December 31, 1998:
Average
Balances Number Loan-to- Yield
Type of Loan Outstanding of Loans Value Range Range of Maturities
- -------------------------------------- --------------------- ---------- ---------- ---------- --------------------
Long-term first mortgages and senior
loan participations ................. $ 35,111,995 9 49% 9-16% 9/2/99-7/31/21
Mezzanine (including wraparound) loans $ 81,334,701(1) 11 78% 11-30% 1/1/02-11/30/08
Short term bridge loans .............. $ 9,881,200 5 75% 9-22% 11/30/98-3/1/99
- ------------
(1) Includes $46,936,032 of senior financing.
Long Term First Mortgages and Senior Loan Participations
Description of Long Term First Mortgages and Senior Loan Participations
(the "First Mortgage Loans") and the Collateral. Each of the First Mortgage
Loans bears interest at a fixed rate per annum and requires specified debt
service payments either on a interest only basis (eight Loans) or on the basis
of a specified principal amortization schedule plus interest (one Loan). Seven
of the First Mortgages are cash flow mortgages; however in two of such
situations, the Company owns a participation in the first mortgage and is
therefore only entitled to a specified monthly payment. The First Mortgage
Loans are secured by multi-family apartment buildings in the greater
Philadelphia area, Chicago, Illinois, and Pittsburgh, Pennsylvania.
Prepayment Terms. All First Mortgage Loans except one (in the amount of
$2.0 million) are prepayable without penalty.
Appreciation Interests. Six First Mortgage Loans (in the aggregate amount
of $16.8 million, including five cash flow mortgages) include Appreciation
Interests based on cash flow and property appreciation.
Limited Non-Recourse. The First Mortgage Loans are generally nonrecourse
loans as to which, in the event of a default under such loans, recourse
generally may be had only against the collateral, subject to certain standard
carve-outs relating to defaults involving fraud, misappropriation of rents,
environmental obligations and similar matters.
Prohibition on Sale, Encumbrance and Transfer. The First Mortgage Loans
prohibit the transfer, sale or encumbrance of the real properties or interests
in the borrowers related to such First Mortgage Loans, with certain specified
exceptions.
Mezzanine (including wraparound) Loans
Description of Mezzanine (including wraparound) Loans (the "Mezzanine
Loans") and the Collateral. Each of the Mezzanine Loans bears interest at a
fixed rate per annum and requires specified debt service
7
payments either on an interest only basis (nine Loans) or on the basis of a
specified principal amortization schedule plus interest (two Loans). Six of the
Mezzanine Loans are cash flow mortgages, however in three of such situations,
the Company owns a participation in the Mezzanine Loan and is therefore only
entitled to a specified monthly payment. The Mezzanine Loans are secured by
multi-family apartment buildings in Philadelphia, Pennsylvania, Baltimore,
Maryland and New London, Connecticut, and commercial buildings in Philadelphia,
Pennsylvania, Alexandria, Virginia, Washington, D.C. and Atlanta, Georgia.
Prepayment Terms. Three of the Mezzanine Loans (in the aggregate amount of
$34.6 million) are subject to a prepayment lockout period during which time
such loans may not be prepaid. Subsequent to the lockout period these three
loans are prepayable subject to prepayment penalties based on specified yield
maintenance formulas and/or other required costs.
Appreciation Interests. Eight Mezzanine Loans (in the aggregate amount of
$73.2 million, including three cash flow Loans) include Appreciation Interests
based on cash flow and property appreciation.
Limited Non-Recourse. The Mezzanine Loans are generally nonrecourse loans
as to which, in the event of a default under such loans, recourse generally may
be had only against the collateral, subject to certain standard carve-outs
relating to defaults involving fraud, misappropriation of rents, environmental
obligations and other similar matters.
Prohibition on Sale, Encumbrance and Transfer. The Mezzanine Loans
generally prohibit the transfer, sale or encumbrance of the real properties or
interests in the borrowers related to such Mezzanine Loans, with certain
specified exceptions.
Short Term Bridge Loans
Description of Short Term Bridge Loans (the "Bridge Loans") and the
Collateral. Each of the Bridge Loans bears interest at a fixed rate per annum.
The Bridge Loans are secured by multi-family apartment buildings and a
commercial building in Philadelphia, Pennsylvania.
Prepayment Terms. Three of the Bridge Loans (in the aggregate amount of
$4.8 million) have prepayment lockout periods during which time the loans may
not be prepaid. One Bridge Loan (in the amount of $1.2 million) is prepayable
subject to prepayment penalties based on specified yield maintenance formulas
and/or other required costs.
Limited Non-Recourse. Four Bridge Loans are generally nonrecourse loans as
to which, in the event of a default under such loans, recourse generally may be
had only against the collateral, subject to certain standard carve-outs
relating to defaults involving fraud, misappropriation of rents, environmental
obligations and similar matters. One Bridge Loan (in the amount of $1.2
million) is recourse to the borrower.
Prohibition on Sale, Encumbrance and Transfer. The Bridge Loans generally
prohibit the transfer, sale or encumbrance of the real properties or interests
in the borrowers related to such Bridge Loans, with certain specified
exceptions.
Guaranties. One of the Bridge Loans (in the amount of $1.2 million) is
supported by a guaranty of payment and performance.
Competition
Although the commercial mortgage loan origination and acquisition business
is generally competitive in virtually all of its aspects, the Company's focus
on the origination or acquisition of loans in situations that, generally, do
not conform to the underwriting standard of institutional lenders or sources
that provide financing through securitization is a niche in which the Company
believes there are relatively few specialized investors. In the overall market
for the origination and 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).
8
Many of the Company's competitors possess greater financial and other
resources than the Company. As a result, there can be no assurance that the
Company will be able to effect origination or acquisition of loans in the same
manner and on the same terms as in the past or that there will not be
significant variations in the profitability of the Company's commercial
mortgage loan origination and acquisition business. In this regard, the Company
will also have to compete for capital necessary to fund its operations based
largely upon the performance of its loan portfolio.
Cautionary Statements for Purposes of the Safe Harbor
Statements made by the Company in written or oral form to various persons,
including statements made in filings with the U.S. Securities and Exchange
Commission, that are not strictly historical facts are "forward-looking"
statements that are based on current expectations about the Company's business
and assumptions made by management. Such statements should be considered as
subject to risks and uncertainties that exist in the Company's operations and
business environment and could render actual outcomes and results materially
different than predicted. The following includes some, but not all, of the
factors or uncertainties that could cause the Company to miss its projections:
The real property underlying the Company's Loans is the primary or sole
source of any recovery for the Company on its Loans. Accordingly, the Company
is materially dependent upon the value of the real property underlying its
Loans, which value may be affected by numerous factors outside the control of
the Company. The Company's Loans typically provide payment structures other
than self-amortization, including structures that defer payment of some portion
of accruing interest, or defer repayment of principal, until loan maturity.
Where a borrower has an obligation to pay a Loan balance in a large lump sum
payment, its ability to satisfy this obligation may be dependent upon its
ability to obtain suitable refinancing or otherwise to raise a substantial cash
amount.
The Company's Loans generally will have maturities between four and ten
years, typically will not conform to standard underwriting criteria and may
often be subordinate loans. As a result, the Loans in the Company's portfolio
will be relatively illiquid investments and the Company will be unable to vary
its portfolio promptly in response to changing economic, financial and
investment conditions. Although the Company will attempt to obtain Appreciation
Interests in its Loans to provide it with additional compensation, there can be
no assurance that it will be able to do so.
The Company emphasizes the origination and acquisition of mezzanine
(including wraparound) financing, which are junior lien loans. Because of their
subordinate position, junior lien loans carry a greater credit risk, including
a substantially greater risk of non-payment of interest or principal, than
senior lien financing. Where, as part of a financing structure, the Company has
an equity or other unsecured position, the risk of loss may be materially
increased. A decline in the real estate market where the property underlying
the Loan is located could adversely affect the value of the property such that
the aggregate outstanding balances of senior liens and the Company's Loan may
exceed the value of the underlying property. In the event of a default on a
senior loan, the Company may elect to make payments, if it has the right to do
so, in order to prevent foreclosure on the senior loan. In the event of
foreclosure, the Company will only be entitled to share in the proceeds after
satisfaction of the amounts due to senior lienors, which may result in the
Company not being able to recover the full amount or, indeed, any of its
investment.
The Company has acquired, and may in the future acquire, loans not
collateralized by recorded or perfected liens. These loans generally will be
subject and subordinate not only to existing prior liens encumbering the
underlying property, but also to future liens that may arise. Furthermore, in a
bankruptcy, the holder of an unsecured loan has materially fewer rights than
secured creditors and the holders' rights are subordinate to the lien-like
rights of the bankruptcy trustee.
