-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D8wZ+64AaoqrZLihslhEKhGwDbE/6lhKajDdI+mleJj30KJNtcCm6Nbs+mJPuO2Q cEeruVR7yRD5ReoEK/SqwQ== 0000950116-98-002514.txt : 19990112 0000950116-98-002514.hdr.sgml : 19990112 ACCESSION NUMBER: 0000950116-98-002514 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESOURCE AMERICA INC CENTRAL INDEX KEY: 0000083402 STANDARD INDUSTRIAL CLASSIFICATION: 6282 IRS NUMBER: 720654145 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-04408 FILM NUMBER: 98777109 BUSINESS ADDRESS: STREET 1: 1521 LOCUST ST STREET 2: 4TH FL CITY: PHILADELPHIA STATE: PA ZIP: 19102 BUSINESS PHONE: 2155465005 MAIL ADDRESS: STREET 1: 2876 SOUTH ARLINGTON ROAD CITY: AKRON STATE: OH ZIP: 44312 FORMER COMPANY: FORMER CONFORMED NAME: RESOURCE EXPLORATION INC DATE OF NAME CHANGE: 19890214 FORMER COMPANY: FORMER CONFORMED NAME: SMTR CORP DATE OF NAME CHANGE: 19700522 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1998 OR [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-4408 RESOURCE AMERICA, INC. (Exact name of registrant as specified in its charter) DELAWARE 72-0654145 - - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1521 Locust Street Suite 400 Philadelphia, PA 19102 - - ---------------------------------------- ---------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (215) 546-5005 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Common Stock, par value $.01 per share Name of each exchange on which registered: The Company's Common Stock trades on the Nasdaq Stock Market under the symbol "REXI." Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant, based upon the closing price of such stock on December 9, 1998, was approximately $232,358,000. The number of outstanding shares of the registrant's Common Stock on December 9, 1998 was 21,859,924. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for registrant's Annual Meeting of Stockholders to be held on March 16, 1999 are incorporated by reference in Part III of this Form 10-K. 2 RESOURCE AMERICA, INC. AND SUBSIDIARIES INDEX TO ANNUAL REPORT ON FORM 10-K PART I Page Item 1: Business............................................... 4 Item 2: Properties............................................. 43 Item 3: Legal Proceedings...................................... 43 Item 4: Submission of Matters to a Vote of Security Holders............................................ 44 PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters........................ 44 Item 6: Selected Financial Data................................ 45 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 45 Item 7A: Quantitative and Qualitative Disclosures About Market Risk.................................. 62 Item 8: Financial Statements and Supplementary Data............ 66 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 107 PART III Item 10: Directors, Executive Officers, Promoters and Control Persons of the Registrant.................. 107 Item 11: Executive Compensation................................. 107 Item 12: Security Ownership of Certain Beneficial Owners and Management..................................... 107 Item 13: Certain Relationships and Related Transactions......... 107 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 107 SIGNATURES 3 PART I ITEM 1 BUSINESS General The Company was organized as a Delaware corporation in 1966 and, until 1991, was principally involved in the energy industry. Since 1991, the Company has expanded its business strategy to focus on locating and developing niche finance businesses in which the Company can realize attractive returns by targeting well-defined financial services markets and by developing specialized skills to service those markets on a cost-effective basis. To date, the Company has developed two finance businesses: real estate finance and equipment leasing. Within its real estate finance business, the Company has developed a commercial mortgage loan acquisition and resolution business and a residential mortgage lending business. The Company has also sponsored Resource Asset Investment Trust ("RAIT"), a real estate investment trust, and currently owns 14% of RAIT's common shares of beneficial interest. Within its equipment leasing business, the Company focuses primarily on small ticket equipment lease financing, although it also manages five publicly-owned equipment leasing partnerships and has a small lease finance placement and advisory business. In its energy business, the Company produces natural gas and oil. In September 1998, the Company acquired The Atlas Group, Inc. ("Atlas"), a company primarily involved in energy finance through the syndication of oil and gas properties. Amounts of revenue, operating profit or loss and identifiable assets attributable to each of the Company's industry segments for fiscal 1996 through fiscal 1998 are shown in note 13 of the Consolidated Financial Statements. During the past three fiscal years, the Company's revenues were distributed across its industry segments as follows:
Year ended September 30, ------------------------ (Dollars in Thousands) 1998 1997 1996 ---- ---- ---- Segment % $ % $ % $ - - ------- --- --- --- --- --- --- Real estate finance 72 62,856 58 19,144 42 7,171 Equipment leasing 16 13,561 22 7,162 26 4,466 Energy 8 6,734 17 5,608 30 5,157
Real Estate Finance Commercial Mortgage Loan Acquisition and Resolution Strategy Identification and Acquisition of Commercial Mortgage Loans. The Company believes that the success to date of its commercial mortgage loan acquisition and resolution business has been due in large part to its ability to identify and acquire, on favorable terms, commercial mortgage loans held by large private sector financial institutions and other entities. Due to the complexity of issues relating to these loans (including under-performance and past or present defaults), their comparatively small size relative to a large 4 institution's total portfolio, their lack of conformity to an institution's then existing lending criteria and/or other factors, the lender is often not able, or willing, to devote the necessary managerial and other resources to the loans. The Company, which offers to acquire a loan quickly and for immediate cash, provides a convenient way for an institution to dispose of these loans. Efficient Resolution of Loans. The Company believes that a further aspect of its success to date has been its ability to resolve issues surrounding loans it has identified for acquisition. The principal element of this strategy is the cost-effective use of management and third-party resources to identify and resolve any existing operational, financial or other issues at the property or to manage the non-conforming aspects of the loan or its underlying property. To implement this strategy, the Company has taken advantage of the background and expertise of its management and has identified third-party subcontractors (such as property managers and legal counsel) familiar with the types of issues to which commercial properties may be subject and who have, in the past, provided effective services to the Company. Refinancings and Sales of Senior Lien Interests in Portfolio Loans. The Company seeks to reduce its invested cash and enhance its returns from its commercial loan portfolio through refinancing by borrowers of the properties underlying its loans, financing by the Company of the loans held by it, or the sale of senior lien interests or loan participations in loans held by it. In so doing, the Company has in the past obtained, and in the future anticipates obtaining, a return of a substantial portion of its invested cash (and in some cases has obtained returns of amounts in excess of its invested cash), which it will typically seek to reinvest in further loans, while maintaining a significant continuing position in the original loan. See "Business - Real Estate Finance - Commercial Mortgage Loan Acquisition and Resolution: Refinancings and Sales of Senior Lien Interests in Portfolio Loans." In addition, the Company has sold and anticipates further sales of whole loans, senior lien interests and loan participations to RAIT (see "Business - Real Estate Finance - Sponsorship of Real Estate Investment Trust"). Disposition of Loans. In the event a borrower does not repay a loan when due, or upon expiration of applicable forbearance periods (See "Business - Real Estate Finance - Commercial Mortgage Loan Acquisition and Resolution: Forbearance Agreements"), the Company will seek to foreclose upon and sell the underlying property or otherwise liquidate the loan. In appropriate cases and for appropriate consideration, the Company may agree to forbear (or further forbear) from the exercise of remedies available to it. Market for Commercial Mortgage Loan Acquisition and Resolution Services Loans acquired by the Company are, at the time of acquisition, secured by commercial properties (generally multi-family housing, office buildings, hotels or single-user retail properties) which, while income producing, are typically unable fully to meet the debt service requirements of the original loan terms or otherwise do not conform to the holder's then-established lending criteria. The loans are usually acquired from banks, insurance companies, investment banks, mortgage banks, pension funds or other similar financial organizations. The market for commercial mortgage loan acquisition and resolution services of the type provided by the Company is, the Company believes, relatively new. A major impetus to the creation of this market was the sale of packages of under-performing and non-performing loans by government agencies, 5 which has declined in recent years. The Company believes, however, that a permanent market for these services has emerged in the private sector as financial institutions and other entities realize that outside specialists may be able to address issues surrounding under-performing, defaulted, non-conforming or similar loans more cost-efficiently than their internal staff. Additionally, the Company believes that Japanese banks are continuing to dispose of non-performing, under-performing and non-conforming commercial mortgages secured by properties located in the United States in response to Japanese domestic market and banking conditions. The sale of loans provides selling institutions with a means of disposing of these assets, thereby obtaining liquidity and improving their balance sheets. The trend has been reinforced, management believes, by consolidation within the banking industry and by the standardization of financing criteria by real estate conduits and other "securitization" outlets. Acquisition and Administration Procedures for Commercial Mortgage Loan Acquisition and Resolution Operations Prior to acquiring any commercial mortgage loan, the Company conducts an acquisition review. This review includes an evaluation of the adequacy of the loan documentation (for example, the existence and adequacy of notes, mortgages, collateral assignments of rents and leases, and title policies ensuring first or other lien positions) and other available information (such as credit and collateral files). The value of the property securing the loan is estimated by the Company based upon a recent independent appraisal obtained by the borrower or seller of the loan, an independent appraisal obtained by the Company, or upon valuation information obtained by the Company and thereafter confirmed by an independent appraisal. One or more members of the Company's management makes an on-site inspection of the property and, where appropriate, the Company will require further inspections by engineers, architects or property management consultants. The Company may also retain environmental consultants to review potential environmental issues. The Company obtains and reviews available rental, expense, maintenance and other operational information regarding the property, prepares cash flow and debt service analyses and reviews all pertinent information relating to any legal or other disputes to which the property is subject. The amount of the Company's purchase offer for any loan is based upon the foregoing evaluations and analyses. The Company has established the following guidelines in connection with its loan acquisitions: (i) cash flow from the property securing the loan should be sufficient to yield an initial cash return on the Company's cash investment of not less than 10% per annum; (ii) the ratio of the Company's initial investment to the appraised value of the property underlying the loan (generally utilizing an appraisal dated within one year of acquisition) should be less than 80%; (iii) there is the possibility of either prompt refinancing of the loan by the borrower after acquisition, refinancing of the loan by the Company or sale by the Company of a senior lien interest, that will result in an enhanced yield to the Company on its (reduced) funds still outstanding; and (iv) there is the possibility of a substantial increase in the value of the property underlying the loan over its appraised value, increasing the potential amount of the loan discount recoverable by the Company at loan termination. The Company is not, however, bound by these guidelines and will acquire a loan that does not meet one or more of the criteria specified above if, in the Company's judgment, other factors make the loan an appropriate investment opportunity. While the Company has met the initial cash return on net investment guideline in acquiring its loans, as of September 30, 1998, the Company had in its portfolio 10 loans (57% of the Company's commercial loan portfolio by book value, including four loans acquired in 1998 constituting 47% of the Company's commercial loan portfolio by book value) in which the ratio of the cost of investment to the appraised value of the underlying property (both at the time of acquisition and at the date of 6 the most recent appraisal) exceeded 80%. While the Company has historically acquired loans in the $1.0 million to $15.0 million range, it has expanded its focus to also include larger loans which meet its investment objectives. The Company currently has seven loans in its portfolio which had initial acquisition costs in excess of $15.0 million. After borrower refinancings or sales of senior lien interests in six of these loans, the Company had an investment in two loans that exceeded $15.0 million, one of which has not been refinanced. The Company is not limited by regulation or contractual obligation as to the types of properties that secure the loans it may seek to acquire or the nature or priority of any lien or other encumbrance it may accept with respect to a property. The Company also does not have restrictions regarding whether, after sale of a senior lien interest or a refinancing, its interest in a particular loan must continue to be secured (although the Company will typically retain a subordinated lien position), or as to the amount it may invest in any one loan, the ratio of initial investment cost-to-appraised value of the underlying property or the cash yield on the Company's remaining investment. See "Business - - - Real Estate Finance - Commercial Mortgage Loan Acquisition and Resolution: Sale of Senior Lien Interests and Refinancings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations: Real Estate Finance." As part of the acquisition process, the Company typically resolves existing issues relating to the loans or the underlying properties. Through negotiations with the borrower and, as appropriate or necessary, with other creditors or parties in interest, the Company seeks to arrive at arrangements that reflect more closely the current operating conditions of the property and the present strategic position of the various interested parties. Where appropriate, the Company will offer concessions to assure that the Company's future control of the property's cash flow is free from dispute. These arrangements are normally reflected in an agreement (a "Forbearance Agreement") pursuant to which foreclosure or other action on the mortgage is deferred so long as the arrangements reflected in the Forbearance Agreement are met. With respect to non-conforming loans or their related properties, or where a property underlying a loan has operational problems, the Company will typically require appointment of a property manager acceptable to it (see "Business - Real Estate Finance - Commercial Mortgage Loan Acquisition and Resolution: Forbearance Agreements") and may advance funds for purposes of paying property improvement costs, unpaid taxes and similar items. Prior to loan acquisition, the Company includes in its pre-acquisition analysis of loan costs and yields an estimate of such advances. Upon acquisition of a loan, the Company typically requires that all revenues from the property underlying the loan be paid into an operating account which the Company or its managing agent control. All expenditures with respect to a property (including debt service, taxes, operational expenses and maintenance costs) are paid from the Company's account and are reviewed and approved by a senior officer of the Company prior to payment. The Company further requires that its approval be obtained before any material contract or commercial lease with respect to the property is executed. To assist it in monitoring the loan, the Company requires that the borrower prepare a budget for the property not less than 60 days prior to the beginning of a year, which must be reviewed and approved by the Company, and submit both a monthly cash flow statement and a monthly occupancy report. The Company analyzes these reports in comparison with each other and with account activity in the operating account. The Company may alter the foregoing procedures in appropriate circumstances. Where a borrower has refinanced a loan held by the Company (or where the Company has acquired a loan subject to existing senior debt), the 7 Company may agree that the revenues be paid to an account controlled by the senior lienor, with the excess over amounts payable to the senior lienor being paid directly to the Company. As of September 30, 1998, revenues were being paid directly to senior lienholders with respect to two loans (loans 7 and 40). Where the property is being managed by Brandywine Construction & Management, Inc. ("BCMI"), a property manager affiliated with the Company (see "Business - Real Estate Finance - Commercial Mortgage Loan Acquisition and Resolution: Forbearance Agreements"), the Company may direct that property revenues be paid to BCMI, as the Company's managing agent. As of September 30, 1998, revenues are being paid to BCMI with respect to two loans (loans 25 and 30). Where the Company believes that operating problems with respect to an underlying property have been substantially resolved, the Company may permit the borrower to retain revenues and pay property expenses directly. As of September 30, 1998, the Company permitted borrowers with respect to six loans (loans 24, 27, 31, 32, 37 and 41) to do so. Commercial Mortgage Loan Acquisition and Resolution: Refinancings and Sales of Senior Lien Interests In evaluating a potential commercial mortgage loan, the Company places significant emphasis on the likelihood of its being able to finance its interest or sell a senior lien interest on favorable terms after the acquisition and/or the borrower's likely ability, with or without the Company's assistance, to secure favorable refinancing. When a loan is refinanced, or a senior lien interest sold, the Company will obtain net sale or refinance proceeds in an amount representing a major portion of (and sometimes exceeding) the amount of its investment in the loan. After refinancing or sale of a senior lien interest, the Company will typically retain an interest in the loan, which is subordinated to the interest of the refinance lender or senior lienholder. Where a refinancing is effectuated, the Company reduces the amount outstanding on its loan by the amount of net refinancing proceeds received by it and either converts the outstanding balance of the original note (both principal and accrued interest, as well as accrued penalties) into the stated principal amount of an amended note on the same terms as the original note, or retains the original loan obligation as paid down by the amount of refinance proceeds received by the Company. As with senior lien interests, the interest rate on the refinancing is typically less than the interest rate on the Company's retained interest. Where a senior lien interest is sold, the outstanding balance of the Company's loan at the time of sale remains outstanding, including as a part of that balance the amount of the senior lien interest. Thus, the Company's remaining interest effectively "wraps around" the senior lien interest. Typically, the interest rate on the senior lien interest is less than the stated rate on the Company's loan. As of September 30, 1998, senior lien interests with an aggregate balance of $12.0 million relating to seven of the Company's loans obligate the Company, in the event of a default on a loan, to replace such loan with a performing loan. These senior lien interests become due upon the expiration of their respective Forbearance Agreements (one in 1999, five in 2000 and one in 2001). Five other senior lien interests obligate the Company, upon their respective maturities (all in fiscal 2003), to repurchase the senior lien interest (if not theretofore paid off) at a price equal to the outstanding balance of the senior lien interest plus accrued interest (which will aggregate $2.1 million, $11.9 million, $2.5 million, $10.7 million and $2.8 million, 8 respectively, assuming all debt service payments have been made). See "Business - - - Real Estate Finance - Commercial Mortgage Loan Acquisition and Resolution: Loan Status." After sale of a senior lien interest or a refinancing, the Company's retained interest will usually be secured by a subordinate lien on the property. In certain situations, however, (including two loans aggregating $2.8 million and constituting 1.5%, by book value, of the Company's loans as of September 30, 1998), the Company's retained interest may not be formally secured by a mortgage because of conditions imposed by the senior lender, although it may be protected by a judgment lien, an unrecorded deed-in-lieu of foreclosure, the borrower's covenant not to further encumber the property without the Company's consent, a pledge of the borrower's equity and/or a similar device. Commercial Mortgage Loan Acquisition and Resolution: Forbearance Agreements Commercial mortgage loans acquired by the Company that are in default typically are subject to Forbearance Agreements with borrowers pursuant to which the holder of the loan (the Company, upon loan acquisition) (i) agrees, subject to receipt of specified minimum monthly payments, to defer the exercise of existing rights to proceed on the defaulted loan (including the right to foreclose), (ii) receives the rents from the underlying property (either directly or through a managing agent approved by the Company, subject to certain exceptions; see "Business - Real Estate Finance - Acquisition and Administration Procedures for Commercial Loan Acquisition and Resolution Operations") and (iii) requires the borrower to retain a property management firm acceptable to the holder. The Forbearance Agreements also provide that any cash flow from the property (after payment of Company-approved expenses and debt service on senior lien interests) above the minimum payments will be retained by the Company and applied to accrued but unpaid debt service on the loan. As a result of provision (iii), BCMI has assumed responsibility for supervisory and, in many cases, day-to-day management of the underlying properties with respect to substantially all of the loans owned by the Company as of September 30, 1998. In eight instances, the President of BCMI (or an entity affiliated with him) has also acted as the general partner, president or trustee of the borrower. The minimum payments required under a Forbearance Agreement (generally related to anticipated cash flow from the property after operating expenses) are normally materially less than the debt service payments called for by the original terms of the loan. The difference between the minimum required payments under the Forbearance Agreement and the payments called for by the original loan terms continues to accrue, but (except for amounts recognized as an accretion of discount; see "Business - Real Estate Finance - Commercial Mortgage Loan Acquisition and Resolution: Accounting for Discounted Loans") are not recognized as revenue to the Company until actually paid. When a loan is refinanced by the Company or the borrower, or the Company sells a senior lien interest in the loan, the Forbearance Agreement typically will remain in effect, subject to such modifications as may be required by the refinance lender or senior lien holder. At the end of the term of a Forbearance Agreement, the borrower is required to pay the loan in full. The borrower's ability to do so, however, will depend upon a number of factors, including prevailing conditions at the underlying property, the state of real estate and financial markets (generally and as regards the particular property), and general economic conditions. In the event the borrower does not or cannot do so, the Company anticipates that it 9 will seek to sell the property underlying the loan or otherwise liquidate the loan. Alternatively, the Company anticipates that it might, in appropriate cases, and for appropriate additional consideration, agree to further forbearance. Commercial Mortgage Loan Acquisition and Resolution: Loan Status At September 30, 1998, the Company's loan portfolio consisted of 41 loans of which 32 loans were acquired as first mortgage liens and nine loans were acquired as junior lien obligations. The Company's strategy has been to acquire loans in anticipation of financing the loan by the Company, selling a senior lien interest in the loan or in anticipation of the borrower's refinancing of the loan. As of September 30, 1998, the Company had sold senior lien interests in 21 loans in its portfolio (including senior interests in five loans initially acquired by the Company as junior lien loans) and borrowers with respect to 10 of the Company's loans had obtained refinancing. After such sales and refinancings, the Company held subordinated interests in 35 loans of which two interests, constituting approximately 1.5% of the book value of the Company's loan portfolio, are not collateralized by recorded mortgages (see "Business - Real Estate Finance - Commercial Mortgage Loan Acquisition and Resolution: Sale of Senior Lien Interests and Refinancings"). The following table sets forth certain information relating to the Company's investments in commercial mortgage loans, grouped by the type of property underlying the loans, as of September 30, 1998. Loans 2, 4, 6, 8, 9, 10, 12, 19, 23, and 38 are not included in the table because they were sold to RAIT during the 1998 fiscal year.