The Company's Loans typically will not conform to conventional loan
criteria due to past defaults by borrowers resulting from lack of a strong
operating history for the properties underlying the Loans, historical credit or
cash flow problems of the borrowers or with respect to the underlying
properties, or other factors. As a result, the Company's Loans (and,
particularly, loans that the Company acquires at a discount) may be subject to
a higher risk of default than conventional loans.
9
The Company's Loans often have loan-to-value ratios in excess of 80%. By
reducing the margin available to cover fluctuations in property value (or
differences between appraised value and the amount actually obtainable upon
foreclosure and sale), a Loan with a high loan-to-value ratio may involve
increased risk that, upon default, the amount obtainable from sale of the
underlying property may be insufficient to repay the financing.
The market value of the Company's Loans will be affected by changes in
interest rates. In general, the market value of a loan will change in inverse
relation to an interest rate change where a loan has a fixed interest rate or
only limited interest rate adjustments. Accordingly, in a period of rising
interest rates, the market value of such a loan will decrease. Moreover, in a
period of declining interest rates, real estate loans may benefit less than
other fixed income securities due to prepayments. Interest rate changes will
also affect the Company's return on new Loans that it makes. In particular,
during a period of declining rates, the amounts becoming available to the
Company for investment due to repayment of its Loans may be invested at lower
rates than the Company had been able to obtain in prior investments, or than
the rates on the repaid Loans. Also, increases in interest on debt, if any,
incurred by the Company in originating or acquiring Loans or Property Interests
may not be reflected in increased rates of return on the Loans or Property
Interests funded or acquired through such debt, thereby adversely affecting the
Company's return on such investments. Accordingly, interest rate changes may
materially adversely affect the total return on the Company's investment
portfolio.
The Company's Loans are, and the Company anticipates that they will
continue to be, concentrated in the Philadelphia region and the
Baltimore/Washington corridor for the foreseeable future. Such a lack of
geographic diversification may result in the Company's investment portfolio
being more sensitive to, and the Company being less able to respond to,
economic developments of a primarily regional nature, which may result in
reduced rates of return, or higher rates of default, on the Company's Loans
than might be incurred with a more geographically diverse investment portfolio.
The Company may not be able to obtain Appreciation Interests in connection
with its Loans and, even if obtained, an Appreciation Interest may result in a
lower stated interest on a Loan. Even if the Company obtains an Appreciation
Interest in connection with a particular Loan, the rate may be less than that
sought by the Company.
The Company's Loans may be secured by interests in entities owning real
property, rather than the property itself. In that event, the Company will be
subject to the risk that the interests pledged as a security will be illiquid,
or otherwise have features that may make it difficult for the Company to obtain
a return of its investment in the event of a default on its Loan. These
interests typically will be subject and subordinate to the rights of creditors
of the entity and the property owned by that entity.
Interest charged on Loans owned by the Company (which may include amounts
received in connection with Appreciation Interests) may be subject to state
usury laws imposing maximum interest rates and penalties for violation,
including restitution of excess interest and unenforceability of debt.
Although the Company does not seek to originate construction loans, the
Company may make loans in situations where construction is involved, generally
either (i) as financing that repays a third party's construction loan, or (ii)
where the loan is secured by property with a pre-construction value that is
within the Company's investment guidelines. The Company may depart from its
guidelines, typically where there are other assurances of payment such as
personal guarantees from the developers. Loans in construction situations may
involve a higher degree of risk than other lending, to the extent that
repayment is dependent upon successful completion of the project, or as a
result of the lack of an operating history on the project as constructed or
rehabilitated upon which to base a loan's underwriting, difficulties in
estimating construction costs and timing, the financial strength of guarantors
and other reasons.
Income from and the value of the Company's Property Interests (as well as
the real properties underlying the Company's Loans) may be adversely affected
by general and local economic conditions, neighborhood values, competitive
overbuilding, casualty losses and other factors beyond the Company's control.
Revenues from and values of real properties are also affected by such factors
as the cost of compliance with regulations and the potential for liability
under applicable environmental laws, changes in interest rates and the
availability of financing. Income from a property will be adversely affected if
a significant number of tenants are unable to pay
10
rent or if available space cannot be rented on favorable terms. Certain
significant expenditures associated with real property (such as mortgage
payments, real estate taxes and maintenance costs) generally are not reduced
when circumstances cause a reduction in income from the property.
Real estate investments are relatively illiquid and, therefore, the
Company may be limited in its ability to vary its portfolio of Property
Interests quickly in response to changes in economic or other conditions.
To the extent that the Company acquires equity interests in an entity
owning a property, or lends against the security of such interests in whole or
in part, the Company's interests will be subordinate to both general and
secured creditors of the entity. This subordination could increase the
Company's risk of loss. Moreover, acquisition of equity interests provides
certain risks not present in real property loans or direct property ownership.
For example, there is the possibility that the other equity owners in the
entity holding the property might have economic or business interests or goals
which are inconsistent with the business interests or goals of the Company or
be in a position to take action contrary to the instructions or requests of the
Company or contrary to its policies or objectives. Moreover, in limited
partnerships, even if the Company is a limited partner, if its rights under the
partnership agreement allow it sufficient control over the partnerships or its
property, it might be deemed to be a general partner and, in such a case, could
incur liability for the debts of the partnership beyond the amount of its
investment.
Item 2. Properties
The Company's office is located in Philadelphia, and is sub-leased from
JeffBanks, Inc. ("JBI") under an agreement providing for rents of $24,000 per
year through May 2008. The Chairman and Chief Executive Officer of the Company
is the Chairman and Chief Executive Officer of JBI and she, together with her
spouse (also an officer and director of JBI), are principal shareholders of
JBI. For a description of Property Interests owned, see Item 1.
"Business-Existing Investments: Property Interests."
Item 3. Legal Proceedings
Pursuant to a loan restructuring agreement entered into prior to the
Company's acquisition of one of the Loans, the borrower was required to make
payments on the loan in a minimum monthly amount plus certain excess cash flow.
The borrower was current on minimum payments, but the Company determined that
the borrower had not made all required excess cash flow payments. Accordingly,
the Company moved to exercise its remedies, which included the right to replace
the current manager of the property, an affiliate of the borrower. In November
1998, the borrower sought protection under Chapter 11 of the United States
Bankruptcy Code in order to prevent the Company's exercise of this remedy. The
borrower has continued to make all minimum monthly payments throughout the term
of the bankruptcy proceedings. In March 1999, the Company and the borrower
entered into a settlement agreement whereby the borrower and the Company will
file a joint plan of reorganization pursuant to which the borrower will
relinquish ownership management control of the property. The Company believes
that the property has not been managed to its full potential and that this
change in management control will increase the Company's return on this
investment.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
11
PART II
Item 5. Market for the Company's Common Equity and Related Shareholder Matters
The Company had approximately 1,345 Common Shareholders as of March 15,
1999. The shares are traded on the American Stock Exchange under the symbol
"RAS".
The following table sets forth the high and low sales prices of the
Company's Common Shares, together with quarterly dividend payment information
for such period.
Cash
Dividends
Quarter Ended High Low Per Share
- ----------------------------------------------- ----------- ----------- ----------
December 31, 1998 .......................... $ 14.13 $ 8.63 $ .51
September 30, 1998 ......................... $ 19.00 $ 11.00 $ .51
June 30, 1998 .............................. $ 19.13 $ 15.25 $ .48
March 31, 1998 (from inception of trading on
January 14, 1998) ........................ $ 19.50 $ 15.00 $ .27
For the first quarter of 1999 (through March 15, 1999) the high and low sales
prices of the Company's Common Shares as reported by the American Stock
Exchange were $13.13 and $10.50.
Item 6. Selected Financial Data
The following selected financial and operating information of the Company
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements of
the Company, including the notes thereto, included elsewhere herein.
For the period
August 20, 1997
(date of inception)
As of or for the year ended through December
December 31, 1998(1) 31, 1997
----------------------------- --------------------
(dollars in thousands except per share data)
Total revenues .............................. $ 17,177 --
Funds from operations ("FFO"(2)) ............ 9,238 --
FFO(2) per share-basic ...................... 1.98 --
FFO(2) per share-diluted .................... 1.97 --
Net Income (loss) ........................... 8,474 $ (46)
Net Income per share-basic .................. 1.82 nm
Net Income per share-diluted ................ 1.81 nm
Dividends per share ......................... 1.77 --
Total assets ................................ 201,259 2,192
Indebtedness secured by real estate ......... 114,204 --
Shareholders' equity(deficiency) ............ 85,518 (45)
Shareholders' equity per share .............. 13.87 nm
- ------------
(1) Operations commenced January 14, 1998.