Loan Outstanding Loan Type of Acquired Loan Number Property Location Seller/Originator (Fiscal Year) Receivable(1) - - ------ -------- -------- ----------------- ------------- ------------- 005 Office Pennsylvania Shawmut Bank(10) 1993 $ 6,871,095 011(32) Office Washington, D.C. First Union Bank(10) 1995 1,496,017 014 Office Washington, D.C. Nomura/Cargill/Eastdil Realty(13) 1995 16,981,029 020 Office New Jersey Cargill/Eastdil Realty(13) 1996 7,537,780 026(32) Office Pennsylvania FirsTrust FSB/The Metropolitan Fund 1997 8,900,194 027(22) Office Pennsylvania Lehman Brothers Holdings, Inc. 1997 57,103,389 029(24)(32) Office Pennsylvania Castine Associates, L.P. 1997 7,655,240 035(26) Office Pennsylvania Jefferson Bank 1997 2,434,553 036 Office North Carolina Union Labor Life Insurance Co. 1997 4,626,269 044(31) Office Washington, DC Dai-Ichi Kangyo Bank 1998 100,725,247 046 Office Pennsylvania CoreStates Bank, N.A. 1998 6,014,713 048(33) Office Pennsylvania Institutional Property Assets 1998 65,665,695 049(37) Office Maryland BRE/Maryland 1998 98,856,915 ------------ Office Totals $384,868,136 ------------ 001 Multifamily Pennsylvania Alpha Petroleum Pension Fund 1991 $ 8,852,591 003 Multifamily New Jersey RAM Enterprises/Glenn Industries 1993 2,860,838 Pension Plan 015 Condo/ North Carolina First Bank/South Trust Bank(14) 1995/1997 3,564,318 Multifamily 021(18) Multifamily Pennsylvania Bruin Holdings/Berkeley Federal 1996/1997 9,821,038 Savings Bank 022 Multifamily Pennsylvania FirsTrust FSB 1996 5,257,097 024 Multifamily Pennsylvania U.S. Dept. of Housing & Urban Development 1996 3,404,809 028 Condo/ North Carolina First Bank/SouthTrust Bank(23) 1997 1,724,363 Multifamily 031 Multifamily Connecticut John Hancock Mutual Life 1997 10,121,734 Insurance Company 032 Multifamily New Jersey John Hancock Mutual Life 1997 12,532,447 Insurance Company 034(25) Multifamily Pennsylvania Resource America, Inc. 1997 404,537
[TABLE RESTUBBED FROM ABOVE]
Value of Property Loan Securing Cost of Number Loan(2) Investment(3) - - ------ ---------- ------------- 005 $ 1,700,000 $ 1,246,629 011(32) 1,500,000 1,187,419 014 14,000,000 11,995,336 020 4,600,000 3,358,762 026(32) 5,000,000 2,485,078 027(22) 34,000,000 19,252,051 029(24)(32) 4,025,000 3,057,928 035(26) 2,550,000 1,695,498 036 4,150,000 3,077,343 044(31) 98,000,000 79,192,515 046 5,300,000 3,737,114 048(33) 65,000,000 58,657,176 049(37) 99,000,000 88,511,074 ----------- ----------- Office Totals $338,825,000 $277,453,923 ----------- ----------- 001 $ 5,300,000 $ 4,742,767 003 1,350,000 1,334,167 015 3,702,000 2,792,309 021(18) 4,222,000 2,498,065 022 4,110,000 2,461,114 024 3,250,000 2,740,159 028 1,773,000 1,028,143 031 7,500,000 4,777,959 032 13,278,000 7,397,888 034(25) 450,000 401,500
11 (Continued)
Loan Outstanding Loan Type of Acquired Loan Number Property Location Seller/Originator (Fiscal Year) Receivable(1) - - ------ -------- -------- ----------------- ------------- ------------- 037 Multifamily Florida Howe, Soloman & Hall 1997 $ 7,421,526 Financial, Inc. 041 Multifamily Connecticut J.E. Roberts Companies 1998 26,767,078 042 Multifamily Pennsylvania Fannie Mae(28) 1998 5,540,485 043(29) Multifamily Pennsylvania Downingtown National Bank 1998 2,049,150 045(16) Multifamily Maryland Lennar Partners 1998 19,900,000 047(32) Multifamily New Jersey Credit Suisse First Boston Mortgage Capital, Inc. 1998 3,336,500 050 Multifamily Illinois J.E. Roberts Companies 1998 47,144,118 051 Multifamily Illinois J.E. Roberts Companies 1998 24,987,898 ---------- Multifamily Totals $195,690,527 ----------- 007 Single User Minnesota Prudential Insurance, Alpha 1993 $ 5,363,557 (Retail) Petroleum Pension Fund 013(32)(36) Single User California California Federal Bank, FSB 1994 2,929,469 (Commercial) 016 Single User California Mass Mutual/Alpha Petroleum 1995/1996 7,226,604 (Retail) Pension Fund 017(15)(32) Single User West Virginia Triester Investments(10) 1996 1,506,191 (Retail) 018 Single User California Emigrant Savings Bank/Walter 1996 2,933,741 (Retail) R. Samuels and Jay Furman(17) 033 Single User Virginia Brambilla, Ltd. 1997 4,191,328 (Retail) 040 Retail Virginia Lehman Brothers Holdings 1998 45,365,832 ---------- Commercial Retail Totals $ 69,516,722 ---------- 025 Hotel/Commercial Georgia Bankers Trust Co. 1997 $ 6,304,855 030 Hotel Nebraska CNA Insurance 1997 7,940,171 039(25)(27) Hotel Georgia Resource America, Inc. 1997 1,476,527 ----------- Hotel Totals $ 15,721,553 ----------- Balance as of September 30, 1998 $665,796,938 ============
[TABLE RESTUBBED FROM ABOVE]
Appraised Value of Property Loan Securing Cost of Number Loan(2) Investment(3) - - ------ --------- ------------- 037 $ 3,500,000 $ 2,760,380 041 21,000,000 14,724,961 042 5,740,000 4,234,556 043(30) 2,275,000 1,563,215 045(16) 19,500,000 1,300,000 047(32) 3,375,000 2,515,513 050 23,400,000 18,114,910 051 21,000,000 17,320,143 ---------- ---------- Multifamily Totals $144,725,000 $92,707,749 ----------- ---------- 007 $ 2,515,000 $ 1,356,507 013(32)(36) 2,600,000 1,701,049 016 3,000,000 2,157,238 017(15)(32) 1,900,000 895,334 018 4,555,000 2,267,232 033 2,650,000 2,108,028 040 47,000,000 43,156,561 ---------- ---------- Commercial Retail Totals $ 64,220,000 $53,641,949 ---------- ---------- 025 $ 8,500,000 $ 5,945,373 030 5,100,000 3,872,589 039(25)(27) 4,100,000 1,438,146 ------------ ----------- Hotel Totals $ 17,700,000 $11,256,108 ------------ ----------- $565,470,000 $435,059,729 ============ ============
12 (Continued)
Proceeds from Company's Net Maturity of Loan/ Ratio of Cost Refinancing or Interest In Expiration of Loan of Investment to Sale of Senior Net Book Value Outstanding Loan Forbearance Number Appraised Value Lien Interests Investment(4) of Investment(5) Receivables(6) Agreement(7) - - ------ ---------------- -------------- ------------- ---------------- ----------------- ----------------- 005 73% $ 940,000(12) $ 306,629 $ 817,001 $ 6,031,095 02/07/01 011 79% 660,000(12) 527,419 748,554 811,017 06/01/00 014 86% 6,487,000 5,508,336 6,888,741 10,432,874 11/30/98(34) 020 73% 2,562,000 796,762 2,243,582 5,150,563 02/07/01 026 50% 2,231,693 253,385 1,312,215 6,687,291 09/30/03 027 57% 17,900,000(9)(21) 1,352,051 13,576,057 39,318,931 01/01/02 029 76% 2,625,000(20) 432,928 1,299,182 5,044,263 07/01/02 035 66% 1,750,000(38) (54,502) 570,282 684,553 09/25/02 036 74% 1,750,000(38) 1,327,343 1,800,246 2,876,269 12/31/11 044 81% 71,500,000(9) 7,692,515 20,040,925 19,342,588(31) 08/01/08 046 71% 0 3,737,114 3,753,934 6,014,713 09/30/14 048 90% 44,000,000 14,657,176 16,378,129 21,740,202 08/01/08 049 89% 60,000,000 28,511,074 35,081,713 38,856,915 10/01/03 ---------- ---------- ---------- ---------- Office Totals $212,405,923 $65,048,230 $ 104,510,561 $162,991,274 ----------- ---------- ----------- ----------- 001 89% $ 2,570,000(8) $ 2,172,767 $ 2,632,828 $ 6,282,591 12/31/02 003 99% 627,000 707,167 735,102 2,235,969 01/01/03 015 75% 2,558,000(8) 234,309 3,564,320 1,303,246 08/25/00 021 59% 2,860,000(12)(38) (361,935) 1,081,033 6,961,038 07/01/16 022 60% 3,125,000(19)(20) (663,886) 981,399 2,144,117 10/31/98(35) 024 84% 2,318,750 421,409 809,139 926,349 11/01/22 028 58% 0 1,028,143 1,724,363 1,724,363 03/31/02 031 64% 1,800,000(38) 2,977,959 3,917,915 8,321,734 09/01/05 032 56% 6,000,000(9) 1,397,888 4,499,371 6,570,245 09/01/05 034 89% 0 401,500 402,414 404,537 10/01/02
13 (Continued)
Proceeds from Company's Net Maturity of Loan/ Ratio of Cost Refinancing or Interest In Expiration of Loan of Investment to Sale of Senior Net Book Value Outstanding Loan Forbearance Number Appraised Value Lien Interests Investment(4) of Investment(5) Receivables(6) Agreement(7) - - ------ ---------------- -------------- ------------- ---------------- ----------------- ----------------- 037 79% $ 2,096,000(11)(12) $ 664,380 $ 1,213,994 $ 5,325,526 07/01/00 041 70% 12,000,000(21) 2,724,961 6,600,194 14,825,089 07/01/03 042 74% 3,000,000(20) 1,234,556 1,760,228 2,543,278 12/31/02 043 69% 1,000,000(30) 563,215 879,702 1,049,150 07/01/02 045 7% 0 1,300,000 1,374,064 3,900,000 06/30/08 047 75% 1,800,000(38) 715,513 1,200,136 1,536,500 10/31/08 050 77% 10,000,000(9) 8,114,910 10,579,556 37,144,118 04/30/03 051 82% 0 17,320,143 17,333,232 24,987,898 09/30/02 ---------- ---------- ---------- ------------ Multifamily Totals $ 51,754,750 $ 40,952,999 $ 61,288,990 $128,185,748 ---------- ---------- ---------- ----------- 007 54% $ 2,099,000 $ (742,493) $ 602,472 $ 3,275,960 12/31/14 013 65% 1,975,000(12) (273,951) 338,112 929,469 05/01/01 016 72% 2,375,000(12) (217,762) 538,238 4,826,604 12/31/00 017 47% 1,000,000(38) (104,666) 488,382 512,399 12/31/16 018 50% 1,969,000(12) 298,232 942,374 964,741 12/01/00 033 80% 1,383,705(8) 724,323 670,556 2,778,697 02/01/21 040 92% 35,250,000(8) $ 7,906,561 8,358,238 10,405,563 12/01/02 ---------- --------- ---------- ---------- Commercial Retail Totals $ 46,051,705 $ 7,590,244 $ 11,938,372 $ 23,693,433 ------------ ------------- ----------- ----------- 025 70% $ 0 $ 5,945,373 $ 6,283,987 $ 6,304,855 12/31/15 030 76% 0 3,872,589 4,082,083 7,940,171 09/30/02 039 35% 0 1,438,146 1,452,527 1,476,527 11/01/02 ------------ ------------- ----------- ----------- Hotel Totals $ 0 $ 11,256,108 $ 11,818,597 $ 15,721,553 ------------ ------------- ----------- ----------- Balance as of September 30, 1998 $310,212,148 $124,847,581 $189,556,520 $330,592,008 ============ ============ ============ ============
14 (1) Consists of the original stated or face value of the obligation plus accrued interest and the amount of the senior secured interest at September 30, 1998. (2) The Company generally obtains appraisals on each of its properties at least once every three years. Accordingly, appraisal dates range from 1995 to 1998. (3) Consists of the original cost of the investment to the Company (including acquisition costs and the amount of any senior lien obligation to which the property remained subject) plus subsequent advances, but excludes the proceeds to the Company from the sale of senior lien interests or borrower refinancings. (4) Represents the unrecovered costs of the Company's investment, calculated as the cash investment made in acquiring the loan plus subsequent advances less cash received from sale of a senior lien interest in or borrower refinancing of the loan. Negative amounts represent the receipt by the Company of proceeds from the sale of senior lien interests or borrower refinancings in excess of the Company's investment. (5) Represents the cost of the investment carried on the books of the Company after accretion of discount and allocation of gains from the sale of a senior lien interest in, or borrower refinancing of, the loan but excludes an allowance for possible losses of $905,000. For a discussion of accretion on discount and allocation of gains, see "- Commercial Mortgage Loan Acquisition and Resolution: Accounting for Discounted Loans." (6) Consists of the amount set forth in the column "Outstanding Loan Receivable" less senior lien interests at September 30, 1998 (excluding one senior lien interest of $2.3 million which is included in the cost of investment carried on the books of the Company relating to loan 15). (7) With respect to loans 7, 14, 17, 25, 27, 30, 31, 32, 34, 39,40,42,44, 45, 46, 47,48 and 49, the date given is for the maturity of the Company's interest in the loan. For loan 43, the date given is the expiration date of the Forbearance Agreement with respect to the loan in the original principal amount of $404,026 (see note (29) below). For the remaining loans, the date given is the expiration date of the related Forbearance Agreement. (8) Represents the amount of the senior lien interest in place on the date of acquisition, except that, with respect to loan 40, it represents the amount of a refinancing of the loan by the Company contemporaneously with the Company's investment. (9) A senior lien interest was sold to RAIT. See "Business - Real Estate Finance - Sponsorship of Real Estate Investment Trust." (10) Successor by merger to the seller. (11) Senior lien interests in sold loans 2, 4 and 10 were transferred to loan 37. (12) Senior lien interest sold subject to the right of the holder (Citation Insurance Company, a subsidiary of Physicians Insurance Company of Ohio), upon default, to require the Company to substitute a performing loan. (13) Seller was a partnership of these entities. (14) Original lending institutions. In March 1997, as a result of agreements among the borrower, the Company and a third party, Concord Investment, L.P. ("Concord"), the borrower's partnership interests were transferred to the Company which resold them to Concord for a mortgage note (which wrapped around certain senior indebtedness) and cash. (15) The loan acquired consists of a series of notes becoming due yearly through December 31, 2016. (16) The Company's interest is subordinate to a $4,000,000 senior lien held by RAIT and a $12,000,000 senior lien held by an unaffiliated third party. 15 (17) Amounts advanced by the Company were used in part to directly repay the loan of Emigrant Savings Bank; the balance was applied to purchase a note held by Messrs. Samuels and Furman. (18) The loan acquired consists of 31 separate mortgage loans on 49 individual condominium units in a single building. Nine of such loans are due July 1, 2016, 18 are due January 1, 2015, one is due October 1, 2007, one is due March 1, 2001 and two are due October 9, 2001. The president of BCMI and his wife own general and limited partnership interests in the borrowers of some of these loans. The borrower with respect to other loans is a trust, the trustee of which is the president of BCMI and the beneficiary of which is a limited partnership for which a director of the Company is general partner. (19) Includes a junior lien interest sold to Crafts House Apartments Partners, L.P., a limited partnership in which the Chairman and Vice Chairman of the Company beneficially own a 21.3% interest. (20) Three senior lien interests sold to Crusader Bank, Philadelphia, Pennsylvania. At the time of sale the Company paid off the original senior lien interests pertaining to two of these loans. The Company has the obligation to repurchase these senior lien interests, at Crusader's option, on or after March 31, 2003 (loans 22 and 29) and June 25, 2003 (loan 42). (21) Two senior lien interests were sold to Commerce Bank, N.A. ("Commerce"), Philadelphia, Pennsylvania. The Company has the obligation to repurchase the senior lien interest associated with loan 27, at Commerce's option, on or after March 5, 2003, if the senior lien interest is not repaid in accordance with its terms by the borrower. (22) The property securing the loan is owned by two partnerships, the "Building Partnership" and the "Garage Partnership." Pursuant to a loan restructuring agreement which pre-dates the Company's interest in the loan, an affiliate of the holder of the loan is required to hold the general partnership interests in both the Building Partnership and the Garage Partnership as additional security for the loan. The partnership interest in the Building Partnership was assigned to a limited partnership for which a subsidiary of the Company is general partner and RPI Partnership, an entity for which the Vice Chairman of the Company is the general partner and the Chairman and President of the Company are limited partners, is a limited partner. Similarly, the Garage Partnership interest was assigned to a limited partnership for which a subsidiary of the Company is general partner and RPI Partnership is a limited partner. RPI Partnership has agreed that any economic benefit distributed to it as a result of its limited partnership interests described above will be assigned and transferred to the Company. (23) Original lending institutions. In connection with the transactions referred to in note (14), Concord acquired other condominium units in the same building. These units secured a loan in the original principal amount of $910,000 held by the Company. (24) From 1993 to October 1997, an officer of the Company served as the general partner of the seller. (25) Loan originated by the Company. (26) The borrower is a limited partnership formed in 1991. The general partner of the partnership is owned by the president of BCMI; the Chairman of the Company and his wife beneficially own a 49% limited partnership interest in the partnership and the Vice Chairman beneficially owns a 1% limited partnership interest. (27) Construction loan with a maximum borrowing of $3,625,000. (28) Original lending institution. (29) Consists of two related loans to one borrower secured by a single property in the original principal amounts of $1,600,000 and $404,026, (30) Senior lien interest sold to Washsquare Properties Partners, L.P., a limited partnership in which the Chairman and Vice Chairman of the Company beneficially own a 14.4% limited partnership interest. 16 (31) The Company and RAIT jointly purchased this loan, with RAIT contributing $10,000,000 of the purchase price. Pursuant to an order of the United States Bankruptcy Court for the District of Columbia that was in effect at the time the Company acquired the loan, legal title to the underlying property had to be transferred on or before June 30, 1998. In order to comply with that order and to maintain the control of the property that the Company deemed necessary to protect its loan interest, Evening Star Associates took legal title on June 19, 1998. A subsidiary of the Company is the general partner and owns a 1% interest in Evening Star Associates; the Chairman, Vice Chairman and President of the Company own a 94% limited partnership interest. The latter have agreed to list their interests in Evening Star Associates for sale through a qualified real estate broker until December 31, 1999. Any amounts received by the limited partners for their interests in excess of their original capital contributions plus a 6% return will be paid to Evening Star Associates. If no such sale occurs by December 31, 1999, the limited partners may retain their interests. (32) With respect to loans 13, 17 and 26, the president of BCMI is the general partner of the borrower; with respect to loan 29, he is the general partner for the sole limited partner of the borrower; and with respect to loan 11, he is the president of the borrower. With respect to loan 47, the president of the borrower is an employee of BCMI. (33) The borrower for this loan is a partnership of which BCMI owns an 11% interest and RAIT owns a 89% interest. (34) The Company is negotiating an extension of the forbearance agreement with the borrower. (35) The borrower is currently seeking to refinance the Company's loan. The Company has not initiated any action with respect to the expiration of the forbearance agreement. (36) The Chairman of the Company and his wife beneficially own a 40% limited partnership interest in the borrower. (37) In connection with the acquisition of this loan, the Company acquired the right to transfer the equity interest in the borrower. Currently, a subsidiary of the Company is the general partner of the borrower. Pending transfer of the limited partnership interests, the Vice Chairman of the Company holds legal title to these interests. (38) Senior lien interest sold to Peoples Thrift Savings Bank which has the right, upon a default by borrower, to require the Company to substitute a performing loan. 17 The following table sets forth certain information, grouped by the type of property underlying the loans, with respect to average monthly cash flow from the properties underlying the Company's commercial mortgage loans, average monthly debt service payable to senior lienholders and refinance lenders, average monthly payments with respect to the Company's retained interest and the ratio of cash flow from the properties to debt service payable on senior lien interests.
Average Average Monthly Debt Average Monthly Monthly Cash Service on Refinancing Payment to Loan Flow from or Senior Lien the Company's Cash Flow Number Property(1)(2) Interests(3) Interest Coverage - - ------ --------------- ---------------------- --------------- --------- 005 $ 9,841 $ 6,825 $ 3,016 1.44 011 7,813 5,566 2,247 1.40 014 92,620(4) 58,551 34,069 1.58 020 27,016 19,527 7,489 1.38 026 30,283 21,600 8,683 1.40 027 175,515 161,704 13,811 1.09 029 23,667 22,254 1,413 1.06 035 23,173 14,583 8,590 1.59 036 36,719 14,583 22,136 2.52 044 815,883 456,101 359,782 1.79 046 35,141 0 35,141 N/A 048(9) 425,000 288,314 136,686 1.47 049(9) 620,000(5) 450,000(6) 170,000 1.38 ---------- ---------- ---------- Office Totals $2,322,671 $1,519,608 $ 803,063 1.53 ---------- ---------- ---------- 001 $ 39,197 $ 26,425 $ 12,772 1.48 003 8,052 6,058 1,994 1.33 015 & 028(7) 30,297 26,113 4,184 1.16 021 26,689 22,789 3,900 1.17 022 27,537 26,997 540 1.02 024 25,926 17,962 7,964 1.44 031 72,001 15,000 57,001 4.80 032 90,712 78,805 11,907 1.15 034 5,104 0 5,104 N/A 037 25,000 17,030 7,970 1.47 041 160,346 109,192 51,154 1.50 042 32,166 25,176 6,990 1.47 043 15,851 8,343 7,508 1.90 045 12,998 0 12,998 N/A 047 15,165 15,000(8) 165 1.01 050 92,773(5) 83,333(8) 9,440 1.11 051 67,731(5) 0 67,731 N/A ---------- ---------- ---------- Multifamily Totals $ 747,545 $ 478,223 $ 269,322 1.56 ---------- ---------- ---------- 007 $ 20,400 $ 20,400 $ 0 1.00 013 23,503 15,833 7,670 1.48 016 23,917 19,500 4,417 1.23 017 10,690 9,087 1,603 1.18 018 25,493(9) 15,998 9,495 1.59 033 21,940 14,985 6,955 1.46 040 375,000 249,497 125,503 1.50 ---------- ---------- ---------- Commercial Retail Totals $ 500,943 $ 345,300 $ 155,643 1.45 ---------- ---------- ---------- 025 $ 50,205 $ 0 $ 50,205 N/A 030 77,667 0 77,667 N/A 039 12,148(10) 0 12,148 N/A ---------- ---------- ---------- ----- Hotel Totals $ 140,020 $ 0 $ 140,020 N/A ---------- ---------- ---------- Total Properties $3,711,179 $2,343,131 $1,368,048 1.58 ========== ========== ==========
18 (1) "Cash Flow" as used in this table is that amount equal to the operating revenues from property operations less operating expenses, including real estate and other taxes pertaining to the property and its operations, and before depreciation, amortization and capital expenditures. (2) Except as set forth in notes (4) and (5), monthly cash flow from each of the properties has been calculated as the average monthly amount during the three month period ended September 30, 1998. (3) Monthly debt service consists of required payments of principal, interest and other regularly recurring charges payable to the holder of the refinancing loan or participation. (4) Average monthly cash flow from the property represents stabilized rents for the two months ending December 31, 1998 for leases executed for which total rental payments commence in November 1998. (5) Estimate based on an historical analysis of the property's cash flow prior to the Company's purchase of the loan. (6) The Company sold a senior lien interest in the loan on September 25, 1998. The debt service is the monthly payment commencing November 1998. (7) Loans 15 and 28 represent different condominium units in the same property and are, accordingly, combined for cash flow purposes. (8) The Company sold a senior lien interest in the loan on September 30, 1998. The debt service is the monthly payment commencing November 1998. (9) Includes one-twelfth of an annual payment of $118,000 received in December of each year. (10) Loan 39 is a construction loan and, as such, loan payments are based upon outstanding advances. Commercial Mortgage Loan Acquisition and Resolution: Accounting for Discounted Loans The difference between the Company's cost basis in a commercial morgage loan and the sum of projected cash flows therefrom is accreted into interest income over the estimated life of the loan using a method which approximates the level interest method. Projected cash flows, which include amounts realizable from the underlying properties, are reviewed on a regular basis, as are property appraisals. Changes to projected cash flows reduce or increase the amounts accreted into interest income over the remaining life of the loan. The Company records the investments in its commercial mortgage loan portfolio at cost, which is significantly discounted from the face value of, and accrued interest and penalties on, the loans. This discount to face value and accrued interest and penalties (as adjusted to give effect to refinancings and sales of senior lien interests) totaled $139.7 million, $86.3 million and $40.0 million at September 30, 1998, 1997 and 1996, respectively. The carrying value in the various loans is periodically reviewed to determine that it is not greater than the sum of the projected cash flows and the appraised value of the underlying properties. If the carrying value were found to be greater, the Company would provide, through a charge to operations, an appropriate allowance. In establishing the Company's allowance for possible losses, the Company also considers the historic performance of the Company's loan portfolio, characteristics of the loans in the portfolio and the properties underlying those loans, industry statistics and experience regarding losses in similar loans, payment history on specific loans as well as general economic conditions in the United States, in the borrower's geographic area or in the borrower's (or its tenant's) specific industries. 19 For the year ended September 30, 1998, the Company recorded a provision for possible losses of $505,000 to reflect the increase in size of its commercial mortgage loan portfolio, thereby increasing its allowance for possible losses to $905,000. Gains on the sale of a senior lien interest in a loan (or gains, if any, from the refinancing of a loan) are allocated between the portion of the loan sold or refinanced and the portion retained based upon the fair value of those respective portions on the date of such sale or refinancing. Any gain recognized on a sale of a senior lien interest or a refinancing is brought into income on the date of such sale or refinancing. Commercial Mortgage Loan Acquisition and Resolution: Competition The commercial mortgage loan acquisition and resolution business is competitive in virtually all of its aspects. There are a substantial number of competitors (including investment partnerships, financial institutions, investment companies, public and private mortgage funds and other entities), many of which possess far greater financial resources than the Company. This competition has in the past caused, and may in the future cause, the Company's loan acquisition costs to increase, thus reducing both the amount of loan discount the Company can obtain and the yield of the investment to the Company. In addition, the Company's ability to add to its loan portfolio will depend on its success in obtaining funding for the acquisition of additional mortgages. Subject to general market conditions and investor receptivity to the investment potential of specialty finance companies in general and real estate and equipment leasing companies in particular, the Company will have to compete for capital based largely on the Company's overall financial performance and, more specifically, the performance of the Company's loan portfolio. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Residential Mortgage Loans During fiscal 1998, the Company's residential mortgage lending business emphasized providing first and second mortgage loans on one-to-four family residences to borrowers who typically do not conform to guidelines established by the Federal Home Loan Mortgage Corporation ("Freddie Mac") because of past credit impairment or other reasons. The Company originated approximately $74.8 million of such loans in fiscal 1998. Subsequent to the fiscal year end, and as a result of conditions in the capital markets (which affected the Company's ability to obtain warehouse lines of credit and to resell residential mortgage loans it originated), the Company determined to focus more heavily on establishing private label programs for institutions. Under these programs the Company operates the residential lending function of an institution for its account, under its name and funded by the institution. No private label programs had been established at September 30, 1998. In addition, with respect to loans originated for its own account for resale, the Company has determined to place more emphasis on originating conforming loans and has become a Freddie Mac qualified lender. During fiscal 1998, approximately 7% of the Company's residential mortgage loans conformed to Freddie Mac guidelines. The Company currently is licensed as a residential mortgage lender in 25 states and is originating loans in 18 states. The Company originates residential mortgage loans with a targeted average loan size of approximately $50,000. As of September 30, 1998, the average loan size was approximately $44,000. Depending upon the credit qualification of a borrower, the Company may originate loans for its portfolio 20 with a loan-to-value ratio of up to 60% (for the least qualified borrowers) to 90% (for the most qualified borrowers). During fiscal 1998, the Company also had a program for originating "125 loans" (that is, loans with a cumulative loan-to-value ratio of up to 125%). Approximately 29% of the Company's residential mortgage loans originated in fiscal 1998 were 125 loans. Subsequent to fiscal year end, the Company terminated its 125 loan program due to conditions in the capital markets and the consequent withdrawal of entities to whom the Company sold its 125 loans. As of September 30, 1998, the Company held $3.9 million of 125 loans, all of which are held for sale. During fiscal 1998, the Company utilized two warehouse lines of credit, which have since expired, to fund its residential lending operations. The Company is currently in the process of obtaining a new warehouse line of credit; pending the establishment of a new line of credit, lending operations for the Company's account are being internally funded. See "Business - Sources of Funds." The Company's policy is to sell loans originated for its own account for cash. During the first quarter of fiscal 1998, however, the Company engaged in a sale of a pool of loans for a note. The Company's policy is generally to sell loans on a servicing-released basis; however, with respect to the sale of a group of originated and acquired loans, the sale was on a servicing-retained basis. The Company has subcontracted the servicing of these loans to Jefferson Bank. As an originator of residential mortgage loans, the Company faces intense competition, primarily from mortgage banking companies, commercial banks, credit unions, thrift institutions and finance companies. This competition is particularly intense in the area of conforming loan originations and results in loan yields and fees that are less than in the non-conforming loan market. Sponsorship of Real Estate Investment Trust The Company has sponsored RAIT, a publicly-held real estate investment trust whose common shares of beneficial interest are listed on the American Stock Exchange. RAIT's primary business is to acquire or originate commercial mortgage loans in situations that, generally, do not conform to the underwriting standards of institutional lenders or sources that provide financing through securitization. Although RAIT may acquire commercial mortgage loans at a discount, it seeks to acquire such loans where the workout process has been initiated and where, unlike the commercial mortgage loans acquired by the Company, there is no need for RAIT's active intervention. RAIT commenced operations on January 14, 1998. As the sponsor of RAIT, the Company has acquired 14% of RAIT's common shares at a cost of approximately $12.0 million. So long as the Company owns 5% or more of RAIT's common shares, the Company will have the right to nominate one person to RAIT's board of trustees (the "Board of Trustees"). In connection with RAIT's initial public offering, the Company sold 10 of its mortgage loans and senior lien interests in two other loans (representing a net investment by the Company at December 31, 1997 of $17.1 million, including $2.1 million of senior lien interests acquired by the Company in connection with the sale) to RAIT, as part of RAIT's initial investments, for $20.1 million. The Company subsequently sold the balance of its interest in one of the loans in which RAIT had acquired a senior lien interest to RAIT at the carrying value of such interest to the Company. In addition, RAIT separately acquired a $6.0 million participation in loan 32, a $12.0 million participation in loan 44, a $4.0 million participation in loan 45 and a $10.0 million participation in loan 50, each of which is senior 21 to the Company's interest. RAIT also purchased an 89% interest in a partnership that owns the property securing a portion of loan 48. The Company may sell further loans to RAIT, to a maximum of 30% of RAIT's investments (on a cost basis), excluding the initial investments. Betsy Z. Cohen, spouse of the Company's Chairman and Chief Executive Officer, Edward E. Cohen, and mother of Daniel G. Cohen, President and director of the Company, is the Chairman and Chief Executive Officer of RAIT. Jonathan Z. Cohen, a son of Mr. and Mrs. Cohen and a Vice President of the Company, is the Company's nominee to the Board of Trustees and is the Secretary of RAIT. To limit conflicts between RAIT and the Company, it has been agreed that, until January 14, 2000, (i) the Company will not sponsor another real estate investment trust with investment objectives and policies which are the same as, or substantially similar to, those of RAIT; (ii) if the Company originates a proposal to provide wraparound or other junior lien or subordinated financing (as opposed to acquiring existing financing) with respect to multifamily, office or other commercial properties to a borrower (other than to a borrower with an existing loan from the Company), the Company must first offer the opportunity to RAIT; and (iii) if the Company desires to sell any loan it has acquired that conforms to RAIT's investment objectives and policies with respect to acquired loans, it must first offer to sell it to RAIT. The Company believes that complying with these restrictions has not materially affected the Company's current operations, nor does it anticipate that it will do so in the future. The Company has also agreed that if, following January 14, 2000, the Company sponsors a real estate investment trust with investment objectives similar to those of RAIT, the Company's representative on the Board of Trustees (should the Company have a representative on the Board at that time) will recuse himself or herself from considering or voting upon matters relating to financings which may be deemed to be within the lending guidelines of both RAIT and the real estate investment trust then being sponsored by the Company. Equipment Leasing General The Company's equipment leasing business commenced in September 1995 with the acquisition of an equipment leasing subsidiary of a regional insurance company. Through this acquisition, the Company assumed the management of five publicly-held equipment leasing partnerships involving $50.1 million (original equipment cost) in leased assets at September 30, 1998. More importantly, through this acquisition the Company acquired an infrastructure of operating systems, computer hardware and proprietary software (generally referred to as a "platform"), as well as personnel, which the Company utilized in fiscal 1996 as a basis for the development of an equipment leasing business for its own account. As part of its development of this business, in early 1996 the Company hired a team of four experienced leasing executives, including the former chief executive officer of the U.S. leasing subsidiary of Tokai Bank, a major Japanese banking institution. The Company conducts its leasing operations through three corporate divisions: Fidelity Leasing, Inc. ("FLI"), which conducts the Company's small ticket leasing operations; F.L. Partnership Management, Inc. ("FLPM"), which manages five public leasing partnerships; and FL Financial Services, Inc. ("FLFS"), which provides lease finance placement and advisory services. The Company's primary focus in its equipment leasing operations is on the development of FLI, which commenced small ticket leasing operations in August 1996. FLPM's operations will continue to be reduced over the next several years 22 as partnership assets are sold and cash is distributed back to the investors. FLPM does not anticipate forming new limited partnerships in the future. FLFS will continue to operate its lease finance placement and advisory business which, while profitable, is not expected to constitute a material source of revenues for the Company. Strategy Focus on Small Ticket Leasing. The Company focuses on leasing equipment that costs between $5,000 and $100,000 ("small ticket" leasing). By so doing, the Company takes advantage not only of the background and expertise of its leasing management team, but also of the servicing platform the Company has acquired and developed which has the capacity to monitor the large amounts of equipment and related assets involved in a small ticket leasing operation. In addition, small ticket items represent a substantial portion of the equipment sought by small businesses thereby affording the Company a niche market with significant growth potential (see "Business - Equipment Leasing - Strategy: Focus on Leasing to Small Businesses"). Moreover, the small size of a typical transaction relative to the Company's total lease portfolio reduces the Company's credit risk exposure from any particular transaction. Focus on Vendor Programs. The significant majority of equipment leased to end-user customers by the Company will be purchased from manufacturers or regional distributors with whom the Company is establishing vendor programs. In so doing, the Company utilizes the manufacturer's or distributor's sales organization to gain access to the manufacturer's end-user base without incurring the costs of establishing independent customer relationships. The Company actively pursues the establishment of multiple vendor programs in an effort to reduce its reliance on any one vendor and, thus, to reduce the risk of tying the success of the Company's leasing operations to the continuation of a relationship with one (or a small group) of vendors. The Company currently has programs established with 10 manufacturers or distributors of equipment in a variety of equipment categories, including Lucent Technologies (telecommunications) and Minolta (office automation). In addition, in fiscal 1998 the Company became the exclusive lessor for Tech Data Corporation, the world's second largest distributor of information technology equipment. Two of the Company's vendor programs (for Minolta Corporation and for Lucent Technologies) accounted for 16% and 10%, respectively, of the equipment (by cost) leased by the Company during fiscal 1998. In 1998, the Company also pursued a marketing strategy of providing leasing on a private label basis to the small business customers of commercial banks. Through September 30, 1998, program agreements had been signed with three banks, including Huntington Bank, a $40.0 billion (total assets) bank based in Columbus, Ohio. Focus on Leasing to Small Businesses. The Company focuses its marketing programs and resources on lease programs for small business end-users (generally those with 500 or fewer employees). The Company has acquired and developed credit evaluation and scoring systems (based upon credit evaluation services provided by Dun & Bradstreet) which it believes significantly increases its ability to evaluate the credit risk in dealing with small business end-users (see "Business - Equipment Leasing Small Ticket Leasing"). The Company also believes that small business end-users, while sensitive to the size of a monthly lease payment, are less sensitive than large end-users to the interest rate structure of a lease, allowing the Company to increase its yield by lengthening lease terms to lower monthly rent. The Company currently offers lease terms from one to five years to meet the needs of its end-users and will consider other lease terms in appropriate circumstances. 23 Focus on Full-Payout Leases. The Company seeks to reduce the financial risk associated with the lease transactions it originates through the use of full-payout leases. A "full-payout lease" is a lease under which the non-cancelable rental payments due during the initial lease term are at least sufficient to recover the purchase price of the equipment under the lease, related acquisition fees and, typically, a minimum return on the Company's invested capital. To the extent possible, the Company seeks to increase this return through amounts received upon remarketing the equipment or through continued leasing of the equipment after expiration of the initial lease term. Focus on Providing Service. The Company provides service and support to its small business customers and vendors by seeking to minimize the time required to respond to customer applications for lease financing and by providing sales training programs to its vendors and their sales staff (which it customizes to their particular needs) regarding the use of lease financing for marketing purposes to increase a vendor's equipment sales and market share. The Company has acquired and developed proprietary management systems to assist it in providing lease quotes and application decisions to its customers, generally within four hours after receipt of a request. Focus on Lease Sales. The Company sells substantially all of its leases. In fiscal 1997, the Company sold four separate pools of leases and the equipment underlying the leases (including the residual interest) to special purpose lease financing entities (each, an "Intermediate Purchaser") which then sold interests in the leases to an institutional buyer. In the first quarter of fiscal 1998, the Company entered into an arrangement with an unaffiliated Intermediate Purchaser and a group of institutional buyers to periodically sell leases (including lease residuals) to a maximum of $50.0 million of leases. The Company has utilized $27.7 million of availability under this arrangement through September 30, 1998. In June 1998, the Company entered into a second lease sale facility with an affiliated Intermediate Purchaser to a maximum of $100.0 million. Under this latter facility, the Company retains lease residuals (that is, the proceeds received from the sale or re-leasing of equipment upon lease termination or from the extension of the lease term beyond its original expiration date). The Company has utilized $50.2 million of availability under this facility through September 30, 1998. See "Business - Sources of Funds - Forward Lease Sale Facilities." To date, the Company has retained the servicing rights on the leases it sells. Selling the leases allows the Company to recover a significant amount of its investment in the leased equipment, freeing capital for further leasing activity. Small Ticket Leasing The Company offers full-payout leases with options, exercisable by the lessee at the end of the lease term, either to purchase the equipment at fair market value, to purchase the equipment for a fixed price negotiated at the time the lease is signed, or to continue as a lessee on a month-to-month basis. The Company's leases have a provision which requires the lessee to make all lease payments under all circumstances. The leases are also net leases, requiring the lessee to pay (in addition to rent) any other expenses associated with the use of equipment, such as maintenance, casualty and liability insurance, sales or use taxes and personal property taxes. The Company offers lease terms from one to five years and will consider other lease terms in appropriate circumstances. The equipment that the Company presently purchases for lease includes document processing and storage equipment, telecommunications systems and computer systems. The table below sets forth the distribution of equipment purchased by the Company, by principal product type and percentage of dollar volume of equipment purchased, during the fiscal years 1998, 1997 and 1996. 24 Equipment Volume by Product Type (% by dollar volume of equipment purchased)