(2) FFO adjusts net income (including realized gains) for non-cash charges
such as real property depreciation and certain amortization expenses.
nm Per share amounts would be based on the pre-offering amount of 100 shares
outstanding, and accordingly, would not be comparable to amounts shown
after the Company's two public offerings.
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company commenced investment operations in January 1998. Its principal
business objective is to generate income for distribution to its shareholders
from a combination of interest, rents and distributions in respect of rents
from financings funded, Loans or Property Interests acquired and other
investments. The Company completed two public offerings of its Common Shares
during 1998 and utilized these proceeds to build its investment portfolio.
Liquidity and Capital Resources
Since commencement of investment operations in January 1998, the principal
source of the Company's capital resources has been the two offerings of its
Common Shares which, after offering costs and underwriting discounts and
commissions, resulted in net proceeds to the Company of $86.0 million.
Secondarily, the Company has obtained capital resources from the repayment or
refinancing of Loans in its portfolio (or principal payments on those Loans),
aggregating $38.4 million for the year ended December 31, 1998. The principal
use of these funds has been the origination and acquisition of Loans ($120.3
million) and Property Interests (2.4 million).
The Company also receives funds from interest payments on its Loans and
operating income from its Property Interests. As required by the Internal
Revenue Code of 1986, the Company utilized these funds (to the extent of not
less than 95% of its taxable income) to pay dividends to its shareholders. For
the year ended December 31, 1998, the Company had paid dividends of $8.8
million.
During the last half of 1998, capital market conditions resulted in a
reduction in the ability of many companies, and particularly specialized
finance companies such as the Company, to obtain financing. These capital
market conditions may have affected the Company's ability to obtain
Company-level debt and equity capital, which, in turn, may have adversely
affected the Company's near-term growth. The Company cannot now predict when
these capital market conditions will improve. In response to these conditions,
and to enhance both its ability to expand its loan portfolio and to generate
income from that portfolio, during 1998 the Company sought to (i) provide
shorter- term financing to its borrowers (generally in the form of bridge
financing) to increase the turnover of its investments, and (ii) pursue
borrower refinancing of the Company's Loans through senior lenders, with the
Company retaining junior interests. During 1998, 11 of the Company's Loans were
refinanced, resulting in net proceeds to the Company of $38.3 million. The
Company retained junior lien interests in these Loans aggregating $19.3
million. The Company has not experienced material difficulties to date in
originating shorter-term financings or obtaining senior lien refinancings on
acceptable terms. However, there can be no assurance that difficulties will not
be encountered in the future, depending upon the development of conditions in
the credit markets
At December 31, 1998, the Company had approximately $5.0 million in funds
available for investment. All of such funds were temporarily invested in a
money-market account that the Company believed had a high degree of liquidity
and safety.
As of March 15, 1999, $3.9 million of the Company's short term bridge
loans have been repaid and it is expected that four additional short-term
bridge loans will be repaid by April 1999 which will provide additional funds
available for investment in the approximate amount of $6.0 million.
Results of Operations
The Company had average earning assets for the year ended December 31,
1998 of $68.3, including $22.0 million of average earning assets invested in a
money-market account. The money market account generally has an interest rate
that is substantially below interest rates the Company seeks in providing
financing, and the rates of return the Company seeks in originating and
acquiring Loans and Property Interests.
The Company's primary source of income for the year ended December 31,
1998 was interest income from its earning assets, of which $10.5 million was
derived from financings and $928,000 from the money market account. The yield
on average earning assets was 20.4% for the period, while the yield on average
earning money market account assets was 5.2%. The Company also derived $4.6
million from rents from its property
13
interests and approximately $153,000 of miscellaneous income. Included in
interest income is approximately $5,000 of amortization of original issue
discount with respect to one financing, and $250,000 of accretion of loan
discount relating to eight loans the Company acquired at a discount to the
appraised value of the underlying properties. In addition, the Company
recognized a gain on the sale of a loan participation in the amount of
$940,000. During 1997 (the year the Company was formed), the Company engaged in
organizational activities, including preparation for its initial public
offering, and consequently had no revenues.
14 of the Company's Loans are subject to forbearance agreements or other
contractual restructurings. These agreements were in place prior to the
Company's acquisition. During the year ending December 31, 1998, all payments
under the agreements were timely made and all borrowers (except one-See Part I,
Item 3. "Legal Proceedings") were otherwise in full compliance with the terms
of the agreements. The remaining eleven loans in the Company's portfolio are
performing in accordance with their terms as originally underwritten by the
Company and were current as to payments as of December 31, 1998.
During the year ended December 31, 1998, the Company incurred expenses of
$8.8 million, consisting primarily of $4.3 million of interest expense, $2.3
million in operating expenses relating to its Property Interests, $1.1 million
of general and administrative expenses and $796,000 of depreciation and
amortization. Interest expense relates to interest payments made on senior
indebtedness encumbering properties underlying the Company's investments in
wraparound Loans and properties owned by the Company. The Company anticipates
that interest expense will increase in 1999 to reflect increases in the size of
the Company's wraparound loan portfolio. During 1998 the Company initiated a
reserve for loan losses of $226,000. This reserve is a general reserve and is
not related to any individual loan or to an anticipated loss. In accordance
with its policy, the Company will analyze the adequacy of this reserve on an
annual basis. During 1997, the Company had no operations, and its sponsor, RAI,
paid for approximately $1.6 million of its expenses which was recorded as
"Reimbursement due Affiliate". The Company reimbursed RAI for these expenses
from the proceeds of its initial public offering in January 1998.
Computer Systems and Year 2000 Issue
The "Year 2000 issue" is the result of computer programs being written
using two digits, rather than four digits, to identify the year in a date
field. Any computer programs using such a system, and which have date sensitive
software, will not be able to distinguish between the year 2000 and the year
1900. This could result in miscalculations or an inability to process
transactions, send invoices or engage in similar normal business activities,
which could cause a disruption of business operations. The Company has
completed the process of evaluating Year 2000 compliance of both its
information technology and non-information technology systems (collectively,
the "Systems"). Based upon that assessment, the Company has determined that it
has in place Year 2000 capable Systems for all internal operations.
As a newly organized business that purchased its Systems during 1998, all
of the Systems that were acquired were certified as Year 2000 compliant.
Consequently, the Company did not incur remediation costs above the cost of the
equipment and software.
The Company has initiated communications with all of its significant
business partners through a Vendor Readiness Survey to determine their Year
2000 compliance. Responses are evaluated as they are received to determine if
additional action is required to ensure compliance of the business partner. As
of December 31, 1998, all of the Company's principal business partners have
advised the Company that they are Year 2000 compliant or have initiated
programs that will render them Year 2000 compliant in a timely fashion.
As a result of its internal assessment and survey of its business
partners, the Company currently does not believe that Year 2000 matters will
have a material impact on its business, financial condition or results of
operations. To the extent that any of its business partners are materially
affected by Year 2000 problems, the Company intends to seek alternative firms
providing the same services that are Year 2000 compliant. In view of the
responses from its current business partners, the Company will identify
alternative firms on an as-needed basis. There can be no assurance, however,
that the Company would be able to make appropriate arrangements should the need
arise and, accordingly, it is uncertain whether or to what extent the Company
may be affected if problems with its business partners arise.
14
The Company is aware of the potential for claims against it and other
companies for damages for products and services that were not Year 2000
compliant. Since the Company is neither a hardware manufacturer nor a software
developer, the Company believes that it does not have significant exposure to
liability for such claims.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
The following table sets forth certain information regarding the cash held
in a money market account, Loans held in the Company's portfolio and long term
debt underlying the Company's Loans and Property Interests as of December 31,
1998. The presentation, for each category of information, aggregates the assets
and liabilities by their maturity dates for maturities occurring in each of the
years 1999 through 2003 and separately aggregates the information for all
maturities arising after 2003.
Interest Bearing Assets and Liabilities, Aggregated by Maturity Date
As of December 31, 1998
1999 2000 2001 2002
---------------- ------------- --------------- --------------
Interest Bearing Assets:
Money market accounts ............ $ 5,011,666 -- -- --
First mortgages and senior
loan participations ............. 1,023,715 $ 282,453 $ 2,905,477 $ 358,639
Average interest rate ............ 12.0% 12.0% 14.0% 12.0%
Mezzanine (including
wraparound) loans ............... -- -- -- 19,387,979
Average interest rate ............ -- -- -- 11.4%
Bridge loans ..................... 9,881,200 -- -- --
Average interest rate ............ 10.2% -- -- --
Interest Bearing Liabilities:
Senior Indebtedness
Secured by real estate
underlying the Company's
wraparound loans ................ 612,547 664,179 719,769 780,113
Average interest rate ............ 7.9% 7.9% 7.9% 8.0%
Long term debt secured by real
estate owned .................... 443,083 474,922 508,049 545,628
Average interest rate ............ 6.9% 6.9% 6.9% 6.9%
Fair Market
2003 Thereafter Total Value
---------------- --------------- ---------------- --------------
Interest Bearing Assets:
Money market accounts ............ -- -- $ 5,011,666 $ 5,011,666
First mortgages and senior
loan participations ............. $ 23,881,564 $ 6,660,147 $ 35,111,995 $ 36,125,331
Average interest rate ............ 11.6% 10.6% 11.6%
Mezzanine (including
wraparound) loans ............... -- 61,946,722 $ 81,334,701 $ 81,575,302
Average interest rate ............ -- 11.0% 11.1%
Bridge loans ..................... -- -- $ 9,881,200 $ 9,881,200
Average interest rate ............ -- -- 10.2%
Interest Bearing Liabilities:
Senior Indebtedness
Secured by real estate
underlying the Company's
wraparound loans ................ 12,295,543 31,863,881 $ 46,936,032 $ 45,937,238
Average interest rate ............ 9.1% 7.1% 7.7%
Long term debt secured by real
estate owned .................... 584,837 64,710,406 $ 67,267,925 $ 59,333,809
Average interest rate ............ 6.9% 8.5% 8.4%
Market Risk
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
Company's primary market risk exposure is to changes in interest rates, which
can affect the value of the Company's investments, and the rates at which it
reinvests funds it obtains from loan repayments. As interest rates increase,
although the interest rates the Company obtains from reinvested funds will
generally increase, the value of its existing loans at fixed rates will
generally tend to decrease. This relationship between interest rate and value
may be diminished or not applicable to those of the Company's Loans
(principally Loans acquired at a discount) that (while normally at fixed rates
of interest) have a substantial amount of interest outstanding and are payable
to the extent of a property's cash flow.
15
Item 8. Financial Statements
Resource Asset Investment Trust
Index to Financial Statements
Page
--------
Report of Independent Certified Public Accountants ....................................... 17
Consolidated Balance Sheets at December 31, 1998 and 1997 ................................ 18
Consolidated Statements of Operations for the year ended December 31,1998 and for the
period
from August 20, 1997 (date of inception) through December 31, 1997 ....................... 19
Consolidated Statements of Changes in Shareholders' Equity (Deficiency) for the year ended
December 31, 1998 and for the period from August 20, 1997 (date of inception) through
December 31, 1997 ........................................................................ 20
Consolidated Statements of Cash Flows for the year ended December 31, 1998 and for the
period
from August 20, 1997 (date of inception) through December 31, 1997 ....................... 21
Notes to Consolidated Financial Statements ............................................... 22-31
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
notes thereto ............................................................................ 32
16
[Grant Thornton Letterhead]
Report of Independent Certified Public Accountants
Board of Trustees
Resource Asset Investment Trust
We have audited the accompanying consolidated balance sheets of Resource
Asset Investment Trust and Subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the year ended December 31, 1998 and for the period
from August 20, 1997 (date of inception) through December 31, 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 Asset
Investment Trust and Subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the year
ended December 31, 1998 and for the period from August 20, 1997 (date of
inception) through December 31, 1997, in conformity with generally accepted
accounting principles.
We have also audited Schedule IV as of December 31, 1998. In our opinion
this schedule presents fairly, in all material respects, the information
required to be set forth therein.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
January 25, 1999
17
RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Balance Sheets
December 31,
1998 1997
---------------- --------------
ASSETS
Cash and cash equivalents ............................................... $ 5,011,666 $ --
Accrued interest receivable ............................................. 1,057,919 --
Investments in real estate loans, net ................................... 126,273,069 --
Investments in real estate, net ......................................... 68,244,109 --
Furniture, fixtures and equipment, net .................................. 108,885 8,766
Prepaid expenses and other assets ....................................... 563,443 2,183,698
------------- -----------
Total Assets ........................................................... $ 201,259,091 $ 2,192,464
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Liabilities
Accounts payable and accrued liabilities ................................ 166,067 $ 657,751
Accrued interest payable ................................................ 674,047 --
Deferred interest payable ............................................... 115,568 --
Tenant security deposits ................................................ 144,830 --
Borrowers' escrows ...................................................... 418,402 --
Reimbursements due to affiliate ......................................... -- 1,579,330
Senior indebtedness secured by real estate underlying
the Company's wraparound loans ........................................ 46,936,032 --
Long term debt secured by real estate owned ............................. 67,267,925 --
------------- -----------
Total Liabilities ...................................................... 115,722,871 2,237,081
Minority interest ........................................................ 17,761
Shareholders' Equity (Deficiency)
Preferred Shares, $.01 par value; 25,000,000 authorized shares .......... -- --
Common Shares, $.01 par value; 200,000,000 authorized shares;
issued and outstanding, 6,165,334 and 100 shares, respectively ........ 61,654 1
Additional paid-in-capital .............................................. 85,817,332 999
Accumulated deficit ..................................................... (360,527) (45,617)
------------- -----------
Total Shareholders' Equity (Deficiency) ................................ 85,518,459 (44,617)
------------- -----------
Total Liabilities and Shareholders' Equity (Deficiency) .................. $ 201,259,091 $ 2,192,464
============= ===========
The accompanying notes are an integral part of these consolidated financial
statements
18
RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Statements of Operations
For the period
August 20,1997 (date
For the Year Ended of inception) through
December 31,1998 December 31, 1997
-------------------- ----------------------
REVENUES
Mortgage interest income ................................... $ 10,544,689 $ --
Rental income .............................................. 4,609,534 --
Fee income and other ....................................... 153,440 --
Investment income .......................................... 928,448 --
Gain on sale of loan participation ......................... 940,448 --
------------ ---------
Total Revenues ............................................ 17,176,559 --
COSTS AND EXPENSES
Interest ................................................... 4,309,248 --
Property operating expenses ................................ 2,348,386 --
General and administrative ................................. 1,098,320 --
Depreciation and amortization .............................. 795,577 --
Provision for loan losses .................................. 226,157 --
Start-up costs ............................................. -- 45,617
------------ ---------
Total Costs and Expenses .................................. 8,777,688 45,617
------------ ---------
Net Income (loss) before minority interest ................. 8,398,871 (45,617)
Minority interest .......................................... 74,935 --
------------
Net Income (loss) .......................................... $ 8,473,806 $ (45,617)
============ =========
Net Income per common share-basic .......................... $ 1.82 nm
============ =========
Weighted average common shares outstanding-basic ........... 4,655,633 100
============ =========
Net Income per common share-diluted ........................ $ 1.81 nm
============ =========
Weighted average common shares outstanding-diluted ......... 4,685,229 100
============ =========
nm Per share amounts would be based on the pre-offering amount of 100 shares
outstanding, and accordingly, would not be comparable to amounts shown
after the Company's two public offerings
The accompanying notes are an integral part of these consolidated financial
statements
19
RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Statements of Changes in Shareholder's Equity (Deficiency)
For the Year Ended December 31, 1998 and
For the Period from August 20, 1997 (Date of Inception) to December 31, 1997
Additional Total
Preferred Common Paid-in Accumulated Shareholder's
Stock Stock Capital Deficit Equity/(Deficiency)
----------- ----------- -------------- --------------- --------------------
Balance, August 20, 1997 .............. $ -- $ -- $ -- $ -- $ --
Issuance of Common Shares ............. -- 1 999 -- 1,000
Net loss for the period ended ......... -- -- -- (45,617) (45,617)
----- -------- ----------- ------------ ------------
Balance, December 31, 1997 ............ -- $ 1 $ 999 $ (45,617) $ (44,617)
----- -------- ----------- ------------ ------------
Issuance of Common Shares, net of
expenses ............................. -- 61,653 85,816,333 -- 85,877,986
Net income for the year ended
December 31, 1998 .................... -- -- -- 8,473,806 8,473,806
Cash dividends ........................ -- -- -- (8,788,716) (8,788,716)
----- -------- ----------- ------------ ------------
Balance, December 31, 1998 ............ $ -- $ 61,654 $85,817,332 $ (360,527) $ 85,518,459
===== ======== =========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements
20
RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Statements of Cash Flows
For the period
August 20, 1997
(date of inception)
For the Year Ended Through
December 31, 1998 December 31, 1997
-------------------- --------------------
Cash flows from operating activities
Net Income (loss) ............................................... $ 8,473,806 $ (45,617)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
Gain on sale of loan participation ............................ (940,448) --
Minority interest ............................................. (74,935) --
Depreciation and amortization ................................. 795,577 --
Provision for potential loan losses ........................... 226,157 --
Amortization of original issue discount ....................... (5,001) --
Accretion of loan discount .................................... (249,696) --
Increase in accrued interest receivable ....................... (1,057,919) --
Increase in prepaid expenses and other assets ................. (512,340) (2,105,642)
Increase in accounts payable and accrued liabilities .......... 33,544 657,751
Increase in accrued interest payable .......................... 674,047 --
Increase in deferred interest payable ......................... 115,568 --
Increase in tenant security deposits .......................... 144,830 --
Increase in borrowers' escrows ................................ 418,402 --
Increase in reimbursement due affiliate ....................... -- 1,579,330
------------- ------------
Net cash provided by operating activities .................... 8,041,592 85,822
------------- ------------
Cash flows from investing activities
Purchase of furniture, fixtures and equipment ................... (117,712) (8,766)
Real estate loans purchased ..................................... (79,461,384) --
Real estate loans originated .................................... (40,986,200) --
Proceeds from sale of loan participation ........................ 4,000,000 --
Principal repayments from real estate loans ..................... 38,412,212 --
Purchase of real estate ......................................... (2,406,220) --
Other ........................................................... 92,698 (78,056)
------------- ------------
Net cash used in investing activities ........................ (80,466,606) (86,822)
------------- ------------
Cash flows from financing activities
Issuance of common stock, net ................................... 85,877,986 1,000
Proceeds of long-term debt ...................................... 1,100,000 --
Payment of dividends ............................................ (8,788,716) --
Principal repayments on senior indebtedness ..................... (335,780) --
Principal repayments on long-term debt .......................... (416,810) --
------------- ------------
Net cash provided by financing activities .................... 77,436,680 1,000
------------- ------------
Net change in cash and cash equivalents .......................... 5,011,666 --
------------- ------------
Cash and cash equivalents, beginning of period ................... -- --
------------- ------------
Cash and cash equivalents, end of period ......................... $ 5,011,666 $ --
============= ============
21
NOTE 1 -- FORMATION AND BUSINESS ACTIVITY
Resource Asset Investment Trust ("RAIT"), together with its wholly-owned
subsidiaries, RAIT Partnership, L.P. (the "Operating Partnership"), RAIT
General, Inc. (the "General Partner"), the General Partner of the Operating
Partnership, and RAIT Limited, Inc. (the "Initial Limited Partner"), the
Initial Limited Partner of the Operating Partnership, (the "Company") were each
formed in August 1997. RAIT, the General Partner and the Initial Limited
Partner were organized in Maryland, and the Operating Partnership was organized
as a Delaware limited partnership. The Company was initially capitalized
through the sale of 100 common shares for $1,000.