Year Ended September 30 ------------------------------------- 1998 1997 1996 ---- ---- ---- Document processing and storage.............. 40% 49% 73% Telecommunications........................... 32 37 21 Computer systems............................. 15 8 6 Other........................................ 13 6 - --- --- --- 100% 100% 100% === === ===
The Company has developed a credit evaluation system, known as the "Small Business Credit Scoring System," in order to respond to the inability of small businesses to supply standardized financial information for credit analysis (for example, audited financial statements). The system operates by assigning point amounts, or "scores," to various factors (such as business longevity, type of business, payment history, bank account balances and credit ratings) deemed relevant by the Company in determining whether an end-user is a creditworthy lessee. The scoring system declines approval of end-users with low scores, approves end-users with high scores and refers mid-range scores to credit analysts for further consideration and decision. Information is obtained from the end-user, from reports by standard credit reporting firms and from reports provided by consumer credit bureaus. The credit scoring system is also based upon industry data and the past experience of the Company and will be reviewed and modified as required in response to actual portfolio performance. Financial statements may be required for larger transactions (in the $30,000 to $100,000 range) as a complement to the scoring system. The Company oversees its leasing program through lease administration and management systems which control invoicing, collection, sales and property taxes, and financial and other reporting to management (including reports regarding regular payments, payment shortages, advance payments, security deposits, insurance payments and late or finance charges). The Company has supplemented the system with an internal audit department (which evaluates the safeguarding of assets, reliability of financial information and compliance with the Company's credit policies) and a collection department. The Company markets its leasing services primarily through the establishment of vendor programs. See "Business - Equipment Leasing - Strategy - Focus on Vendor Programs." As of September 30, 1998, the Company had vendor program relationships with 10 vendors, including Minolta Corporation and Minolta Business Systems. In addition, three manufacturers, including Lucent Technologies, Inc. and Tech Data Corporation, have designated the Company as an authorized lessor for their dealer distribution channels. Under a typical vendor program, the Company will work with the vendor and the lessee to structure the lease, finance the lease, purchase the related equipment and administer the lease, including providing all billing and collection services (except for private-label leasing, referred to below). At the end of the initial lease term, the Company and the vendor will typically coordinate the re-marketing of the equipment. The Company seeks to establish vendor relationships by (i) obtaining manufacturers' endorsements of the Company's finance programs, (ii) offering 25 inventory financing credit lines to a manufacturer's vendors, (iii) developing customized sales training programs to offer to vendors and (iv) assisting the manufacturers and their vendors in establishing a sales package including the lease financing provided by the Company. The Company also competes by establishing private-label leasing programs with its vendors. Private-label leasing involves the lease by a vendor of its own equipment on a lease form bearing the vendor's name as lessor (but otherwise identical to the Company's lease form), the sale of the lease and equipment to the Company, and the provision of basic administrative services by the vendor (such as billing and collecting rent). The Company will provide assistance, particularized rental payment structures and other customized lease terms, remarketing, customized invoicing and management information reports. The Company also seeks to develop programs marketing directly to end-user groups, primarily through small business affinity groups or associations, participations in trade shows and conventions, and media advertising. In April 1998, the Company commenced retaining for its own account the residual interest in leases sold by it and anticipates that it will derive a significant portion of its leasing profits (if any) from residuals. Currently, repayment of notes received by the Company from Intermediate Purchasers of the Company's equipment leases in earlier sales depends, to a significant extent, on realization of residuals. See "Business - Equipment Leasing - Revenue Recognition and Lease Accounting." The Company anticipates that residuals will principally involve the original end-users; however, equipment not sold or re-leased to end-users will be disposed of in the secondary market. While residual realization is generally higher with original end-users than in the secondary market, the secondary market (essentially, networks of distributors and dealers in various equipment categories) is well developed in the product categories the Company currently pursues and transactions in these product categories have historically resulted in residual recoveries, on average, equal to the book value of the equipment. Equipment reacquired by the Company prior to lease termination (through lease default or otherwise) will be sold in the secondary market. Revenue Recognition and Lease Accounting General. The manner in which lease finance transactions are characterized and reported for accounting purposes has a significant impact upon the Company's reported revenue, net earnings and the resulting financial measures. Lease accounting methods significant to the Company's leasing operations are discussed below. Direct Financing Leases. The Company classifies its lease transactions, as required by the Statement of Financial Accounting Standards No. 13, Accounting for Leases ("FASB No. 13"), as direct financing leases (as distinguished from sales-type or operating leases). Direct financing leases transfer substantially all benefits and risks of equipment ownership to the customer. A lease is a direct financing lease if the creditworthiness of the customer and the collectibility of lease payments are reasonably certain and the lease meets one of the following criteria: (i) it transfers ownership of the equipment to the customer by the end of the lease term; (ii) it contains a bargain purchase option; (iii) the term at inception is at least 75% of the estimated economic life of the leased equipment; or (iv) the present value of the minimum lease payments is at least 90% of the fair market value of the leased equipment at inception of the lease. The Company's net investment in direct financing leases consists of the sum of the total future minimum lease payments receivable and the estimated unguaranteed residual value of leased equipment, less unearned income. Unearned lease income, which is recognized as 26 revenue over the term of the lease by the effective interest method, represents the excess of the total future minimum lease payments plus the estimated unguaranteed residual value expected to be realized at the end of the lease term over the cost of the related equipment. Initial direct costs incurred in consummating a lease are capitalized as part of the investment in direct finance leases and amortized over the lease term as a reduction in the yield. Residual Values. Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or disposition of the leased equipment. The estimates are based upon available industry data and senior management's prior experience with respect to comparable equipment. Current estimates of residual values will vary from the original recorded estimates. Residual values are reviewed periodically to determine if the fair market value of the equipment is below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market value. Generally accepted accounting principles do not permit upward adjustments to residual values. Sales of Leases. The Company sells a large percentage of the leases it originates (until recently including residuals) through indirect securitization transactions and other structured finance techniques. In a securitization transaction, the Company sells and transfers a pool of leases to a bankruptcy remote Intermediate Purchaser. Typically, the Intermediate Purchaser will have no material assets apart from the leases sold to it. The Intermediate Purchaser in turn simultaneously sells and transfers its interest in the leases (excluding the residual value) to a financial institution in return for cash equal to a percentage of the aggregate present value of the lease receivables being sold. The consideration paid to the Company for the lease receivables and the residuals sold to the Intermediate Purchaser consists of the cash advanced by the financial institution and an interest bearing note from the Intermediate Purchaser. (Only cash is received on sales that do not include residuals.) Gains on the sale of leases are recorded at the date of sale in the amount by which the sales price exceeds the book value of the underlying leases. Subsequent to a sale which includes residuals, the Company has no remaining interest in the pool of leases or equipment except (i) a security interest is retained in the pool when a note is received as part of the sale proceeds and (ii) under certain circumstances, the Company is obligated to replace or accept retransfer of non-performing leases in the pool. The Company maintains an allowance for possible losses in connection with payments due under lease contracts held in the Company's portfolio and its retained interest in leases securitized or sold. The allowance is determined by management's estimate of future uncollectible lease contracts based on the Company's historical loss experience, an analysis of delinquencies, economic conditions and trends and management's expectations of future trends, industry statistics and lease portfolio characteristics and assumptions of future losses. The Company's policy is to charge off to the allowance those lease contracts which are delinquent and for which management has made a determination that the probability of collection is remote. Recoveries on leases previously charged off are restored to the allowance. For the fiscal year ended September 30, 1998, the Company recorded a provision for possible losses of $1.4 million or 27 approximately 1% of lease receivables under management. For the year ended September 30, 1997, it recorded a provision for possible losses of $253,000. To the extent that the Company determines to retain residuals for its own account, the Company's gain on sale from any pool of leases so sold may be materially reduced, although the Company's revenues in subsequent years from realization of residuals may be increased. During fiscal 1998, the Company sold leases with a book value of approximately $78.4 million to an Intermediate Purchaser in return for cash of $78.0 million, on a servicing retained basis, and notes with a face value of $8.0 million, resulting in a gain of $7.6 million. During fiscal 1997, the Company sold leases with a book value of approximately $30.2 million, on a servicing retained basis, to Intermediate Purchasers in return for cash of $20.6 million and notes with a total face value of $13.3 million, resulting in a gain of $3.7 million. During fiscal 1998 and 1997, $8.6 million of principal payments were made on these notes. The Company accounts for the sale and servicing of lease equipment in accordance with SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." See Note 2, Notes to Consolidated Financial Statements. In calculating the gains on sale to Intermediate Purchasers, the Company assumed that the cash flows on the underlying leases sold were discounted at rates ranging from 6.1% to 7.8% per annum during the fiscal year ended September 30, 1998. Partnership Management The Company acts as the general partner and manager of five public limited partnerships formed between 1986 and 1990 with total assets at September 30, 1998 of $34.4 million, including $21.1 million (book value) of equipment with an original cost of $50.1 million and investments in direct financing leases of $8.0 million. The partnerships primarily lease computers and related peripheral equipment to investment grade, middle market and capital intensive companies. The principal stated objective of each of the limited partnerships is to generate leasing revenues for distribution to the investors in the partnerships. The partnerships commenced their liquidation periods at various times between December 1995 and December 1998. For its services as general partner, the Company receives management fees, an interest in partnership cash distributions and a reimbursement of specified expenses related to administration of the partnerships (including costs of non-executive personnel, legal, accounting and third-party contractor fees and costs, and costs of equipment used in a partnership's behalf). Management fees range from 4% to 6% of gross rents except that, if leases are full-payout leases, management fees range from 2% to 3% of gross rents. In four of the partnerships, management fees are subordinated to the receipt by limited partners of a cumulative annual cash distribution of 11% (one partnership) or 12% (three partnerships) of the limited partners' aggregate investment. The Company's interest, as general partner, in cash distributions from the partnerships is 3.5% (one partnership) and 1% (four partnerships). 28 Lease Finance Placement and Advisory Business The Company also operates a lease finance placement and advisory business which focuses on two related types of leasing transactions: the origination of leases by others and the identification of third-party lease funding sources. Lease transactions generated by the division are typically full-payout leases. The Company generally receives between 1% and 4% of the equipment cost at the time the transaction is closed for its services in arranging a transaction. In some of the transactions it generates, the Company also enters into a remarketing agreement that entitles it to fees upon residual sale. Lease finance placement and advisory services generated revenues of $789,000, $657,000 and $650,000 during fiscal years 1998, 1997 and 1996, respectively. Competition The Company believes that, although the small ticket leasing business has experienced substantial consolidation in the past few years, the business of equipment leasing remains highly competitive. The Company believes, however, that small ticket leasing, to be viable, requires the financing and monitoring of large amounts of equipment and related assets. Because of the complexity and cost of developing and maintaining the platforms and vendor programs to handle such high volumes, the Company believes that there are substantial barriers to others entering into this business. Accordingly, the Company believes that its principal competitors are and will be primarily major financial institutions and their affiliates. Recent Developments On December 15, 1998, the Company entered into an agreement to acquire JLA Credit Corporation ("JLA"). JLA is the small-ticket United States leasing subsidiary of Japan Leasing Corporation, headquartered in Tokyo, Japan. Like FLI, JLA underwrites, finances and services non-cancelable, full-payout equipment leases. JLA originated leases with an aggregate original equipment purchase price of $151.0 million and $168.0 million during the year ended December 31, 1997 and during the eleven months ending November 30, 1998, respectively. As of October 31, 1998, JLA had a net investment in leases of $324.4 million and total assets of $367.0 million. JLA's equipment leasing business focuses on small ticket leasing programs from vendors and manufacturers primarily in the high technology, machine tool, printing and Japanese business segments. Lease transactions generally range in equipment size from $25,000 to $500,000 to small and medium size businesses. Key vendor relationships include Heidelberg, Scitex and Buycomp. The Company expects to acquire JLA for a combination of cash, including financing to be arranged by the Company, and assumption of existing JLA debt. The Company values the transaction at approximately $350.0 million. Subject to a financing contingency, the Company anticipates that the transaction will close in January 1999. 29 Energy Operations General The Company produces natural gas and, to a lesser extent, oil from locations principally in Ohio, Pennsylvania and New York. On September 29, 1998, the Company acquired Atlas by merger. See "Business - Energy Operations - Acquisition of Atlas." As a result of that acquisition, at September 30, 1998 the Company had (either directly or through partnerships and joint ventures managed by it) interests in 2,505 wells (including royalty or overriding interests with respect to 182 wells), of which the Company operates approximately 2,200 wells, 1,250 miles of natural gas pipelines and 301,000 acres (net) of mineral rights. Natural gas produced from wells operated by the Company is collected in gas gathering pipeline systems owned by partnerships managed by the Company (and in which the Company also has an interest) and by systems directly owned by the Company, and is sold to customers, such as gas brokers and local utilities, under a variety of contractual arrangements. Oil produced from wells operated by the Company is sold at the well site to regional oil refining companies at the prevailing spot price for Appalachian crude oil. The Company seeks to increase its reserve base through selective acquisition of producing properties and assets, through further development of its existing oil and gas interests and acquisition of energy industry companies. For further information, see Note 14 to Consolidated Financial Statements. Acquisition of Atlas On September 29, 1998, the Company acquired Atlas, a company principally involved in the energy finance business, by merger with Atlas America, Inc., a newly-formed, wholly-owned subsidiary of the Company. Atlas owned interests in, operated or managed more than 1,400 natural gas and oil wells and 650 miles of gas gathering pipelines, located predominantly in Pennsylvania and Ohio. Atlas also had undeveloped oil and gas leases covering more than 155,000 acres and managed more than 25 energy-related partnerships and joint ventures which it had syndicated through public and private offerings. Pursuant to the Agreement and Plan of Merger dated July 13, 1998, as amended, (the "Agreement"), the former shareholders of Atlas received 2,063,496 shares of the Company's Common Stock ("Common Stock"), options to acquire 120,213 shares of Common Stock for nominal consideration and cash of $6.9 million. Atlas shareholders also received certain "piggy-back" registration rights, effective during the period from September 30, 1999 through September 29, 2000, with respect to the shares of Common Stock received by them. Atlas shareholders are also eligible to receive incentive compensation should Atlas' post-acquisition earnings exceed a specified amount during the four years following the merger. The incentive compensation is equal to 10% of Atlas' aggregate earnings in excess of that amount equal to an annual (but uncompounded) return of 15% on $63.0 million. The $63.0 million base amount will increase by the amounts (if any) the Company pays for any post-merger energy acquisitions. Incentive compensation is payable, at the Company's option, in cash or in shares of Common Stock, valued at the average closing price of the Common Stock for the ten trading days preceding September 30, 2003. The Agreement requires the Company to indemnify the officers and directors of Atlas until September 29, 2000 against claims based upon their service as officers and directors of Atlas (except for claims based upon breach of the Agreement or upon a failure to disclose information as required by the Agreement) and against claims alleging wrongdoing by any of them outside the scope of their employment with Atlas. The Agreement requires the principal Atlas 30 shareholders to indemnify the Company for losses resulting from a breach of any representation or warranty given by Atlas. The maximum aggregate amount that the shareholders are required to pay as a result of this indemnification is $10.0 million. The shareholders will have no indemnification obligation until the aggregate loss (including expenses) exceeds $750,000 and then only to the extent such loss exceeds $250,000. As security for this indemnification, 698,651 shares of the Common Stock issued in connection with the merger are being held in escrow until September 29, 2002. The merger consideration paid by the Company was based upon the Company's valuation of Atlas' assets and the price of the Common Stock. There were no material relationships between the Company, its officers, directors or affiliates, and Atlas or its officers, directors or affiliates, prior to the merger. The cash paid in connection with the merger was derived from the Company's working capital. It is anticipated that any cash required for payment of incentive compensation will come from the earnings of Atlas from which the incentive compensation has been derived. Well Operations The following table sets forth information as of September 30, 1998 regarding productive oil and gas wells in which the Company has a working interest, including wells acquired in connection with the acquisition of Atlas: Number of Productive Wells -------------------------- (Unaudited) Gross(1) Net(1) -------- ------ Oil wells ................... 180 73 Gas wells ................... 2,143 1,015 ----- ----- 2,323 1,088 ===== ===== (1) Includes the Company's equity interest in wells owned by 84 partnerships and joint ventures. Does not include royalty or overriding interests with respect to 182 wells held by the Company. 31 The following table sets forth net quantities of oil and natural gas produced, average sales prices, and average production (lifting) costs per equivalent unit of production, for the periods indicated, including the Company's equity interests in the production of 51 partnerships and joint ventures.
Average Lifting Production Average Sales Price Cost per ------------------------- ---------------------- Equivalent Fiscal Period Oil(bbls) Gas(mcf) per bbl per mcf mcf(1) - - ------------- --------- -------- ------- ------- ------ 1998(2) 48,113 1,485,008 $14.38 $2.66 $1.14 1997 35,811 1,227,887 $19.68 $2.59 $1.13 1996 33,862 1,165,477 $18.53 $2.34 $1.04
(1) Oil production is converted to mcf equivalents at the rate of six mcf per barrel. (2) Excludes production relating to Atlas, which was not acquired by the Company until the end of the 1998 fiscal year. Neither the Company nor the partnerships and joint ventures it manages are obligated to provide any fixed quantities of oil or gas in the future under existing contracts. Exploration and Development The following table sets forth information with respect to the number of wells completed in Ohio and New York (the only areas in which Company drilling activities occurred) at any time during the fiscal years 1998, 1997 and 1996, regardless of when drilling was initiated.