The General Partner and the Initial Limited Partner capitalized the
Operating Partnership by contributing to it the proceeds of the public offering
of the Company's Common Shares (See Note 9 -- Transactions With Affiliates) The
General Partner owns a 1% general partnership interest, and the Initial Limited
Partner owns a 99% limited partnership interest in the Operating Partnership.
The Company's principal business activity is to provide or acquire loans
(or participation interests in such loans) secured by mortgages on commercial
real property or similar instruments in situations that, generally, do not
conform to the underwriting standards of institutional lenders or sources that
provide financing through securitization. The Company emphasizes subordinated
(or "mezzanine") financing, including wraparound financing, with principal
amounts generally between $1.0 million and $10.0 million. The Company also
provides short-term bridge financing to a borrower in excess of the targeted
size range where the borrower has committed to obtain take-out financing (or
the Company believes that it can arrange such financing) to reduce the
Company's investment to an amount within the targeted size range. The Company
also acquires real properties, or interests therein. The Operating Partnership
undertakes the business of the Company, including the origination and
acquisition of financing and the acquisition of property interests.
The Company principally competes with banks, insurance companies, savings
and loan associations, mortgage bankers, pension funds, investment bankers, and
other public or private real estate investment trusts for origination or
acquisition of real estate loans.
The Company emphasizes financing with respect to properties located in
metropolitan areas of the United States, and has identified certain areas in
which it may concentrate its investments, particularly the Philadelphia,
Pennsylvania metropolitan area (18 of the 25 loans as of December 31, 1998
relate to properties located in this area) and in the Baltimore/Washington,
D.C. corridor (4 of the 25 loans as of December 31, 1998 relate to properties
located in this area.)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. The consolidated
financial statements include the accounts of the Company and its majority-owned
subsidiaries. All material intercompany balances and transactions have been
eliminated in consolidation.
In preparing the consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, and the reported
amounts of revenue and expenses. Actual results could differ from those
estimates.
The principal estimate that is particularly susceptible to significant
change in the near term relates to the provision for loan losses. The
evaluation of the adequacy of the provision for loan losses includes an
analysis of the individual investment in real estate loans and overall risk
characteristics and size of the different loan portfolios, and takes into
consideration current economic and market conditions, the capability of
specific borrowers to pay specific loan obligations, and current loan
collateral values. However, actual losses on specific loans, which also are
encompassed in the analysis, may vary from estimated losses.
In 1998 the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting of Comprehensive Income". The statement
establishes new standards for reporting comprehensive income, which includes
net income, as well as other items that result in a change to equity during the
period. As of December 31, 1998, the Company did not have any components of
other comprehensive income to be disclosed.
22
In 1998 the Company adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement redefines how operating
segments are determined and requires disclosures of certain financial and
descriptive information about the Company's operating segments. Under current
conditions, the Company is reporting one segment.
Investment in Real Estate Loans
Investment in real estate loans consists of loans that are originated at
par or acquired at face value ("Par Loans") and certain mortgage loans, for
which the borrower is not current as to original contractual principal and
interest payments, that are acquired at a discount from both the face value of
the loan and the appraised value of the property underlying the loan
("Discounted Loans"). For Discounted Loans, the difference between the
Company's cost basis in the 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.
Par Loans are originated or purchased at face value and are stated at
amortized cost, less any provision for loan losses, because the Company has the
ability and the intent to hold them for the foreseeable future or until
maturity or payoff. Interest income is accrued as it is earned. In some
instances, the borrower pays additional interest ("points") at the time the
loan is closed. The points are recognized over the term of the loan to which it
relates. The Company will place loans on non- accrual status after being
delinquent greater than 89 days, or earlier if the borrower is deemed by
management to be unable to continue performance. When a loan is placed on
non-accrual status, interest accrued but not received is reversed. While a loan
is on non-accrual status, interest is recognized only as cash is received.
Loans are returned to accrual status only when the loan is reinstated and
ultimate collectibility of future interest is no longer in doubt (none of the
Company's loans is on non-accrual status). Gains and losses on disposal of such
assets are computed on a specific identification basis.
Management's periodic evaluation of the adequacy of the provision for loan
losses is based on known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral, and current economic conditions and trends. Such
estimates are susceptible to change, and actual losses on specific loans may
vary from estimated losses. The provision for loan losses will be increased by
charges to income and decreased by charge-offs (net of recoveries).
The Company accounts for the impairment of loans under SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan, " as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan: Income Recognition and
Disclosures." These statements require that a creditor measure impairment based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair value
of the collateral if the loan is collateral dependent. Regardless of the
measurement method, a creditor must measure impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable.
The Company accounts for its transfers of financial assets under SFAS No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," as amended by SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of SFAS No. 125". This standard provides
accounting guidance on transfers of financial assets, servicing of financial
assets and extinguishments of liabilities. Adoption of this statement did not
have a material impact on the Company's consolidated financial position or
results of operations.
Investment in Real Estate
Investment in real estate is carried at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over an
estimated useful life of 39.5 years. The Company reviews its investment in real
estate for impairment as defined in SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable.
23
Borrowers' Escrows
Borrowers' Escrows represents borrower's funds held by the Company to fund
certain expenditures or to be released at the Company's discretion upon the
occurrence of certain pre-specified events.
Depreciation and Amortization
Furniture, fixtures and equipment are carried at cost less accumulated
depreciation. Furniture and equipment are depreciated using the straight-line
method over an estimated useful life of five years. Leasehold improvements are
amortized using the straight-line method over the life of the related lease.
Organizational costs are being amortized over a five-year period. Loan
costs incurred relating to acquisition and origination of loans are amortized
over the lives of the related loans. In April 1998, The American Institute of
Certified Public Accountants' Accounting Standards Executive Committee issued
Statement of Position "SOP" 98-5, "Reporting on Costs of Start-up Activities."
SOP 98-5 requires that costs of start-up activities, as defined, including
organization costs, be expensed as incurred. This statement is effective for
fiscal years beginning after December 15, 1998. Upon adoption, the application
of this statement is reported as the cumulative effect of a change in
accounting principle.