Exploratory Wells Development Wells --------------------------------------- ------------------------------------- Productive Dry Productive Dry Fiscal --------------- ---------------- --------------- -------------- Period Gross Net Gross Net Gross Net Gross Net - - ------ ----- --- ----- --- ----- --- ----- --- 1998(1) 1.0 .25 2.0 .75 3.0 3.0 -- -- 1997 1.0 .50 -- -- -- -- -- -- 1996 3.0 .52 1.0 .29 2.0 1.50 -- --
- - ---------- (1) Excludes wells drilled by Atlas, which was not acquired by the Company until the end of the 1998 fiscal year. All drilling has been on acreage held by the Company. The Company does not own its own drilling equipment; rather, it acts as a general contractor for well operations and subcontracts drilling and certain other work to third parties. 32 Oil and Gas Reserve Information An evaluation of the Company's estimated proved developed oil and gas reserves as of September 30, 1998, including those acquired with Atlas, was reviewed by Wright & Company, Inc., an independent petroleum engineering firm. Such study showed, subject to the qualifications and reservations therein set forth, reserves of 90.0 million mcf of gas and 573,000 barrels of oil. See Note 14 to the Consolidated Financial Statements. The following table sets forth information with respect to the Company's developed and undeveloped oil and gas acreage as of September 30, 1998, including acreage acquired in connection with the acquisition of Atlas. The information in this table includes the Company's equity interest in acreage owned by 84 partnerships and joint ventures.
Developed Acreage Undeveloped Acreage --------------------- ------------------- Gross Net Gross Net ----- --- ----- --- Arkansas............................ 2,560 403 - - Kansas.............................. 160 20 - - Kentucky............................ 9,838 4,919 9,771 4,885 Louisiana........................... 1,819 206 - - Mississippi......................... 40 3 - - New York............................ 23,738 18,816 18,528 15,749 Ohio................................ 122,526 80,227 44,008 42,793 Oklahoma............................ 4,243 635 - - Pennsylvania........................ 39,786 39,194 59,822 59,822 Tennessee........................... - - 1,804 1,804 Texas............................... 4,520 209 - - West Virginia....................... 4,692 2,346 58,177 29,038 ----- ----- ------ ------ 213,922 146,978 192,110 154,091 ======= ======= ======= =======
The terms of the oil and gas leases held by the Company for its own account and by its managed partnerships vary, depending upon the location of the leased premises and the minimum remaining terms of undeveloped leases, from less than one year to five years. Rentals of approximately $72,000 in fiscal 1998 were paid to maintain leases on such acreage in force. The Company believes that the partnership, joint venture and Company properties have satisfactory title. The developed oil and gas properties are subject to customary royalty interests generally contracted for in connection with the acquisition of the properties, burdens incident to operating agreements, current taxes and easements and restrictions (collectively, "Burdens"). Presently, the partnerships, joint ventures and the Company are current with respect to all such Burdens. At September 30, 1998, the Company had no individual interests in any oil and gas property that accounted for more than 10% of the Company's proved developed oil and gas reserves, including the Company's interest in reserves owned by 84 partnerships and joint ventures. 33 Pipeline Operations The Company operates, on behalf of four limited partnerships of which it is both a general and limited partner (in which it owns 22%, 46%, 26% and 50% interests and including one partnership for which Atlas acts as a general and limited partner), and for its own account, various gas gathering pipeline systems (including those owned by Atlas) totaling approximately 1,250 miles in length. The pipeline systems are located in Ohio, New York and Pennsylvania. Well Services The Company provides a variety of well services to wells of which it is the operator and to wells operated by independent third party operators. These services include well operations, petroleum engineering, well maintenance and well workover and are provided at rates in conformity with general industry standards. Sources and Availability of Raw Materials The Company contracts for drilling rigs and purchases tubular goods necessary for the drilling and completion of wells from a substantial number of drillers and suppliers, none of which supplies a significant portion of the Company's annual needs. During fiscal 1998, the Company faced no shortage of such goods and services. The duration of the current supply and demand situation cannot be predicted with any degree of certainty due to numerous factors affecting the oil and gas industry, including selling prices, demand for oil and gas, and governmental regulations. Major Customers The Company's natural gas and oil is sold to various purchasers. During fiscal 1998, gas sales to two purchasers accounted for 35% and 14%, respectively, of the Company's total production revenues. For the years ended September 30, 1997 and 1996, gas sales to two purchasers accounted for 29% and 12%, and 29% and 13%, respectively, of the Company's total production revenues. Competition The oil and gas business is intensely competitive in all of its aspects. The oil and gas industry also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual customers. Domestic oil and gas sales are also subject to competition from foreign sources. Moreover, competition is intense for the acquisition of leases considered favorable for the development of oil and gas in commercial quantities. The Company's competitors include other independent oil and gas companies, individual proprietors and partnerships. Many of these entities possess greater financial resources than the Company. While it is impossible for the Company to accurately determine its comparative industry position with respect to its provision of products and services, the Company does not consider its oil and gas operations to be a significant factor in the industry. 34 Markets The availability of a ready market for oil and gas produced by the Company, and the price obtained therefor, will depend upon numerous factors beyond the Company's control including the extent of domestic production, import of foreign natural gas and/or oil, political instability in oil and gas producing countries and regions, market demands, the effect of federal regulation on the sale of natural gas and/or oil in interstate commerce, other governmental regulation of the production and transportation of natural gas and/or oil and the proximity, availability and capacity of pipelines and other required facilities. Currently, the supply of both crude oil and natural gas is more than sufficient to meet projected demand in the United States. These conditions have had, and may continue to have, a negative impact on the Company through depressed prices for its oil and gas reserves. Governmental Regulation The exploration, production and sale of oil and natural gas are subject to numerous state and federal laws and regulations. Compliance with the laws and regulations affecting the oil and gas industry generally increases the Company's costs of doing business in, and the profitability of its energy operations. Inasmuch as such regulations are frequently changing, the Company is unable to predict the future cost or impact of complying with such regulations. The Company is not aware of any pending or threatened matter involving a claim that it has violated environmental regulations which would have a material effect on its operations or financial position. Sources of Funds The Company historically relied upon internally generated funds to finance its growth. During the past two fiscal years, the Company has augmented its internally generated funds with the proceeds of one debt and two equity offerings (which generated aggregate net proceeds of $249.3 million) and lines of credit to the Company and its subsidiaries. The following is a summary of the terms of the Company's debt offering and the lines of credit outstanding as of December 1, 1998. 12% Senior Notes. The 12% Senior Notes (the "12% Notes") are unsecured general obligations of the Company, with interest only payable until maturity on August 1, 2004. The 12% Notes are not subject to mandatory redemption except upon a change in control of the Company, as defined in the Indenture governing the 12% Notes, when the Noteholders have the right to require the Company to redeem the 12% Notes at 101% of principal amount plus accrued interest. No sinking fund has been established for the 12% Notes. At the Company's option, the 12% Notes may be redeemed in whole or in part on or after August 1, 2002 at a price of 106% of principal amount (through July 31, 2003) and 103% of principal amount (through July 31, 2004), plus accrued interest to the date of redemption. The Indenture contains covenants that, among other things, (i) require the Company to maintain certain levels of net worth (generally, an amount equal to $50.0 million plus a cumulative 25% of the Company's consolidated net income) and liquid assets (generally, an amount equal to 100% of required interest payments for the next succeeding interest payment date); and (ii) limit the ability of the Company and its subsidiaries to (a) incur indebtedness (not including secured indebtedness used to acquire or refinance the acquisition of loans, equipment leases or other assets), (b) pay dividends or make other distributions in excess of 25% of aggregate consolidated net income (offset by 100% of any deficit) on a cumulative basis, (c) engage in certain transactions with affiliates, (d) dispose of certain subsidiaries, (e) create liens and guarantees with respect to pari passu or junior indebtedness 35 and (f) enter into any arrangement that would impose restrictions on the ability of subsidiaries to make dividend and other payments to the Company. The Indenture also restricts the Company's ability to merge, consolidate or sell all or substantially all of its assets and prohibits the Company from incurring additional indebtedness if the Company's "leverage ratio" exceeds 2.0 to 1.0. As defined by the Indenture, the leverage ratio is the ratio of all indebtedness (excluding debt used to acquire assets, obligations of the Company to repurchase loans or other financial assets sold by the Company, guarantees of either of the foregoing, non-recourse debt and certain securities issued by securitization entities, as defined in the Indenture), to the consolidated net worth of the Company. The Indenture also prohibits the Company from incurring pari passu or junior indebtedness with a maturity date prior to that of the 12% Notes. Commercial Mortgage Loan Credit Facility. In March 1998, the Company, through certain operating subsidiaries, established an $18.0 million revolving credit facility (with current permitted draws of $5.0 million) with Jefferson Bank for its commercial mortgage loan operations. The credit facility bears interest at the prime rate reported in The Wall Street Journal plus .75%, and is secured by the borrowers' interests in certain commercial loans and by a pledge of their outstanding capital stock. In addition, repayment of the credit facility is guaranteed by the Company. Credit availability is based upon the amount of assets pledged as security for the facility and is subject to approval by Jefferson Bank of additional collateral. The facility expires on April 1, 1999. There were no borrowings under this facility during fiscal 1998. See "Certain Relationships and Related Party Transactions." Lease Financing Credit Facility. The Company's equipment leasing subsidiary, FLI, maintains a $20.0 million revolving credit facility with term loan availability with First Union National Bank and European American Bank. The facility has, in addition to customary covenants, the following principal terms: (i) no single advance may exceed the lesser of (a) 95% of the cost of the leases being financed or (b) $500,000 or, in the case of leases to investment grade lessees, $1,000,000; (ii) revolving credit loans bear interest, at FLI's election, at (a) an adjusted LIBOR rate plus 150 basis points or (b) the rate for one month U.S. dollar deposits as reported by Telerate (London) plus 150 basis points, while term loans bear interest at the adjusted LIBOR rate plus 150 basis points; (iii) term loans must be for not less than $2.0 million per loan; (iv) the loans are secured by a first lien on the equipment leases being financed (and on the underlying equipment), a guaranty by the Company and a pledge of the capital stock of FLI and Resource Leasing, Inc. (the direct parent of FLI and a wholly-owned subsidiary of the Company); (v) revolving credit loans may be converted to term loans and paid in accordance with applicable amortization schedules; (vi) adjustable rate term loans may, at the option of FLI, be converted into fixed rate term loans at then quoted rates; and (vii) FLI will be required to maintain a debt (excluding non-recourse debt) to tangible net worth ratio of 5.5 to 1.0 or less, a minimum tangible net worth equal to $8.0 million plus 75% of FLI's net income, and a ratio of cash flow (income before taxes, depreciation, amortization and extraordinary items, plus interest expense) to the sum of interest expense, mandatory principal payments and 25% of outstanding obligations under the revolving line of credit, of 1.5 to 1.0. The facility expires on March 31, 2000 but may be renewed for additional 18 month periods by the lenders. In fiscal 1998, there was an aggregate of $33.8 million in borrowings under this line, all of which were repaid prior to September 30, 1998. Forward Lease Sale Facilities. In December 1997, the Company, through FLI, entered into an arrangement (the "1997 Commitment") with SW Leasing Portfolio IV, Inc. ("SW"), as the Intermediate Purchaser, and First Union National Bank ("First Union") and Variable Funding Capital Corporation ("VFCC" 36 and collectively with First Union, the "Purchaser"), as the ultimate investors, for the sale of equipment leases by FLI. In June 1998, the Company entered into a similar arrangement (the "1998 Commitment" and together with the 1997 Commitment, the "Commitments") with Fidelity Leasing SPC I, Inc. (a wholly-owned special purpose lease finance subsidiary of FLI) ("FSP"), as the Intermediate Purchaser, and the Purchaser. Under the Commitments, (i) SW or FSP will purchase equipment leases (meeting specific eligibility requirements) and the underlying equipment from FLI for a purchase price equal to the sum of the present value of scheduled payments (the "Discounted Contract Balance") as of the date of sale and, with respect to the 1997 Commitment only, the residual value of the equipment (the "Residual Value"), (ii) the Purchaser will purchase, for a price equal to the product of .88 (.90 in the 1998 Commitment) multiplied by the aggregate Discounted Contract Balances on the date of sale, up to $50.0 million of equipment leases ($100.0 million of equipment leases for the 1998 Commitment) from time to time during the one year term of each Commitment, and (iii) FLI acts as servicing agent for the equipment leases purchased. With respect to transactions under the 1997 Commitment, SW uses the cash received by it from the Purchaser to pay a portion of the purchase price of the leases and pays the balance of the purchase price with a promissory note in an original principal amount equal to the aggregate Residual Value and the non-advanced portion of the aggregate Discounted Contract Balances. With respect to transactions under the 1998 Commitment, FSP uses the cash received by it from the Purchaser to pay portion of the purchase price of the leases; the unpaid balance of the purchase price constitutes a contribution to FSP's capital by the Company. Lease collections in excess of fees associated with the leases and a return to the Purchaser (equivalent to LIBOR, the First Union prime rate or the federal funds rate plus 1%, depending on the circumstances) may be reinvested in eligible leases (unless the capital limit the product of the aggregate Discounted Contract Balances multiplied by .88 or .90, as the case may be, has been exceeded, in which event the amount of such excess must be paid to the Purchaser or paid to SW or FSP, as the case may be). Payments made to SW will be available to pay down the promissory note, while the payments to FSP will be distributed to FLI. Under the Commitments, FLI is obligated to provide a substitute equipment lease to the Purchaser in the event a lease is terminated or prepaid in full prior to its scheduled expiration date and the prepayment amount is less than the Discounted Contract Balance on the date of prepayment plus any outstanding services advances. In addition, SW and FSP, as the case may be, and FLI, in either case, are obligated to accept retransfer of, or provide a substitute lease for, any lease which does not meet the eligibility requirements. The Commitments are subject to early termination under certain circumstances, including (i) if the ratio of the average Discounted Contract Balances (for each of the previous three months) for all leases delinquent in payments by 60 days or more to the aggregate Discounted Contract Balances (for each of the previous three months) for all non-delinquent leases exceeds 3% or (ii) if the ratio of the aggregate Discounted Contract Balances (for each of the preceding nine months) for all defaulted leases (i.e., leases which FLI has determined are not collectible or subject to repossession or which are delinquent in payments by 120 days or more) to the aggregate Discounted Contract Balances (for each of the preceding nine months) for all non-defaulted leases exceeds 2.75%. In fiscal 1998, the Company sold to SW equipment leases under the 1997 Commitment with an aggregate book value of $31.8 million in return for cash of $27.7 million and promissory notes for $8.0 million and sold FSP equipment leases under the 1998 Commitment with an aggregate book value of $46.5 million in return for cash of $50.2 million, retaining lease residuals with a book value of $3.9 million. 37 Oil and Gas Credit Facilities. The Company maintains a $5.0 million credit facility with KeyBank for purposes of acquiring oil and gas assets. The credit facility permits draws based on a percentage of reserves of oil and gas properties pledged as security for the facility. Draws under the facility bear interest at KeyBank's prime rate plus 25 basis points. The facility requires the Company to maintain a tangible net worth in excess of $31.0 million, a 2.0 to 1.0 ratio of current assets to current liabilities, a 1.5 to 1.0 ratio of cash flow to maturities of long-term debt coming due within the calculation period and a ratio of adjusted debt to tangible net worth of not more than 2.0 to 1.0. The facility terminates on June 30, 1999. As of September 30, 1998, the Company had $5.0 million outstanding under this line. Prior to its acquisition by the Company, Atlas maintained a $40.0 million credit facility (with $27.0 million of permitted draws) at PNC Bank ("PNC"). This line has been continued by the Company. The credit facility is divided into two principal parts: a revolving credit facility and a term loan facility. The revolving credit facility has $20.0 million of permitted draws, with a term ending in 2001 and with draws bearing interest at one of two rates (elected at borrower's option) which increase as the amount outstanding under the facility increases: (i) PNC prime rate plus between 0 to 50 basis points, or (ii) LIBOR plus between 137.5 to 212.5 basis points. The term loan facility has $7.0 million of permitted draws, with a term ending in 2003, and with draws bearing interest at one of two rates (elected at borrower's option), which increase as the amount outstanding under the facility increases: (i) PNC prime rate plus between 12.5 to 62.5 basis points, or (ii) LIBOR plus between 150 to 225 basis points. The credit facility contains certain financial covenants of Atlas, including maintaining a current ratio of .75 to 1.0, a ratio of fixed charges to earnings of 2.0 to 1.0 and a leverage ratio (essentially a ratio of debt to equity) of not less than 3.75 to 1.0, reducing to 3.50 to 1.0 in January 1999, 3.25 to 1.0 in October 1999 and 3.0 to 1.0 in March 2000. The credit facility also imposes the following limits: (a) Atlas' exploration expense can be no more than 20% of capital expenditures plus exploration expense, without PNC's consent; (b) sales, leases or transfers of property by Atlas are limited to $1.0 million without PNC's consent; and (c) Atlas cannot incur debt in excess of $2.0 million to lenders other than PNC without PNC's consent. As of September 30, 1998 there was $20.0 million outstanding under the revolving credit facility and $7.0 million outstanding under the term loan facility. Other. During fiscal 1998, FMF maintained two credit facilities, both of which have expired. FMF is currently in the process of obtaining a new credit facility; however, no such facility has yet been established and there can be no assurance that FMF will be able to obtain such a facility on acceptable terms. Employees As of September 30, 1998, the Company employed 309 persons, including 15 in general corporate, 56 in real estate finance, 96 in equipment leasing and 142 in energy. Cautionary Statements for Purposes of the Safe Harbor Statements made by the Company in written or oral form to various persons, including statements made in filings with the Securities and Exchange Commission, that are not strictly historical facts are "forward-looking" 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 38 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: o The Company's real estate finance and equipment leasing businesses are dependent on outside capital in order to sustain current growth. Historically, funding for the Company's operations has been derived from a number of different sources, including internally generated funds, proceeds from the sale of senior lien interests and refinancings of commercial mortgages, sales of residential loans and equipment leases, borrowings and the sale of its notes and Common Stock. A decrease in availability of such outside funds could have a material adverse effect on the Company's results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations: Liquidity and Capital Resources." o Variations in the volume of commercial mortgage loans purchased or originated by the Company or in the volume of residential mortgage loans and equipment leases originated by the Company could materially affect the Company's results of operations and financial condition. o Unforeseen interest rate increases could reduce the resale value of leases with fixed interest rates, could increase the Company's costs of funds (such as the interest rates payable on new senior lien interests sold by the Company on, or new borrower refinancings of its commercial loan portfolio), and could reduce demand for the Company's residential mortgage loans and lease funding. In addition, in residential mortgage lending and equipment leasing, the return expected, and the rates charged by the Company, are based on interest rates prevailing in the market at the time of loan origination or lease approval. Until the Company's residential loans or equipment leases are sold, they are funded from credit facilities or working capital. An increase in interest rates during the period between funding by the Company of the residential loan or equipment lease and its resale could adversely affect the Company's operating margin. During a period of declining rates, the amounts becoming available to the Company for investment may have to be invested at lower rates that the Company had been able to obtain in prior investments. o Declines in real property values generally and/or in those specific markets where the properties securing the Company's commercial mortgage and residential loans are located could materially affect the value of and default rates under those loans and, with respect to residential mortgage loans, may reduce consumer demand. o In each of its business operations, the Company is subject to intense competition from numerous persons, many of whom possess far greater financial, marketing, operational and other resources than the Company and may have lower costs of funds than the Company. o Many of the Company's commercial mortgage loans are secured by properties that, while income producing, are unable to generate sufficient revenues to pay the full amount of debt service under the original loan terms or are subject to other problems. Although prior to acquisition of a loan the Company will generally negotiate with the borrower or other parties in interest to resolve outstanding issues, ensure the Company's control of the cash flow and, where appropriate, make financial accommodations to take into account the operating 39 conditions of the underlying property, there may be a higher risk of default with these loans as compared to conventional loans. o Many of the Company's commercial mortgage loans were acquired as or became (as a result of borrower refinancing) junior lien obligations. Subordinate liens carry a greater credit risk, including a substantially greater risk of non-payment of interest or principal, than senior lien financing. In the event of foreclosure, the Company will be entitled to share only in the net proceeds after payment of all senior lienors. It is therefore possible that the Company will not recover the full amount of its outstanding loan or of its unrecovered investment in the loan, either of which events could have a material adverse effect on the Company's results of operations and financial condition. o At September 30, 1998, the Company's allowance for possible losses was $905,000 (.5% of book value of its commercial mortgage loan portfolio at that date). There can be no assurance that this allowance will prove to be sufficient or that future provisions for loan losses will not be materially greater, either of which could have a material adverse effect on the Company's results of operations. o Unforeseen and drastic changes in governmental truth-in-lending, equal credit opportunity, settlement procedures, mortgage disclosure, debt collection practices, environmental and similar policies affecting the Company's business could make compliance more difficult (or impossible) and expensive. o In the first quarter of fiscal 1998 the Company sold, on a servicing-retained basis, a pool of residential mortgage loans that were both acquired and originated by it to an unaffiliated special purpose mortgage financing entity for a note with a face value of $8.3 million. The note was partially prepaid during fiscal 1998 through third-party financing, which financing was unconditionally guaranteed by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations: Real Estate Finance." The $1.4 million balance of the note is due on or before December 31, 2027. The special purpose financing entity has no material assets other than the loan pool sold to it and approximately 75% of these loans have loan to value ratios in excess of 100%. To the extent that defaults under the loans in the pool are greater than anticipated by the Company, or if loan prepayments are substantially in excess of those anticipated by the Company, the Company may not receive full payment on the remaining balance of the note. This would result in a charge to the Company's earnings in the amount of any unrecovered remaining balance of the note. Moreover, if the number of defaults is sufficiently large, the Company may be required to repay some portion or all of the third party financing pursuant to its guaranty. Any such repayment could have a material adverse effect on the Company's results of operations and financial condition. o The Company currently relies in its equipment leasing business upon relationships it has established with certain manufacturers and regional distributors in order to gain access to end-users who will enter into equipment leases. To date, the Company has established vendor programs with 10 manufacturers or distributors. Two manufacturers, Minolta Corporation and Lucent Technologies, accounted for 16% and 10%, respectively, of the equipment (by cost) leased by the 40 Company during fiscal 1998. In the event that these vendors significantly reduce the number of leases placed with the Company, and the Company cannot replace the lost lease volume, such reduction could have a material adverse effect on the Company's financial condition and results of operations. o During fiscal 1997 and the first six months of fiscal 1998, the Company typically sold some portion or all of its interest in originated equipment leases and the related equipment to Intermediate Purchasers for cash and promissory notes. At September 30, 1998, the Company held $14.1 million of such notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Intermediate Purchasers have no material assets other than the leases and equipment purchased from the Company. If lease defaults are greater than anticipated by the Company, the ability of an Intermediate Purchaser to repay its notes to the Company may be adversely affected. The ability of an Intermediate Purchaser to repay the notes could also be adversely affected if the realization of residuals is less than anticipated by the Company. Accordingly, lease defaults that are greater than anticipated and residual earnings that are less than anticipated could result in a charge to the Company's earnings in the amount of the notes not recoverable by the Company. Moreover, if the number of lease defaults is sufficiently large, the Company may be required, under the terms of any credit enhancement provided by it, to repay some portion or all of the financing arranged by the Intermediate Purchaser or to replace defaulted leases with performing leases. Any such repayment or replacement could have a material adverse effect on the Company's results of operations and financial condition. o Through March 31, 1998, as part of its equipment lease sales the Company sold its entire interest in the leased equipment, including residuals, to Intermediate Purchasers in exchange for cash and promissory notes. At April 1, 1998, the Company commenced retaining residuals for its own account, which materially reduces the gain on sale of leases as the recognition of revenues, if any, from residuals will be recognized over the term of the lease. Realization of residuals is subject to a number of factors including the ability or willingness of a lessee to continue to lease or to acquire the equipment, unusual wear and tear on or use of the equipment, equipment obsolescence, excessive supply of similar equipment, reductions in manufacturers' prices for similar equipment and similar matters which could materially adversely affect the amount of residuals obtainable. To the extent that the Company retains residuals, a decline in their value could adversely affect the Company's operating results and financial condition. At September 30, 1998, the Company held unrealized residuals with a book value of $6.3 million. o Under the terms of certain of its lease sales, the Company may be required to replace a lease if the lessee defaults in its obligations under the lease. If the Company were required to replace a lease, the pool of leases otherwise available for sale by the Company would be reduced. In addition, the Company would have to repossess the leased equipment in order to attempt to recover the lease balance. There can be no assurance that the amount realizable from equipment subject to a defaulted lease will be sufficient to recover amounts invested by the Company. 41 o Historically, the markets for natural gas and oil have been volatile and are likely to continue to be volatile in the future. Prices for natural gas and oil are subject to wide fluctuation in response to relatively minor changes in the supply of and demand for natural gas and oil, market uncertainty and other factors over which the Company has no control. Depending on the purchasers' needs, the price obtainable for natural gas produced by the Company, or the amount of natural gas which the Company is able to sell, the revenues of the Company from its energy operations may be materially adversely affected. o The oil and natural gas business involves certain operating hazards such as well blowouts, craterings, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures or spills, pollution, releases of toxic gas and other environmental hazards and risks, any of which could result in substantial losses to the Company. In addition, the Company may be liable for environmental damage caused by previous owners of property purchased or leased by the Company. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could materially adversely affect the Company's results of operations or financial condition. In accordance with customary industry practices, the Company maintains insurance against some, but not all, of such risks and losses. The Company may elect to self-insure if it believes that the cost of insurance, although available, is excessive relative to the risks presented. The occurrence of an event that is not covered, or not fully covered, by insurance could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, pollution and environmental risks generally are not fully insurable. o The Company annually reviews the carrying value of its oil and natural gas properties under the full cost accounting rules of the Securities and Exchange Commission (the "Commission"). Under these rules, capitalized costs of proved oil and natural gas properties may not exceed the present value of estimated future net revenues from proved reserves, discounted at 10%. Application of the "ceiling" test generally requires pricing future revenue at the unescalated prices in effect as of the end of each fiscal year and requires a write-down for accounting purposes if the ceiling is exceeded, even if prices were depressed for only a short period of time. The Company may be required to write-down the carrying value of its oil and natural gas properties when oil and natural gas prices are depressed or unusually volatile. If a write-down is required, it could result in a material charge to earnings, but would not impact cash flow from operating activities. Once incurred, a write-down of oil and natural gas properties is not reversible at a later date. o The estimates of the Company's proved oil and natural gas reserves and the estimated future net revenues therefrom referred to immediately above are based upon reserve reports that rely upon various assumptions, including assumptions required by the Commission as to oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Such estimates are inherently imprecise. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may vary substantially from those estimated by the Company or contained in the reserve reports. Any significant variance in these assumptions could materially affect the estimated quantity of the Company's reserves. The Company's properties also may be susceptible to hydrocarbon drainage from production by other operators on adjacent properties. In addition, the Company's proved reserves may be subject to downward or upward 42 revision based upon production history, results of future exploration and development, prevailing oil and natural gas prices, mechanical difficulties, governmental regulation and other factors, many of which are beyond the Company's control. o Unforeseen Year 2000 compliance issues, both within the Company and among its customers and service providers and in general among the business and governmental communities, could negatively impact the Company's business. ITEM 2. PROPERTIES The Company's executive office is located in Philadelphia, and is leased under an agreement providing for rents of $115,000 per year through May 2000. The Company's small ticket equipment leasing and residential mortgage loan headquarters are located in Ambler, Pennsylvania, and is leased by the Company under agreements providing for rents of $351,000 per year. The agreements terminated on June 30, 1998 but have been extended on a month-to-month basis. The residential mortgage loan business also leases office space in Mt. Laurel, New Jersey under an agreement providing for rents of $220,000 per year through October 2002. The Company leases space in Philadelphia for management operations with respect to its five public leasing partnerships for $87,000 per year. That lease expires on January 24, 2003. The Company owns a 9,600 square foot office building and related land in Akron, Ohio and, as a result of the Atlas acquisition, a 24,000 square foot office building in Pittsburgh, Pennsylvania which are used for its energy operations. In addition, as a result of the Atlas acquisition, the Company owns a 17,000 square foot field office and warehouse facility in Jackson Centre, Pennsylvania. The Company also maintains two energy field offices in Ohio and New York, on month-to-month tenancies, for which aggregate rent for fiscal 1998 was $25,000. The Company also maintains a lease brokerage office in California for which the rent is $24,000 per year through July 1999. Aggregate rent for all of the Company's offices was $750,000 for fiscal 1998. ITEM 3. LEGAL PROCEEDINGS On October 14, 1998, Theodore M. Birnbaum filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania (the "Eastern District") on behalf of himself and all purchasers of the Common Stock between December 17, 1997 and August 28, 1998 against the Company, its directors and executive officers and the Company's independent auditors. On December 2, 1998, Janet Leigh and Glenn Hutton filed a similar complaint in the Eastern District, individually and on behalf of all others similarly situated, against the Company, the Company's Chief Executive, Financial and Accounting Officers, and the Company's independent auditors. The complaints allege that the Company (i) used the "accretion-of-discount" method of recognizing revenue on discounted loans inappropriately and (ii) applied FASB 125 improperly with respect to the calculation of the fair value of the Company's retained junior interests in loans in which the Company had sold a senior lien interest or which the borrower had refinanced. The complaints further allege that, as a result, the Company's revenues and net income were inflated. The complaints seek unspecified damages. The Company believes that the complaints are without merit and intends to defend itself vigorously. 43 The Company is also party to various routine legal proceedings arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the financial condition or operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is quoted on the Nasdaq Stock Market under the symbol "REXI." The following table sets forth the high and low sale prices, as reported by Nasdaq, on a quarterly basis for the Company's last two full fiscal years and the 1999 fiscal year through December 9, 1998. All amounts have been retroactively adjusted to reflect the three-for-one stock split effected in the form of a 200% stock dividend by the Company on June 5, 1998. High Low ---- --- Fiscal 1999 ----------- First Quarter (through December 9, 1998)....... $13.69 $7.56 Fiscal 1998 ----------- Fourth Quarter................................. 37.50 7.75 Third Quarter.................................. 29.25 19.75 Second Quarter ................................ 20.17 14.50 First Quarter.................................. 18.83 14.25 Fiscal 1997 ----------- Fourth Quarter................................. 17.17 8.33 Third Quarter.................................. 8.75 6.33 Second Quarter................................. 8.83 5.92 First Quarter.................................. 6.33 4.08 As of December 9, 1998, there were 21,859,924 shares of Common Stock outstanding held by 794 holders of record. The Company paid regular quarterly cash dividends on its Common Stock (as adjusted for stock dividends) of $.03 per share commencing with the fourth quarter of fiscal 1995. Under the terms of the 12% Notes, the payment of dividends on the Company's Common Stock is restricted unless certain financial tests are met. See "Business - Sources of Funds: 12% Notes." 44 ITEM 6. SELECTED FINANCIAL DATA Selected financial data as of and for the five fiscal years ended September 30, 1998 are as follows (all amounts in thousands, except per share data):
For the Years Ended September 30, ----------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Revenues Real estate finance $62,856 $19,144 $ 7,171 $ 6,114 $ 2,522 Equipment leasing 13,561 7,162 4,466 - - Energy production 4,682 3,936 3,421 3,452 3,442 Energy services 2,052 1,672 1,736 1,879 2,080 Interest and other 4,316 1,031 204 149 136 ------- ------- ------- ------- ------ Total revenues $87,467 $32,945 $16,998 $11,594 $8,180 ======= ======= ======= ======= ====== Income from continuing operations before income taxes and extraordinary item $40,740 $14,931 $7,353 $3,344 $1,209 Provision (benefit) for income taxes 13,368 3,980 2,206 630 (100) ------ ------ ----- ----- ----- Income from continuing operations before extraordinary item $27,372 $10,951 $5,147 $2,714 $1,309 Extraordinary Item 239 - - - - ------- ------- ------ ------ ------ Net income $27,611 $10,951 $5,147 $2,714 $1,309 ======= ======= ====== ====== ====== Net income per common share (basic) before extraordinary item $1.64 $1.05 $.91 $.48 $.22 Extraordinary item .01 - - - - ----- ----- ---- ---- ---- Net income per common share (basic) $1.65 $1.05 $.91 $.48 $.22 ===== ===== ==== ==== ==== Cash dividends per common share $ .13 $ .13 $ .13 $ .03 $ - ===== ===== ===== ===== ==== Balance Sheet Data Total assets $426,447 $195,119 $43,959 $37,550 $34,796 Long-term debt less current maturities 133,016 118,786 8,966 8,523 8,627 Stockholders' equity 236,478 64,829 31,123 26,551 24,140
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company's operating results and financial condition reflect the growth of the Company's real estate finance and equipment leasing businesses following substantial increases in working capital due to the sale, in December 1996, of Common Stock (from which it received net proceeds of $19.5 million), 45 the issuance, in July 1997, of $115.0 million of 12% Notes (from which it received net proceeds of $110.6 million), and the sale, in April 1998, of Common Stock (from which it received net proceeds of $119.2 million). These transactions along with the acquisition of Atlas were primarily responsible for increasing the Company's capital (stockholders' equity plus long-term debt) to $369.5 million as of September 30, 1998. Overview of Fiscal 1998 The Company's gross revenues were $87.5 million in fiscal 1998, an increase of $54.5 million (165%) from $32.9 million in fiscal 1997, as compared to an increase in fiscal 1997 of $15.9 million (94%) from $17.0 million in fiscal 1996. Of the increases in total revenue during that period, the revenues from the Company's real estate finance business increased to $62.9 million, an increase of $43.7 million (228%) from $19.1 million in fiscal 1997, as compared to an increase of $12.0 million (167%) in fiscal 1997 from $7.2 million in fiscal 1996. Leasing revenues were $13.6 million in fiscal 1998, an increase of $6.4 million (89%) from $7.2 million in fiscal 1997 as compared to an increase of $2.7 million (60%) from $4.5 million in fiscal 1996, the period in which leasing operations commenced. In addition, energy revenues were $6.7 million in fiscal 1998, an increase of $1.1 million (20%) from $5.6 million in fiscal 1997 as compared to $5.2 million (9%) in fiscal 1996. Real estate finance and equipment leasing revenues were 87%, 80% and 68% of total revenues in fiscal 1998, 1997 and 1996, respectively. Energy revenues were 8%, 17%, and 30% of total revenues in fiscal 1998, 1997 and 1996, respectively. The Company anticipates that its energy revenues, as a percentage of total revenues, will increase in fiscal 1999 as a result of the acquisition of Atlas. As of September 30, 1998, total assets were $426.4 million an increase of $231.3 million (119%) from assets of $195.1 million at September 30, 1997, as compared to an increase of $151.2 million (344%) from assets of $44.0 million at September 30, 1996. Real estate finance and equipment leasing assets were 56%, 53% and 57% of total assets at September 30, 1998, 1997 and 1996, respectively. Energy assets were 21%, 8% and 29% of total assets at September 30, 1998, 1997 and 1996, respectively. 46 Results of Operations: Real Estate Finance The following table sets forth certain information relating to the revenue recognized and cost and expenses incurred in the Company's real estate finance operations during the periods indicated:
Year Ended September 30, ---------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Revenues: Commercial mortgage loan acquisition and resolution: Interest................................ $13,179 $ 4,877 $ 1,899 Accreted discount....................... 6,520 4,124 954 Fees.................................... 5,939 2,556 675 Gains on sales of senior lien interests and loans................... 30,196 7,587 3,643 ------ ------- ------ 55,834 19,144 7,171 ------ ------- ------ Residential mortgage lending: Gain on sales of residential mortgage loans........................ 4,273 -- -- Interest................................ 876 -- -- -- Origination and other income............ 1,873 -- -- ------- ------- ------ 7,022 -- -- ------- ------- ------ $62,856 $19,144 $7,171 ======= ======= ====== Costs and expenses: Commercial mortgage loan acquisition and resolution........................ $1,801 $ 1,069 $ 852 Residential mortgage lending............ 9,311 -- -- ------ ------- ------ $11,112 $ 1,069 $ 852 ======= ======= ======