Stock Option Plans
The Company accounts for its stock option grants under the provisions of
FASB No. 123, "Accounting for Stock-Based Compensation," which contains a fair
value-based method for valuing stock-based compensation that entities may use,
and measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, the standard permits entities to
continue accounting for employee stock options and similar instruments under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities that continue to account for stock options using
APB Opinion No. 25 are required to make pro forma disclosures of net income and
earnings per share as if the fair value- based method of accounting defined in
SFAS No. 123 had been applied. The Company accounts for its stock options under
APB Opinion No. 25.
Federal Income Taxes
The Company qualifies and has elected to be taxed as a Real Estate
Investment Trust ("REIT") under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended, commencing with its taxable year ending
December 31, 1998. If the Company qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income tax on its taxable
income that is distributed to its shareholders. A REIT is subject to a number
of organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income.
Earnings per Share
The Company adopted the provisions of SFAS No. 128, "Earnings per Share",
in 1998. This statement eliminates primary and fully diluted earnings per share
and requires presentation of basic and diluted earnings per share ("EPS") in
conjunction with the disclosure of the methodology used in computing such
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing income available to common shares by the weighted average common
shares outstanding during the period. Diluted earnings per share takes into
account the potential dilution that could occur if securities or other
contracts to issue common stock were exercised and converted onto common stock.
EPS is computed based on the weighted average number of shares of common stock
outstanding.
Consolidated Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
non-interest earning deposits and interest earning deposits. Cash paid for
interest was $ 3.5 million for the year ended December 31, 1998. Senior
indebtedness incurred in conjunction with the acquisition and origination of
real estate loans was $ 49.7 million. Long-term debt incurred in conjunction
with the acquisition of an investment in real estate was $66.5 million.
24
NOTE 3 -- INVESTMENTS IN REAL ESTATE LOANS
The Company's portfolio of investments in real estate loans consisted of
the following at December 31, 1998:
Long-term first mortgages and senior loan participations ................ $ 35,111,995
Mezzanine (including wraparound) loans .................................. 81,334,701
Short term bridge loans ................................................. 9,881,200
Loan costs .............................................................. 171,330
Less: Provision for loan losses ......................................... (226,157)
-------------
Investments in real estate loans ....................................... 126,273,069
-------------
Less: Senior indebtedness secured by real estate underlying the Company's
wraparound loans ....................................................... (46,936,032)
-------------
Net investments in real estate loans ................................... $ 79,165,707
=============
The following is a summary description of the assets contained in the
Company's portfolio of investments in real estate loans:
Average
Number Loan-to- Yield Range of
Type of Loan of Loans Value Range Maturities
- ------------------------------------------------ ---------- ---------- ---------- -----------------
Long-term first mortgages and senior loan
participations ................................ 9 49% 9-16% 9/2/99-7/31/21
Mezzanine (including wraparound) loans ......... 11 78% 11-30% 1/1/02-11/30/08
Short term bridge loans ........................ 5 75% 10-23% 1/31/99-3/1/99
Approximately $ 77.6 million of the loans are secured by multi-family
residential properties and $48.7 million are secured by commercial properties.
As of December 31, 1998, 14 of the loans are subject to forbearance
agreements or other contractual restructurings. These agreements were in place
prior to the Company's acquisition of the loans. During the year ending
December 31, 1998, all payments under the agreements were timely made and all
borrowers (except one, see below) were otherwise in full compliance with the
terms of the agreements. The remaining 11 loans in the Company's portfolio are
performing in accordance with their terms as originally underwritten by the
Company and were current as to payments as of December 31, 1998
Pursuant to a loan restructuring agreement entered into prior to the
Company's acquisition of one of the loans, the borrower was required to make
payments on the loan in a minimum monthly amount plus certain excess cash flow.
The borrower was current on minimum payments, but the Company determined that
the borrower had not made all required excess cash flow payments. Accordingly,
the Company moved to exercise its remedies, which included the right to replace
the current manager of the property, an affiliate of the borrower. In November
1998, the borrower sought protection under Chapter 11 of the United States
Bankruptcy Code in order to prevent the Company's exercise of this remedy. The
borrower has continued to make all minimum monthly payments throughout the term
of the bankruptcy proceedings. In March 1999, the Company and the borrower
entered into a settlement agreement whereby the borrower and the Company will
file a joint plan of reorganization pursuant to which the borrower will
relinquish ownership management control of the property. The Company believes
that the property has not been managed to its full potential and that this
change in management control will increase the Company's return on this
investment.
25
As of December 31, 1998, senior indebtedness secured by real estate
underlying the Company's wraparound loans consists of the following:
Loan payable, secured by real estate, monthly installments of $13,789, including
interest at 7.08%, due December 1, 2008 ......................................... $ 1,937,000
Loan payable, secured by real estate, monthly installments of $17,051, including
interest at 6.83%, due December 1, 2008 ......................................... 2,450,000
Loan payable, secured by real estate, monthly installments of $10,070, including
interest at 6.83%, due December 1, 2008 ......................................... 1,540,000
Loan payable, secured by real estate, monthly installments of $116,964, including
interest at 9%, due March 1, 2003 ............................................... 12,813,559
Loan payable, secured by real estate, monthly installments of $80,427, including
interest at 6.95%, due July 1, 2008 ............................................. 12,099,125
Loan payable, secured by real estate, monthly installments of $28,090, including
interest at 6.82%, due 11/1/08 .................................................. 4,296,348
Loan payable, secured by real estate, monthly installments of $72,005, including
interest at 7.55%, due 12/1/08 .................................................. 10,000,000
Loan payable, secured by real estate, monthly installments of interest only at 10%
until July, 1999 at which time amortization on a 20-year schedule, including
interest at 10%, begins ......................................................... 1,800,000
------------
$ 46,936,032
============
As of December 31, 1998 the senior indebtedness secured by real estate
underlying the Company's wraparound loans maturing over the next five years,
and the aggregate indebtedness maturing thereafter is as follows:
1999 .................... $ 612,547
2000 .................... 664,179
2001 .................... 719,769
2002 .................... 780,113
2003 .................... 12,295,543
Thereafter .............. 31,863,881
------------
$ 46,936,032
============
NOTE 4 -- INVESTMENT IN REAL ESTATE
Investment in real estate is comprised of the following at December 31,
1998:
Land ..................................... $ 5,159,710
Office building and improvements ......... 63,826,492
Less: Accumulated depreciation ........... (742,093)
------------
Investment in real estate, net .......... $ 68,244,109
============
Included in office building and improvements are escrow balances totaling
$1.7 million at December 31, 1998 which represent escrows for real estate
taxes, insurance premiums, repair and replacement, tenant improvements and
leasing commissions reserves.
26
As of December 31, 1998, long term debt secured by the Company's
above-referenced real estate investments consists of the following:
Loan payable, secured by real estate, monthly installments of $8,008, including
interest at 7.33%, due August 1, 2008 ................................................ $ 1,094,799
Loan payable, secured by real estate, monthly installments of $288,314, including
interest at 6.85%, due August 1, 2008 ................................................ 43,867,057
Loan payable, secured by real estate, monthly payments of interest only at 10%, due
August 1, 2008 ....................................................................... 4,430,910
Loan payable, secured by partnership interests, monthly payments of interest only
at 8.19%, additional interest of 3.81% is deferred and payable from net cash flow, due
September 1, 2008 .................................................................... 17,875,159
------------
$ 67,267,925
============
As of December 31, 1998 the amount of long-term debt secured by the
Company's above- referenced real estate investments which matures over the next
five years, and the aggregate indebtedness maturing thereafter, is as follows:
1999 .................... $ 443,083
2000 .................... 474,922
2001 .................... 509,049
2002 .................... 545,628
2003 .................... 584,836
Thereafter .............. 64,710,407
------------
$ 67,267,925
============
Expenditures for repairs and maintenance are charged to operations as
incurred. Significant renovations are capitalized. Fees and costs incurred in
the successful negotiation of leases are deferred and amortized on a
straight-line basis over the terms of the respective leases. Rental revenue is
reported on a straight-line basis over the terms of the respective leases.
Depreciation expense relating to the Company's real estate investments for the
year ended December 31, 1998 was $742,000.
The Company leases space in the buildings it owns to several tenants.
Approximate future minimum lease payments under noncancellable leasing
arrangements as of December 31, 1998 are as follows:
1999 ................................. $ 9,205,000
2000 ................................. 9,123,000
2001 ................................. 9,063,000
2002 ................................. 7,922,000
2003 ................................. 7,684,000
Thereafter ........................... 37,129,000
------------
Total minimum lease payments ......... $ 80,126,000
============
27
NOTE 5 -- SHAREHOLDERS' EQUITY
The Company filed a registration statement with respect to the public
offering and sale of 2,833,334 Common Shares that became effective January 8,
1998. The public offering closed on January 14, 1998. In addition to the public
offering, Resource America, Inc. ("RAI") purchased 500,000 Common Shares, as
sponsor of the Company. The initial public offering price of the Common Shares
was $15.00. The net proceeds received by the Company in connection with the
public offering were approximately $44.0 million. Total offering costs
approximated $5.3 million, including underwriting discounts.