47 Year Ended September 30, 1998 Compared to Year Ended September 30, 1997 Commercial Mortgage Lending. In recent years and especially during fiscal 1998, the Company's resources have increased considerably, enabling the Company to acquire loans much larger than those it had previously acquired and to increase the amount of its average net investment in loans. Prior to fiscal 1998, the Company had focused on acquiring loans with outstanding receivable balances of between $1.0 million and $15.0 million, with investment costs (invested funds before proceeds of refinancings or sales of senior lien interests) typically between $1.0 million and $8.0 million. For loans acquired through the fiscal year ended September 30, 1997, the average receivable balance was $6.1 million at September 30, 1998 and the average investment cost was $3.2 million while during the year ended September 30, 1998, the average receivable balance for loans acquired was $37.2 million and the average investment cost was $27.8 million. During the year ended September 30, 1998, the Company acquired 12 loans for a cost of $337.1 million, as compared to the purchase of 18 loans for a cost of $71.7 million in fiscal 1997. The loans acquired in fiscal 1998 had outstanding receivable balances ranging from $2.0 million to $100.7 million, with eight of such loans having receivable balances in excess of $19.0 million (and five of those loans having receivable balances in excess of $45.0 million). During the year ended September 30, 1997, the receivable balances of loans acquired ranged from $401,000 to $52.6 million with only one loan having a receivable balance in excess of $19.0 million (which such loan balance was also in excess of $45.0 million). The Company anticipates that it will continue to acquire loans in excess of its previous historical receivable balance and investment cost ranges, and that such loans may constitute a substantial percentage of the Company's commercial loan portfolio. Revenues from commercial mortgage loan acquisition and resolution operations increased $36.7 million (192%) to $55.8 million in the year ended September 30, 1998. The increase was attributable to the following: (i) An increase of $10.7 million (119%) in interest income (including an increase of $2.4 million of accretion of discount) resulting from an increase of $100.4 million in the book value of loans outstanding during that period to $189.6 million as compared to $89.2 million for the same period in the prior fiscal year. (ii) An increase of $22.6 million (298%) in gains from refinancings, sales of senior lien interests and sales of loans. This increase was primarily the result of an increase in the number of loans sold or loans in which senior lien interests were sold (from eight loans totaling $16.5 million in the year ended September 30, 1997 to 39 loans totaling $279.4 million in the year ended September 30, 1998). These sales included, during the second quarter of fiscal 1998, a sale to RAIT of 10 mortgage loans and senior lien interests in two other loans, resulting in proceeds of $20.1 million and a gain of $3.1 million. In addition, during fiscal 1998, the Company sold senior lien interests in three other loans to RAIT, resulting in proceeds of $18.0 million and a gain of $5.1 million. (iii) An increase of $3.4 million (132%) in fee income to $5.9 million in the year ended September 30, 1998 from $2.6 million in the year ended September 30, 1997. Fees received in the year ended September 30, 1998 consisted of the following: $830,000 for financial advisory and consultation services related to the organization and capitalization of RAIT; $4.1 48 million for services to borrowers whose loans the Company later acquired (of these fees, $840,000 was paid by a partnership whose partners are RAIT and BCMI); and a one-time fee of $850,000 for services rendered to an existing borrower in connection with the operation, leasing and supervision of the collateral securing the Company's loan. Gains on sale of loans and senior lien interests in loans (if any) and the amount of fees (if any) received vary from transaction to transaction and there may be significant variations in the Company's gain on sale and fee income from period to period. As a consequence of the foregoing, the Company's yield (gross commercial mortgage loan acquisition and resolution revenues, including gains resulting from refinancings, sales of loans and sales of senior lien interests in loans, divided by the book value of average loan balances) increased to 40% in the year ended September 30, 1998 as compared to 35% in the year ended September 30, 1997. Costs and expenses of the Company's commercial mortgage loan acquisition and resolution operations increased $732,000 (68%) to $1.8 million in the year ended September 30, 1998. The increase was primarily a result of hiring additional personnel, increased compensation to existing employees and legal costs associated with the expansion of this operation. As a result of the foregoing, the Company's gross profit from commercial mortgage loan acquisition and resolution operations increased to $54.0 million in the year ended September 30, 1998, as compared to $18.1 million in the same period in the prior year. Residential Mortgage Lending. During the year ended September 30, 1998, the Company originated 1,771 residential mortgage loans aggregating $74.8 million. The Company may opportunistically purchase residential mortgage loans although its focus is on residential mortgage loan originations. During fiscal 1998, the Company had a program for originating 125 loans which was terminated at the end of the fiscal year. See "Business - Residential Mortgage Loans." At September 30, 1998, the Company held $3.9 million of 125 loans, all of which were held for sale. The Company sold residential mortgage loans with a book value of $71.2 million during the year ended September 30, 1998, resulting in gains of $4.3 million. These sales included, in the first quarter of fiscal 1998, the sale of certain originated and acquired residential mortgage loans for a note in the principal amount of $8.3 million of which $6.8 million had been paid through September 30, 1998. The $6.8 million payment was funded by a loan to the purchaser from an unaffiliated bank and was guaranteed by the Company and secured by the residential mortgage loans sold to the purchaser. The Company has taken such guaranty into consideration in establishing its allowance for possible losses. The Company also realized $876,000 of interest income from loans originated and $1.9 million in fees from its origination activities. Costs and expenses associated with residential mortgage lending operations were $9.3 million for the year ended September 30, 1998, reflecting commencement of operations on October 1, 1997 and the increase in loan originations. In addition, the Company incurred $723,000 of depreciation and amortization, $248,000 of interest expense and, in connection with a note received in a loan sale, established a $286,000 allowance for possible loan losses. As a result of the foregoing, the Company's residential mortgage lending business incurred a loss from operations of $3.5 million for the year ended September 30, 1998. 49 Year Ended September 30, 1997 Compared to Year Ended September 30, 1996 During fiscal 1997, the Company purchased or originated 18 commercial real estate loans, for a total cost of $71.7 million, as compared to the purchase of nine commercial real estate loans for a total cost of $15.1 million in fiscal 1996. The average net investment in the 18 loans was $4.0 million (with individual investments ranging from a high of $19.2 million to a low of $400,000) during fiscal 1997, as compared to an average net investment of $1.7 million in nine loans (with individual investments ranging from a high of $3.8 million to a low of $100,000) during fiscal 1996. In addition, the Company increased its investment in certain existing loans by an aggregate of $1.9 million in fiscal 1997, and an aggregate of $2.6 million in fiscal 1996, for purposes of paying for property improvement costs, unpaid taxes and similar items relating to properties underlying the loans. The increased investments had been anticipated by the Company at the time the loans were acquired and were included in its analysis of loan costs and yields. Revenues from commercial mortgage loan acquisition and resolution operations increased to $19.1 million in fiscal 1997 from $7.2 million in fiscal 1996, an increase of 167%. The increase in fiscal 1997 was attributable to (i) an increase of $6.1 million (215%) in interest income (including accretion of discount) resulting from an increase in the average amount of loans outstanding during fiscal 1997 as compared to fiscal 1996; (ii) gains recognized on the refinancing of loans and sale of senior lien interests in loans held by the Company which increased to $7.6 million in fiscal 1997 from $3.6 million in fiscal 1996, an increase of $4.0 million (108%); and (iii) an increase in fee income to $2.6 million in fiscal 1997 from $675,000 in fiscal 1996, an increase of $1.9 million (279%), as a result of an increase in the number of transactions in which fee income was earned. The Company sold senior lien interests in or refinanced nine loans during fiscal 1997 and eight loans during fiscal 1996, realizing proceeds of $16.5 million and $18.0 million, respectively. Costs and expenses of the Company's real estate finance operations increased 25% in fiscal 1997 compared to fiscal 1996. The increase was primarily a result of higher personnel costs associated with the expansion of the Company's commercial mortgage lending operations. As a consequence of the foregoing, the Company's gross profit from commercial mortgage loan acquisition and resolution operations increased to $16.5 million in fiscal 1997 from $6.3 million in fiscal 1996 (163%). 50 Results of Operations: Equipment Leasing The following table sets forth certain information relating to the revenue recognized costs and expenses incurred in the Company's equipment leasing operations during the periods indicated:
Year Ended September 30, ------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Revenues: Small ticket leasing - Gains on sale of leases................ $7,598 $3,711 $ -- Interest and fees...................... 3,481 1,081 7 Partnership management.................... 1,693 1,713 3,809 Lease finance placement and advisory services....................... 789 657 650 ------ ------ ------ $13,561 $7,162 $4,466 ======= ====== ====== Year Ended September 30, -------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Costs and expenses: Small ticket leasing...................... $3,337 $2,051 $ 425 Partnership management.................... 1,264 1,243 1,471 Lease finance placement and advisory services....................... 662 528 443 ------ ------ ------ $5,263 $3,822 $2,339 ====== ====== ======
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997 The Company experienced continued growth in its leasing business during fiscal 1998, originating 8,793 leases having a cost of $92.6 million, as compared to 3,177 leases having a cost of $34.6 million during the prior year. During that period, the Company sold leases with a book value of approximately $78.4 million to an Intermediate Purchaser in return for cash of $78.0 million and notes with a face value of $8.0 million, resulting in gains on sale of $7.6 million, as compared to fiscal 1997, in which the Company sold leases with a book value of $30.2 million to an Intermediate Purchaser in return for cash of $20.6 million and a note with a face value of $13.3 million, resulting in gains on sale of $3.7 million. Payment on the notes is subject to the level of lease delinquencies and realization of residuals on the sold leases. Revenues from equipment leasing were $13.6 million in fiscal 1998, an increase of $6.4 million (89%) from $7.2 million in fiscal 1997. The increase in revenues for year ended September 30, 1998 as compared to the prior year was attributable to (i) an increase in the gain on sales of leases of $3.9 million (105%) resulting from the increased number of leases originated and sold by the Company and (ii) an increase in interest and fee income of $2.4 million (222%) resulting from the increased volume of lease originations. 51 Equipment leasing costs and expenses increased $1.4 million (38%) to $5.3 million in the year ended September 30, 1998, as compared to the prior year. The increase was primarily a result of higher operating costs associated with the increase in lease originations. During the quarter ended June 30, 1998, the Company began to retain for its own account the residual values of leases sold. Prior to this quarter the Company had sold its residual interests, primarily for promissory notes (aggregating $14.1 million at September 30, 1998) from Intermediate Purchasers. The Company anticipates that it will continue to retain residual interests for its own account; however, there is no established Company policy as to the retention or sale of residuals and, accordingly, the Company may determine to sell residuals in the future. The effect of retaining residuals is to reduce revenues recognized from the sale of leases at the time of sale while increasing revenues anticipated to be derived in the future from the realization of residuals. At September 30, 1998, unrealized residuals were $6.3 million. Year Ended September 30, 1997 Compared to Year Ended September 30, 1996 In fiscal 1997, the Company received 8,344 lease proposals involving equipment with an aggregate cost of $113.4 million, approved 5,054 of such proposals involving equipment with an aggregate cost of $67.2 million, and entered into 3,214 transactions and acquired equipment for lease with a cost of $34.6 million. During fiscal 1997, the Company sold leases with a book value of approximately $30.2 million to Intermediate Purchasers in return for cash of $20.6 million and notes with an aggregate face value of $13.3 million, resulting in gains on sale of $3.7 million. During fiscal 1997, the Company collected $8.5 million in principal payments on the notes. Small ticket leasing expenses increased as a result of the start-up of small ticket leasing activities in June 1996. Partnership management expenses decreased as a result of the liquidation of one partnership. Lease placement and advisory expenses increased as a result of an increase in commissions paid. The decrease in partnership management revenue in fiscal 1997 as compared to the prior year period was the result of the liquidation, in accordance with the terms of its partnership agreement, of one leasing partnership in the first quarter of fiscal 1996. Partnership management revenue in fiscal 1996 includes the settlement of the Company's general partner share of revenues from prior fiscal periods. 52 Results of Operations: Energy Years Ended September 30, 1998 Compared to Year Ended September 30, 1997 Oil and gas production revenues increased 19% from fiscal 1997 to fiscal 1998. A comparison of the Company's revenues, daily production volumes, and average sales prices follows:
Year Ended September 30, ----------------------- 1998 1997 ---- ---- Revenues (in thousands) Gas(1) ....................................................... $3,944 $3,178 Oil .......................................................... 692 705 Production volumes Gas (thousands of cubic feet ("mcf")/day)(1).................. 4,069 3,364 Oil (barrels ("bbls")/day).................................... 132 98 Average sales price Gas (per mcf)................................................. $ 2.66 $ 2.59 Oil (per bbl)................................................. $14.38 $19.68
(1) Excludes sales of residual gas and sales to landowners. Natural gas revenues increased $766,000 (24%) in fiscal 1998, compared to the same period of the prior fiscal year, due to a 21% increase in production volumes. Oil revenues decreased $13,000 (2%) for fiscal 1998 as compared to fiscal 1997, due to a 27% decrease in the average sales price of oil in fiscal 1998. The decrease was significantly offset by a 35% increase in production volumes as compared to fiscal 1997. Both gas and oil volumes were favorably impacted by two acquisitions of interests in an aggregate of 431 wells located in Ohio and New York, one in the third quarter of fiscal 1997 and the other in the first quarter of fiscal 1998. A comparison of the Company's production costs as a percentage of oil and gas sales, and the production cost per equivalent unit for oil and gas, for the fiscal years 1998 and 1997 is as follows:
Year Ended September 30, ------------------------ 1998 1997 ---- ---- Production Costs As a percent of sales.......................................... 43% 42% Gas (mcf)...................................................... $1.14 $1.13 Oil (bbl)...................................................... $6.84 $6.80
Production costs increased $386,000 (24%) to $2.0 million in the year ended September 30, 1998, as compared to the same period in the prior year as a result of the acquisition of the interests in producing properties referred to above and well workovers. 53 Amortization of oil and gas property costs as a percentage of oil and gas revenues was 17% in the year ended September 30, 1998 compared to 18% in the year ended September 30, 1997. The variance from period to period was directly attributable to changes in the Company's oil and gas reserve quantities, product prices and fluctuations in the depletable cost basis of oil and gas properties. The Company anticipates that revenues and expenses from its energy operations will materially increase in 1999 and subsequent years as a result of its acquisition of Atlas. Year Ended September 30, 1997 Compared to Year Ended September 30, 1996 Oil and gas revenues from production sales increased 16% in fiscal 1997 as compared to fiscal 1996. A comparison of the Company's revenues, daily production volumes, and average sales prices for the periods indicated is as follows: Year Ended September 30, ----------------------- 1997 1996 ---- ---- Revenues (in thousands) Gas(1)................................ $ 3,178 $2,722 Oil.................................... 705 627 Production volumes Gas (mcf/day)(1)....................... 3,364 3,184 Oil (bbls/day)......................... 98 93 Average sales prices Gas (per mcf).......................... $ 2.59 $ 2.34 Oil (per bbl).......................... $19.68 $18.53 (1) Excludes sales of residual gas and sales to landowners. Natural gas revenues from production sales increased 17% in fiscal 1997 from fiscal 1996 due to a 6% increase in production volumes and an 11% increase in the average price per mcf of natural gas. In fiscal 1996, natural gas revenues decreased 1% from fiscal 1995 as a result of a 3% decrease in production volumes partially offset by a 1% increase in the average price per mcf of natural gas. Oil revenues increased by 12% in fiscal 1997 from fiscal 1996 due to a 6% increase in the average price per barrel and a 5% increase in production volumes. Primarily as a result of these changes, the Company's operating profit from energy production (energy production revenues less energy production and exploration costs) increased to $2.1 million in fiscal 1997 from $1.8 million in fiscal 1996. The Company continued to experience normally declining production from its properties located in New York state. This decline was offset by the acquisition of additional well interests in Ohio in June 1997. The Company participated in the drilling of three successful exploratory wells and two successful developmental wells during fiscal 1996. The impact on revenues from these wells was realized in the Company's financial statements commencing with fiscal 1997. In fiscal 1995, the Company participated in the drilling of three 54 successful exploratory wells and recompleted one successful development well. The impact on revenues from these wells was realized in the Company's financial statements commencing with fiscal 1996. A comparison of the Company's production costs as a percentage of oil and gas sales, and the production cost per equivalent unit for oil and gas for the fiscal years 1997 and 1996, is as follows: Year Ended September 30, ------------------------ 1997 1996 ---- ---- Production Costs - - ---------------- As a percent of sales......... 42% 42% Gas (mcf)..................... $1.13 $1.04 Oil (bbl)..................... $6.80 $6.23 Production costs increased $215,000 (15%) in fiscal 1997 from fiscal 1996 as a result of an increase in the number of wells requiring cleanout and workover operations. These operations are conducted on an as-needed basis and, accordingly, costs incurred by the Company may vary from year to year. Production costs also increased in fiscal 1997 as the result of the acquisition of interests in 288 wells in Ohio. Exploration costs increased $26,000 (16%) in fiscal 1997 as compared to fiscal 1996. The fiscal 1997 increase was the result of an increase in delay rentals paid on lease acreage held by the Company. During fiscal 1997, the Company participated in one successful exploratory well and had lease value impairments totaling $6,000. During fiscal 1996 the Company participated in one exploratory dry hole and had lease impairments totaling $50,000. Amortization of oil and gas property costs as a percentage of oil and gas revenues was 18% in fiscal 1997, and 23% in fiscal 1996. The variance from year to year was directly attributable to changes in the Company's oil and gas reserve quantities, product prices and fluctuations in the depletable cost basis of oil and gas properties. See Note 2 to the Consolidated Financial Statements. 55 Results of Operations: Other Revenues, Costs and Expenses Year Ended September 30, 1998 Compared to Year Ended September 30, 1997 Interest and other income increased $3.3 million (319%) to $4.3 million in the year ended September 30, 1998, as compared to the year ended September 30, 1997, as a result of: (i) the substantial increases in the Company's uncommitted cash balances and the temporary investment of such balances during the year; (ii) the reimbursement to the Company, in the third quarter of fiscal 1998, of payroll and administrative costs in the amount of $513,000 for services provided to a partnership in connection with the partnership's investment in an unrelated business (in which the Company's president is the president of the general partner); and (iii) the recognition of dividend income of $801,300 from RAIT in fiscal 1998, following its formation in January 1998. General and administrative expenses increased $1.5 million (53%) to $4.4 million in the year ended September 30, 1998, as compared to $2.9 million the year ended September 30, 1997, primarily as a result of the hiring of additional corporate staff and increases in the compensation of senior officers, together with an increase in occupancy costs as the Company leased additional office space to accommodate its increased staff. Interest expense increased $12.2 million (231%) to $17.5 million in the year ended September 30, 1998 as compared to $5.3 million in the year ended September 30, 1997 primarily reflecting an increase in borrowings as a result of the July 1997 issuance of the 12% Notes which were utilized to fund the growth of the Company's real estate finance and equipment leasing operations. Provision for possible losses increased $1.6 million (239%) to $2.2 million in the year ended September 30, 1998 as compared to $653,000 in the year ended September 30, 1997. The increase was primarily the result of increases in the provisions for possible losses relating to equipment leasing (to $1.4 million) and for possible losses relating to real estate finance (to $791,000). The increased provisions reflect the increases in both lease originations and investments in real estate loans. In establishing the Company's allowance for possible losses in connection with its real estate finance and equipment leasing operations, the Company considers among other things, the historic performance of the Company's loan or lease portfolios, industry standards and experience regarding losses in similar loans or leases and payment history on specific loans and leases, as well as general economic conditions in the United States, in the borrower's or lessee's geographic area and in its specific industry. The effective tax rate increased to 33% in the year ended September 30, 1998 from 27% in the year ended September 30, 1997. The fiscal 1998 increase resulted from: (i) an increase in the statutory tax rate due to an increase in the Company's pre-tax earnings; (ii) a decrease in the generation of depletion for tax purposes; (iii) a decrease in low income housing tax credits; (iv) a decrease in tax exempt interest in relationship to pre-tax income; and (v) an increase in state income taxes. The increase in effective tax rate resulted in an increased provision for taxes of $2.5 million for 1998 over the tax that would have been payable had the 1997 tax rate been in effect. 