The Company issued warrants to purchase 141,667 Common Shares to the
underwriters at an exercise price of $15.00, the initial offering price. The
warrants are exercisable for a period of four years commencing on January 14,
1999.
The Company filed a second registration statement with respect to the
public offering and sale of 2,800,000 Common Shares that became effective June
23, 1998. The public offering closed on June 29, 1998. The offering price of
the Common Shares was $15.75. The net proceeds received by the Company in
connection with the public offering were approximately $42.0 million. Total
offering costs approximated $2.3 million, including underwriting discounts.
On July 24, 1998, the underwriters exercised their over-allotment option
to purchase, at the initial offering price less underwriting discounts and
commissions, 31,900 Common Shares. The net proceeds received by the Company in
connection with the exercise of the over-allotment option were approximately
$475,000.
NOTE 6 -- EARNINGS PER SHARE
The Company's calculation of earnings per share in accordance with SFAS
No. 128 is as follows:
Year ended December 31, 1998
--------------------------------------------
Income Shares Per share
(numerator) (denominator) Amount
------------- --------------- ----------
Basic earnings per share
Net income available to common shareholders ......... $ 8,473,806 4,655,633 $ 1.82
Effect of dilutive securities
Options ............................................. -- 29,208 ( 0.01)
Warrants ............................................ -- 1,403 --
----------- --------- -------
Diluted earnings per share
Net income available to common shareholders
Plus assumed conversions .......................... $ 8,473,806 4,686,244 $ 1.81
=========== ========= =======
NOTE 7 -- OPTION PLAN
The Company has adopted a qualified share option plan (the "Option Plan").
The maximum aggregate number of Common Shares that may be issued pursuant to
options granted under the Option Plan is 450,000. The purpose of the Option
Plan is to provide a means of performance-based incentive compensation for the
Company's key employees.
The Company has granted to certain of its officers options to acquire an
aggregate of 385,000 Common Shares at an exercise price of $15.00 per share.
The options are not exercisable immediately; rather, 25% of each option becomes
exercisable on each January 14 during the period 1999 through 2002. The options
will terminate on January 14, 2008. The Company has also granted to its
Trustees who are not executive officers options to acquire an aggregate of
2,500 Common Shares under substantially the same terms, except that the options
were immediately exercisable.
The Company issued to the underwriters of the public offering warrants to
purchase up to 141,667 Common Shares at an exercise price of $15.00 per share.
See Note 5 -- Shareholders' Equity.
28
On October 9, 1998, the Company granted to certain of its officers options
to acquire an aggregate of 62,500 Common Shares at an exercise price of $9.00
per share (fair value on date of grant). The options are not exercisable
immediately; rather, 25% of each option becomes exercisable on each October 9
during the period 1999 through 2002. The options will terminate on October 9,
2002.
Had compensation cost for the Option Plan been determined based on the
fair value of the options at the grant dates consistent with SFAS No. 123, the
Company's net income and net income per share would have been reduced to the
pro forma amounts indicated below.
December 31,
1998
----------------
Net income ..................................... As reported $ 8,474,000
Pro forma $ 8,057,000
Net income per common share -- basic ........... As reported $ 1.82
Pro forma $ 1.73
Net income per common share -- diluted ......... As reported $ 1.81
Pro forma $ 1.73
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used for grants in 1998: dividend yield of 11.5%; expected
volatility of 55%; risk-free interest rate of 5.29%; and expected lives of five
years.
1998
-------------------------
Weighted
Average
Exercise
Shares Price
---------- ------------
Outstanding, January 1, 1998 ........................................... --
Granted ................................................................ 450,000 $ 14.17
Exercised .............................................................. --
Terminated ............................................................. --
-------
Outstanding, December 31, 1998 ......................................... 450,000 $ 14.17
=======
Options exercisable at December 31, 1998 ............................... --
=======
Weighted average fair value of options granted during the year ......... $ 4.14
========
Options Outstanding
-------------------------------------
Number
Outstanding at Weighted Average Weighted-
Range of December 31, Remaining Average
Exercise Prices 1998 Contractual Life Exercise Price
- ----------------- ---------------- ------------------ ---------------
$ 9.00 62,500 9.78 years $ 9.00
$ 15.00 387,500 9.04 years $ 15.00
-------
450,000
=======
NOTE 8 -- COMMITMENTS
Lease Obligations
The Company sub-leases office space under an operating lease with
JeffBanks, Inc. at an annual rental of $24,000 plus an allocation of building
operating expenses. The sub-lease expires May 14, 2008 and contains two
five-year renewal options. Rental expense was $22,000 for the year ended
December 31, 1998.
Employment Agreements
The Company has entered into automatically renewing, one-year employment
agreements with its Chairman and Chief Executive Officer and the President and
Chief Operating Officer. Compensation under these
29
agreements is $250,000 and $150,000 per year, respectively (subject to
increases which may be approved by the Board of Trustees), and includes the
grant of options to purchase 225,000 Common Shares and 75,000 Common Shares,
respectively. In the event of termination other than for cause, the contracted
employee will receive a lump sum benefit equal to "average compensation" which
is defined as the average compensation in the three most highly compensated
years during the previous five years. In addition, upon termination, all
options to acquire Common Shares vest on the later of the effective date of
termination or six months after the options were granted.
Indemnifications
The Company has indemnified the senior lender in three loans underlying
the Company's wraparound loans from and against those items for which the
senior lender customarily has recourse against the owner of the property
limited to fraud, misappropriation of rents, environmental obligations and
other similar matters. The Company received substantially all of the proceeds
from these loans.
NOTE 9 -- TRANSACTIONS WITH AFFILIATES
In connection with the public offering, RAI acquired 15% of the Company's
outstanding Common Shares. The Chairman and Chief Executive Officer of the
Company is the spouse of the Chairman and Chief Executive Officer of RAI and a
parent of the President of RAI. A trustee of the Company is their son, who is
also employed by RAI. RAI advanced approximately $1.6 million to the Company
for organization, start-up and offering expenses. Simultaneously with the
closing of the public offering, the Company purchased certain investments (the
"Initial Investments") from RAI as described below. The Company anticipates
that it will purchase additional investments from RAI subject to a maximum
limit of 30% of the Company's investments, excluding the Initial Investments.
The Company may also from time to time retain RAI to perform due diligence
investigations on properties underlying proposed investments (except
investments acquired from RAI).
The 12 Initial Investments were acquired from RAI at Closing at an
aggregate investment of approximately $18.1 million together with certain
senior debt relating to four of the Initial Investments from third parties at a
cost of approximately $2.5 million. Two of the Initial Investments were
originated by the Company and were purchased from RAI at cost. Eight of the
Initial Investments were acquired at a discount to the outstanding balance due
from the borrower on the loan and to the appraised value of the underlying
property.
The Company has engaged in the following transactions with RAI subsequent
to the purchase of the Initial Investments:
The Company purchased senior lien interests in three loans from RAI at an
aggregate purchase price of $18.0 million.
The Company and RAI jointly acquired a loan at a purchase price of $85.5
million, $10.0 million of which was contributed by the Company. The Company's
interest is subordinate to the $69.5 million interest of an unaffiliated party,
but senior to RAI's interest.
The Company and RAI jointly acquired a loan at a purchase price of $17.3
million, $4.0 million of which was contributed by the Company. The Company's
interest is senior to RAI's interest and subordinate to the $12.2 million
interest of an unaffiliated party.
The Company purchased an 89% interest in OSEB Associates, L.P. ("OSEB"),
which owns a property in Philadelphia, PA, for $750,000. The property is
subject to a loan payable to RAI, existing at the time of the Company's
acquisition of its interest, of approximately $65.0 million. The loan bore
interest at 10%. OSEB obtained senior financing from an unaffiliated party in
the amount of $44.0 million to reduce the loan to approximately $22.9 million
and to restructure it into two loans, one with an original principal balance of
$18.4 million ($17.9 million at December 31, 1998) and the other with an
original principal balance of $4.5 million ($4.4 million at December 31, 1998),
both of which are subordinate to the senior financing.
The Company purchased a $5.8 million lien interest from RAI, which
includes a $1.8 million senior lien interest of an unaffiliated party.
30
The Company sold a $4.0 million junior lien interest to RAI and recognized
a gain on sale of $940,000.
The Company anticipates that it will purchase and sell additional loans
and lien interests in loans to and from RAI, and participate with it in other
transactions.
Brandywine Construction & Management, Inc. ("Brandywine"), an affiliate of
RAI, provides real estate management services to one property owned by the
Company and14 properties underlying the Company's investments. Management fees
in the amount of $58,000 were paid to Brandywine for the year ended December
31, 1998 relating to the property owned by the Company.
The Company places its temporary excess cash in short-term money market
instruments with JeffBanks, Inc. ("JBI"). The Chairman and Chief Executive
Officer of the Company is the Chairman and Chief Executive Officer of JBI and
she, together with her spouse (also an officer and director of JBI), are
principal shareholders of JBI. As of December 31, 1998, the Company had $5.0
million in deposits at JBI, of which approximately $4.9 million is over the
FDIC insurance limit.
NOTE 10 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an
entity's assets and liabilities considered to be financial instruments. For the
Company, the majority of its assets and liabilities are considered financial
instruments as defined in SFAS No. 107. However, many such instruments lack an
available trading market, as characterized by a willing buyer and seller
engaging in an exchange transaction. Also, it is the Company's general practice
and intent to hold its financial instruments to maturity and not to engage in
trading or sales activities, except for certain loans. Therefore, the Company
has used significant assumptions and present value calculations in estimating
fair value.
Changes in the assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, there may not be reasonable
comparability between institutions due to the wide range of permitted
assumptions and methodologies in the absence of active markets. This lack of
uniformity gives rise to a high degree of subjectivity in estimating financial
instrument fair values.
Estimated fair values have been determined by the Company using the best
available data and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated fair
values, and recorded book balances at December 31, 1998 are outlined below.
For cash and cash equivalents the recorded book value of $5.0 million as
of December 31, 1998, approximates fair value.
The net loan portfolio, senior indebtedness secured by real estate
underlying the Company's wraparound loans, and long term debt secured by real
estate owned at December 31, 1998 have been valued using a present value of
expected future cash flows. The discount rate used in these calculations is the
estimated current market rate adjusted for credit risk. The carrying value of
accrued interest approximates fair value.
The following table describes the carrying amounts and fair value
estimates of the Company's investments in real estate loans and long term debt
underlying the Company's wraparound loans and property interests at December
31, 1998:
At December 31, 1998
--------------------------------------------
Carrying Estimated Discount
Amount Fair Value Rate
-------------- --------------- ---------
First mortgages and senior loan participations .......... $35,111,995 $ 36,125,331 11.6%
Mezzanine (including wraparound) loans .................. $81,334,701 $ 81,575,302 11.1%
Bridge loans ............................................ $ 9,881,200 $ 9,881,200 10.2%
Senior indebtedness secured by real estate underlying the
company's wraparound loans ............................. $46,936,032 $ 45,937,238 7.7%
Long term debt secured by real estate owned ............. $67,267,925 $ 59,933,809 8.4%
31
SCHEDULE IV
Resource Asset Investment Trust
and Subsidiaries
Mortgage Loans on Real Estate
December 31, 1998
Loan Type/ Face Amount Book Value of
Property Type Maturity Date Periodic Payment Terms Senior Liens of Loans Loans
- ------------------------------- --------------- ---------------------------- -------------- --------------- --------------
Long term first
mortgages and senior
loan participations
- -------------------------------
12 yr amortization,
Multifamily 31-Aug-05 $3,499,310 balloon $ -- $ 5,923,644 $ 5,923,644
Multifamily/commercial 30-Jul-03 Interest only -- 23,922,539 11,518,572
Multifamilyl/commercial 30-Apr-03 Interest only -- 10,000,000 10,000,000
All other -- 10,088,662 7,669,779
------------ ------------- ------------
Total long term
first mortgages and
senior loan participations $ -- $ 49,934,845 $ 35,111,995
------------ ------------- ------------
Mezzanine (including
wraparound) loans
- -------------------------------
Commercial 01-Jan-02 Interest only $ 12,813,559 $ 17,884,324 $ 17,884,324
Commercial 01-Jul-08 Interest only 69,264,201 12,088,172 12,088,172
Multifamily 31-Jul-08 Interest only 12,099,125 16,150,000 16,150,000
Multifamily 31-Oct-08 Interest only 4,296,348 5,675,000 5,675,000
Commercial 30-Nov-08 Interest only 10,000,000 12,750,000 12,750,000
Multifamily 31-Aug-05 Interest only, then 20 yr.
amort, $3,647,199 balloon 1,800,000 5,750,000 5,750,000
All other 5,927,000 17,933,925 11,037,205
------------ ------------- ------------
Total Mezzanine
(including wraparound)
loans $116,200,233 $ 88,231,421 $ 81,334,701
------------ ------------- ------------
Short term bridge loans
- -------------------------------
Multifamily/commercial 31-Jan-99 interest only $ -- $ 3,907,200 $ 3,907,200
All other -- 5,974,000 5,974,000
------------ ------------- ------------
Total Short term bridge loans -- $ 9,881,200 $ 9,881,200
------------ ------------- ------------
Grand Total $110,273,233 $ 148,047,466 $126,327,896
============ ============= ============
32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Trustees and Executive Officers of the Registrant.
The information required by this item will be set forth in Company's
definitive proxy statement with respect to its 1999 annual meeting of
stockholders, to be filed on or before March 26, 1999 (the "Proxy Statement"),
and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item will be set forth in the Proxy
Statement, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be set forth in the Proxy
Statement, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be set forth in the Proxy
Statement, and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) Listed below are all financial statements, financial statement schedules,
and exhibits filed as part of this 10-K and herein included.
(1) Financial Statements
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for the year ended December 31,1998
and for the period from August 20, 1997 (date of inception) through December
31, 1997
Consolidated Statements of Changes in Shareholders' Equity (Deficiency) for
the year ended December 31, 1998 and for the period from August 20, 1997
(date of inception) through December 31, 1997
Consolidated Statements of Cash Flows for the year ended December 31, 1998
and for the period from August 20, 1997 (date of inception) through December
31, 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
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 notes thereto.
33
(3) Exhibits
3.1 Form of Amended and Restated Declaration of Trust(1)
3.1.1 Articles of Amendment of Amended and Restated Declaration of
Trust(2)
3.2 By-laws of the Company(1)
3.3 Articles of Incorporation of RAIT General, Inc.(1)
3.4 By-laws of RAIT General, Inc.(1)
3.5 Articles of Incorporation of RAIT Limited, Inc.(1)
3.6 By-laws of RAIT Limited, Inc.(1)
3.7 Certificate of Limited Partnership of RAIT Partnership, L.P.(1)
3.8 Limited Partnership Agreement of RAIT Partnership, L.P.(1)
4 Form of Certificate for Common Shares of the Company(1)
10.1 Form of Indemnification Agreement(1)
10.2 Form of Agreement between Company and Resource America, Inc.(1)
10.3 Employment Agreement between Betsy Z. Cohen and Registrant(1)
10.4 Employment Agreement between Jay J. Eisner and Registrant(1)
21 List of Subsidiaries
(1) Filed previously as an Exhibit to the Company's Registration Statement
on Form S-11 (Registration No. 333-35077)
(2) Filed previously as an Exhibit to the Company's Registration Statement
on Form S-11 (Registration No. 333-53067)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter
of 1998.
(c) Exhibits
EXHBIT 21--LIST OF SUBSIDIARIES
State of incorporation/
Subsidiary organization
- -------------------------- ------------------------
RAIT Partnership, L.P. Delaware
RAIT General, Inc. Maryland
RAIT Limited, Inc. Maryland
OSEB GP, Inc. Delaware
OSEB Associates, L.P. Pennsylvania
RAIT Rohrerstown, L.P. Delaware
SLH Apartments, Inc. Delaware
SL Bonds, Inc. Delaware
34
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.
March 25, 1999 /s/ Jay J. Eisner
-----------------------------
Jay J. Eisner
President and Chief Operating
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------------------------------------- -------------------------------------------- ---------------
/s/ Betsy Z. Cohen Chairman, Chief Executive Officer March 25, 1999
- --------------------------------------- and Trustee
Betsy Z. Cohen
/s/ Jay J. Eisner President and Chief Operating Officer March 25, 1999
- ---------------------------------------
Jay J. Eisner
/s/ Ellen J. DiStefano Vice President and Chief Financial Officer March 25, 1999
- ---------------------------------------
Ellen J. DiStefano
/s/ Jonathan Z. Cohen Secretary and Trustee March 25, 1999
- ---------------------------------------
Jonathan Z. Cohen
/s/ Jerome S. Goodman Trustee March 25, 1999
- ---------------------------------------
Jerome S. Goodman
/s/ Joel R. Mesznik Trustee March 25, 1999
- ---------------------------------------
Joel R. Mesznik
/s/ Daniel Promislo Trustee March 25, 1999
- ---------------------------------------
Daniel Promislo
/s/ Jack L. Wolgin Trustee March 25, 1999
- ---------------------------------------
Jack L. Wolgin
35