56 Year Ended September 30, 1997 Compared to Year Ended September 30, 1996 General and administrative expense increased by $1.1 million (62%) for fiscal 1997 as compared to fiscal 1996 primarily as a result of costs associated with the Company's residential mortgage loan business, higher legal and professional fees and the payment of incentive and retirement compensation to executive officers. Interest expense increased to $5.3 million in fiscal 1997 from $872,000 in fiscal 1996, an increase of $4.4 million (505%), reflecting increased borrowing to fund the growth of the Company's real estate finance and small ticket leasing operations. In July 1997, the Company issued $115.0 million of the 12% Notes and, in December 1996, the Company incurred purchase money financing of $13.4 million to fund the acquisition of a series of mortgage loans on a property located in Philadelphia, Pennsylvania. The purchase money financing was repaid in July 1997. Interest expense decreased $219,000 during fiscal 1996 as a result of a decrease in average debt outstanding during the period due to loan repayments. The effective tax rate decreased to 27% in fiscal 1997 from 30% in fiscal 1996. The fiscal 1997 decrease resulted from the purchase of commercial mortgage loans which generate tax exempt interest as well as the investment in several low-income housing partnerships and the low income housing tax credits associated with such investments. Liquidity and Capital Resources Year Ended September 30, 1998 Compared to Year Ended September 30, 1997 During the past three fiscal years, the Company has derived its capital resources from three main sources: public and private offerings of debt and equity securities, lines of credit and purchase facilities extended by banks and other institutional lenders with respect to equipment leaseing, residential mortgage and energy operations, and sales of senior lien interests in or borrower refinancings of commercial mortgage loans held in the Company's portfolio. The Company has employed its available capital resources primarily in the expansion of its real estate finance and small ticket leasing businesses, and expects that it will continue to do so for the foreseeable future. However, through its acquisition of Atlas, the Company has significantly expanded its oil and gas operations and, as a result, may direct capital resources to oil and gas operations as other opportunities arise or as the Company's oil and gas business develops. The Company believes that its future growth and earnings will be materially dependent upon its ability to continue to generate capital resources from prior sources or to identify new sources. As a result of recent events in the capital markets (including significant drops in the price of equity securities generally and the Common Stock in particular, as well as a loss of liquidity in credit markets), the Company anticipates that generating additional capital resources on terms similar to those available to it during the last three fiscal years may be restricted. Accordingly, the Company's 57 ability to generate continued growth in its real estate finance and equipment leasing operations may be restricted, which could adversely affect the Company's earnings potential. Sources and (uses) of cash for the years ended September 30, 1998 and 1997 were as follows: Year Ended September 30, ----------------------- 1998 1997 ---- ---- (in thousands) (Used in) provided by operations................ $(8,343) $7,023 (Used in) investing activities.................. (94,363) (66,071) Provided by financing activities................ 111,507 124,173 ------- -------- $ 8,801 $ 65,125 ======= ======== The Company had $78.1 million in cash and cash equivalents on hand at September 30, 1998, as compared to $69.3 million at September 30, 1997. The Company's ratio of current assets to current liabilities was 1.73 to 1.0 at September 30, 1998 and 6.7 to 1.0 at September 30, 1997. Working capital at September 30, 1998 was $38.2 million as compared to $61.4 million at September 30, 1997. The Company's ratio of earnings to fixed charges was 3.3 to 1.0 in the year ended September 30, 1998 as compared to 3.9 to 1.0 in the year ended September 30, 1997. Cash provided by operating activities in fiscal 1998 decreased $15.4 million as compared to fiscal 1997, primarily as a result of the following: increases in net income and other non-cash adjustments of $16.7 million and $3.4 million, respectively; increases in gains on asset dispositions, accretion of discount and collection of interest income of $30.7 million, $2.4 million and $2.3 million respectively; increases in operating assets of $698,000; and decreases in operating liabilities of $4.0 million. The Company's cash used in investing activities increased $28.3 million in the year ended September 30, 1998 as compared to the year ended September 30, 1997. This increase resulted primarily from an increase in the amount of cash used to fund increased real estate finance and small ticket leasing activities. In commercial mortgage loan acquisition and resolution, the Company invested $337.1 million and $71.7 million in the acquisition or origination of 12 loans and 18 loans in the years ended September 30, 1998 and 1997, respectively. In addition, the Company advanced funds on existing commercial loans of $6.2 million and $1.9 million in the same respective periods. Cash proceeds received upon refinancings or sales of senior lien interests and loans amounted to $274.4 million and $16.5 million in the years ended September 30, 1998 and 1997, respectively. These proceeds reflect the sale of loans and senior lien interests in or refinancing of 30 and nine loans, respectively. In small ticket leasing, the Company invested $92.6 million and $34.6 million in the origination of 8,793 and 3,177 leases in the years ended September 30, 1998 and 1997, respectively. Cash proceeds received upon sales of leases amounted to $78.1 million and $20.6 million in the years ended September 30, 1998 and 1997, respectively. The Company invested $77.5 million in 1,808 residential mortgage loans during the year ended September 30, 1998, and, during that period, received cash proceeds from the sale of loans of $67.7 million. 58 The Company's cash flow provided by financing activities decreased $12.7 million during the year ended September 30, 1998 as compared to the year ended September 30, 1997 since, during fiscal 1997, the Company completed both an equity and a debt offering, while in fiscal 1998 the Company completed an equity offering only. Year Ended September 30, 1997 Compared to Year Ended September 30, 1996 The Company raised net proceeds of $19.5 million from a Common Stock offering and $110.6 million from an offering of the 12% Notes during fiscal 1997. These activities, coupled with the Company's increased profitability, resulted in the Company having $69.3 million in cash and cash equivalents on hand at September 30, 1997, as compared to $4.2 million at September 30, 1996. The Company's ratio of current assets to current liabilities was 6.7 to 1.0 at September 30, 1997 and 3.7 to 1.0 at September 30, 1996. The Company's ratio of earnings to fixed charges was 3.8 to 1.0 at September 30, 1997 and 9.4 to 1.0 at September 30, 1996. Working capital at September 30, 1997 was $61.4 million as compared to $4.4 million at September 30, 1996, as the Company had not fully deployed the proceeds from the 12% Notes offering. Cash provided by operating activities increased $342,000, or 5%, during fiscal 1997, as compared to fiscal 1996. The fiscal 1997 increase was primarily the result of an increase in operating income in the commercial mortgage loan acquisition and resolution and equipment leasing businesses. The Company's cash used in investing activities increased $61.3 million in fiscal 1997 as compared to fiscal 1996. The increase resulted primarily from increases in the amount of cash used to fund commercial mortgage loan acquisition and resolution activities. The Company invested $71.7 million and $15.1 million in the acquisition of 18 and nine loans in fiscal years 1997 and 1996, respectively. In addition, the Company advanced funds on existing loans of $1.9 million and $2.6 million in fiscal years 1997 and 1996, respectively. Proceeds received from the sale of senior lien interests or borrower refinancings amounted to $16.5 million and $18.0 million in fiscal years 1997 and 1996, respectively. Cash used for capital expenditures increased $694,000, or 63%, during fiscal year 1997 over fiscal 1996. The 1997 increase includes $507,000 in capital expenditures relating to the Company's residential mortgage loan business. During fiscal 1997, the Company invested $1.2 million in 288 wells, operating rights and pipelines located in Ohio. The cost of equipment acquired for lease was $34.6 million in fiscal 1997 as compared to $731,000 in fiscal 1996, an increase of $33.9 million, as a result of the full year's activity for the small ticket leasing business in fiscal 1997 as compared to two months' activity in fiscal 1996. The Company's cash flow provided by financing activities increased $124.4 million during fiscal 1997, as compared to fiscal 1996 as a result of the additional borrowings discussed above. Dividends In the years ended September 30, 1998, 1997 and 1996, $2.3 million, $1.4 million and $757,000 were paid in dividends, respectively. The Company has paid regular dividends since August 1995. In June 1998, the Company effected a three-for-one stock split in the form of a 200% stock dividend. 59 The determination of the amount of future cash dividends, if any, to be declared and paid is in the sole discretion of the Company's Board of Directors and will depend on the various factors affecting the Company's financial condition and other matters the Board of Directors deems relevant, including restrictions which may be imposed pursuant to the indenture under which the 12% Notes were issued. Inflation and Changes in Prices Inflation affects the Company's operating expenses and increases in those expenses may not be recoverable by increases in finance rates chargeable by the Company. Inflation also affects interests rates and movements in rates may adversely affect the Company's profitability. The Company's revenues and the value of its oil and gas properties have been and will continue to be affected by changes in oil and gas prices. Oil and gas prices are subject to fluctuations which the Company is unable to control or accurately predict. Computer Systems and Year 2000 Issue The "Year 2000 issue" is the result of computer programs being written using two digits, rather than four digits, to identify the year in a date field. Any computer programs using such a system, and which have date sensitive software, will not be able to distinguish between the year 2000 and the year 1900. This could result in miscalculations or an inability to process transactions, send invoices or engage in similar normal business activities, which could cause a disruption of business operations. As is the case with most other businesses, the Company is in the process of evaluating and addressing Year 2000 compliance of both its information technology and non-information technology systems (collectively, the "Systems"). 60 Based upon a recent assessment by the Company, the Company has in place Year 2000 capable Systems for its commercial mortgage loan, equipment leasing and residential mortgage loan operations. The Company believes that the Systems for its energy operations (excluding those of Atlas) have completed approximately 85% of the necessary remediation processes and that remediation (including testing) will be completed by March 1999. The Company believes that its embedded systems (such as natural gas monitoring systems and telephones) are Year 2000 compliant or, if not, are either not date dependent or would not materially affect the Company's operations. With respect to Atlas' Systems, the Company's post-acquisition assessment has indicated that Atlas is currently in the stage of implementing required remediation, which will include the purchase of a new central processing system. The Company believes that the necessary system is readily available in the retail market. The Company is also considering, however, merging Atlas' systems with the Company's energy systems thereby largely eliminating remediation requirements. The Company anticipates that, whichever alternative is selected, Atlas' systems will be Year 2000 compliant by September 30, 1999. As of September 30, 1998, the Company's costs in remediation of its Systems has not been material. The Company anticipates that its remaining remediation costs (including costs relating to Atlas' systems) will not exceed $100,000. 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 September 30, 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. 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. 61 Environmental Regulation A continued trend to greater environmental and safety awareness and increasing environmental regulation has resulted in higher operating costs for the oil and gas industry and the Company. The Company monitors environmental and safety laws and believes it is in compliance with such laws and applicable regulations thereunder. To date, compliance with environmental laws and regulations has not had a material impact on the Company's capital expenditures, earnings or competitive position. The Company believes, however, that environmental and safety costs will increase in the future. There can be no assurance that compliance with such laws will not, in the future, materially impact the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following table sets forth certain information regarding 40 of the 41 loans held in the Company's portfolio as of September 30, 1998. The presentation, for each category of information, aggregates the loans by their maturity dates for maturities occurring in each of the fiscal years 1999 through 2003 and separately aggregates the information for all maturities arising after the 2003 fiscal year. The Company does not believe that these loans are sensitive to changes in interest rates since (i) the loans are subject to forbearance or other agreements that require all of the operating cash flow from the properties underlying the loans, after debt service on senior lien interests, to be paid to the Company and thus are not currently being paid based on the stated interest rates of the loans; (ii) all senior lien interests are at fixed rates and are thus not subject to interest rate fluctuation that would affect payments to the Company; and (iii) each loan has significant accrued and unpaid interest and other charges outstanding to which cash flow from the underlying property would be applied even if cash flow were to exceed the interest rate, as originally underwritten.
Portfolio Loans, Aggregated by Maturity Dates,(1) For the Year Ending September 30, -------------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 Thereafter ---- ---- ---- ---- ---- ---------- Outstanding loan receivable balances (to the Company's interest) $12,576,991 $7,439,789 $17,902,472 $80,749,326 $82,004,963 $ 91,061,549 Carried cost of loans (fixed rate) $6,888,741 $4,778,314 4,541,195 $38,165,719 $33,098,200 $59,146,355 Average stated interest rate (fixed rate) 12.00% 11.28% 9.53% 8.58% 9.13% 12.80% Carried cost of loans (variable rate) $981,399 $748,554 $338,112 $1,299,182 $735,102 $3,753,934 Average stated interest rate (variable rate) 7.21% 12.00% 7.61% 12.65% 9.00% 7.93% Average interest payment rate (2) (2) (2) (2) (2) (2) Principal balance of related senior lien interests(3) $9,661,135 $3,860,797 $9,596,217 $23,326,710 $63,310,030 $146,452,834 Average interest rate of senior lien interests (fixed rate) 8.44% 9.53% 9.41% 9.75% 8.67% 7.59%
62 (1) Maturity dates of related Forbearance Agreement or Company's interest in the loan. (2) Pay rates are equal to the net cash flow from the underlying properties after payments on senior lien interests. See "Business - Commercial Mortgage Loan Acquisition and Resolution; Loan Status." (3) Maturity dates for senior lien interests are as follows: Maturity Date of Maturity Dates of Company's Loans Senior Lien Interests Outstanding Balance (Fiscal Year Ended (Fiscal Year Ended of Senior Lien Interests September 30) September 30) at September 30, 1998 ------------ ------------- --------------------- 1999 2002 $ 875,000 2003 2,237,980 2010 6,548,155 2000 2000 685,000 2002 2,096,000 2005 1,079,797 2001 2000 2,000,000 2001 5,209,000 2007 2,387,217 2002 2003 22,145,435 2005 1,181,275 2003 2003 25,564,065 2004 1,000,000 2006 2,212,903 2008 34,960,269 2021 2,570,000 Thereafter 2001 2,010,000 2003 5,393,792 2004 1,800,000 2008 127,786,532 2010 5,962,202 2011 1,412,631 2014 2,087,597 63 The following table sets forth information concerning one of the 41 loans held in the Company's portfolio that the Company believes may be deemed to be interest rate sensitive. The loan matures October 1, 2003. Outstanding receivable balance (to the Company's interest) $38,856,915 Carried cost of loan $35,081,713 Stated interest rate Federal funds rate plus 87.5 basis points plus 200 basis points default interest Interest payment rate Net cash flow from property underlying loan Principal balance of related senior lien interest $60,000,000 Stated interest rate (senior lien LIBOR plus 250 basis interest) points; 8.875% maximum rate Current interest payment rate (senior lien interest) 7.88% Maturity date (senior lien interest) 10/01/01 64 The following table sets forth certain information regarding the Company's interest-bearing assets and debt as of September 30, 1998. For further information regarding the Company's 12% Notes and credit facilities, see Item 1 "Business-Sources of Funds."
Maturity Date For the Year Ending September 30, -------------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 Thereafter ---- ---- ---- ---- ---- ---------- INTEREST-BEARING ASSETS Fixed rate -- -- -- -- $2,088,373 $13,499,007 Average interest rate -- -- -- -- 9.00% 8.84% Variable rate -- -- -- -- $155,283 $5,734,717 Average interest rate -- -- -- -- 13.53% 13.53% DEBT Fixed rate $115,318 $126,884 $139,611 $153,618 $159,700 $105,995,087 Average interest rate 9.30% 9.30% 9.30% 9.30% 9.28% 11.96% Variable rate $7,149,107 $1,690,942 $1,695,751 $1,679,668 $21,593,109 -- Average interest rate 8.65% 9.24% 9.24% 9.24% 8.56% --
65 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Certified Public Accountants Stockholders and Board of Directors RESOURCE AMERICA, INC. We have audited the accompanying consolidated balance sheets of Resource America, Inc. and subsidiaries as of September 30, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Resource America, Inc. and subsidiaries as of September 30, 1998 and 1997, and the consolidated results of their operations and cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. We have also audited Schedule IV as of September 30, 1998. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. Grant Thornton LLP Cleveland, Ohio December 7, 1998, except for the last paragraph of Note 11 for which the date is December 15, 1998 66 RESOURCE AMERICA, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1998 AND 1997
1998 1997 ---- ---- (in thousands) ASSETS Current Assets Cash and cash equivalents $ 78,080 $ 69,279 Accounts and notes receivable 9,461 2,414 Prepaid expenses and other current assets 3,109 576 ---------- ----------- Total Current Assets 90,650 72,269 Investments in Real Estate Loans (less allowance for possible losses of $1,191 and $400) 202,050 88,816 Investments in Leases and Notes Receivable (less allowance for possible losses of $1,602 and $248) 24,977 8,152 Investment in Resource Asset Investment Trust 11,912 - Property and Equipment Oil and gas properties and equipment 44,516 24,939 (successful efforts) Gas gathering and transmission facilities 6,751 1,606 Other 9,133 2,874 ----------- ---------- 60,400 29,419 Less - accumulated depreciation, depletion and amortization (16,915) (15,793) ----------- ----------- Net Property and Equipment 43,485 13,626 Other Assets (less accumulated amortization of $3,112 and $1,014) 53,373 12,256 ---------- ---------- $426,447 $195,119 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Borrowings under credit facilities $ 5,166 $ - Account payable - trade 12,864 1,339 Accrued liabilities 18,648 1,967 Accrued interest 2,226 2,734 Estimated income taxes 6,242 4,093 Current portion of long-term debt 7,264 708 ---------- ---------- Total Current Liabilities 52,410 10,841 Long-Term Debt 133,016 118,786 Deferred Income Taxes 1,764 - Other Long-Term Liabilities 2,779 663 Commitments and Contingencies - - Stockholders' Equity Preferred stock, $1.00 par value: 1,000,000 authorized shares - - Common stock, $.01 par value: 49,000,000 authorized shares 230 54 Net unrealized loss on investment (43) - Additional paid-in capital 208,588 56,787 Less treasury stock, at cost (17,890) (13,664) Less loan receivable for Employee Stock Option Plan ("ESOP") (1,591) (353) Retained earnings 47,184 22,005 ---------- ---------- Total Stockholders' Equity 236,478 64,829 ---------- ---------- $426,447 $195,119 ========== ==========
See accompanying notes to Consolidated Financial Statements 67 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1998 1997 1996 ---- ---- ---- (in thousands, except per share data) REVENUES Real Estate Finance........................................ $62,856 $19,144 $ 7,171 Equipment Leasing.......................................... 13,561 7,162 4,466 Energy: Production........................................ 4,682 3,936 3,421 Services.......................................... 2,052 1,672 1,736 Interest and Other......................................... 4,316 1,031 204 -------- --------- --------- 87,467 32,945 16,998 COSTS AND EXPENSES Real Estate Finance........................................ 11,112 1,069 852 Equipment Leasing.......................................... 5,263 3,822 2,339 Energy: Exploration and Production........................ 2,525 1,823 1,582 Services.......................................... 1,136 909 869 General and Administrative................................. 4,373 2,851 1,756 Depreciation, Depletion and Amortization................... 2,641 1,614 1,368 Interest .................................................. 17,464 5,273 872 Provision for Possible Losses.............................. 2,213 653 7 ------- -------- --------- 46,727 18,014 9,645 ------ -------- --------- Income Before Income Taxes and Extraordinary Item.......... 40,740 14,931 7,353 Provision for Income Taxes................................. 13,368 3,980 2,206 ------- -------- --------- Income Before Extraordinary Item........................... 27,372 10,951 5,147 Extraordinary Item - gain on early extinguishment of debt, net of taxes of $112............ 239 - - ------- -------- --------- NET INCOME................................................. $27,611 $10,951 $ 5,147 ======= ======== ======= Net Income Per Common Share - Basic; Before Extraordinary Item....................................... $ 1.64 $ 1.05 $ .91 Extraordinary Item......................................... .01 - - ------- -------- ------- Net Income Per Common Share - Basic........................ $ 1.65 $ 1.05 $ .91 ======= ======== ======= Weighted Average Common Shares Outstanding................. 16,703 10,434 5,670 ======= ======== ======= Net Income Per Common Share - Diluted Before Extraordinary item....................................... $ 1.59 $ .84 $ .62 Extraordinary Item......................................... .01 - - ------- -------- ------- Net Income Per Common Share - Diluted...................... $ 1.60 $ .84 $ .62 ======= ======== ======= Weighted Average Common Shares............................. 17,268 13,074 8,271 ======= ======== =======
See accompanying notes to Consolidated Financial Statements 68 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (in thousands, except share data)
Common Stock Additional Treasury Stock ESOP --------------- Net Unrealized Loss Paid-In ------------------ Loan Shares Amount on Investment Capital Shares Amount Receivable ------ ------ ---------------------- ---------- ------ ------ ---------- Balance, September 30, 1995 817,912 $8 - $19,214 (152,700) $(2,721) $(482) Treasury shares issued (24) 1,889 39 6% stock dividends 82,688 1 2,453 5-for-2 stock split effected in the form of a 150% stock dividend 1,136,609 11 Issuance of common stock 10,000 77 Treasury shares acquired (1,637) (17) Cash dividends ($.13 per share) Warrants issued 41 Repayment of ESOP loan 65 Net income - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 1996 2,047,209 $20 - $21,761 (152,448) $(2,699) $(417) Treasury shares issued (34) 23,023 483 Issuance of common stock 3,363,436 34 35,060 Treasury shares acquired (579,623) (11,448) Cash dividends ($.13 per share) Repayment of ESOP loan 64 Net income - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 1997 5,410,645 $54 - $56,787 (709,048) $(13,664) $(353) Treasury shares issued 129 9,897 209 Issuance of common stock 4,105,541 41 151,267 Treasury shares acquired (410,000) (4,435) Net Unrealized loss on investment (43) 3-for-1 stock split effected in the form of a 200% stock dividend 13,452,922 135 Loan to ESOP (1,302) Tax benefit of stock option plan 405 Cash dividends ($.13 per share) Repayment of ESOP loan 64 Net income - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 1998 22,969,108 $230 $(43) $208,588 (1,109,151) $(17,890) $(1,591) ========== ==== ===== ======== =========== ========= ========
[RESTUBBED FROM TABLE ABOVE]
Total Retained Stockholders' Earnings Equity -------- ------------- Balance, September 30, 1995 $10,532 $26,551 Treasury shares issued 15 6% stock dividends (2,453) 1 5-for-2 stock split effected in the form of a 150% stock dividend (11) - Issuance of common stock 77 Treasury shares acquired (17) Cash dividends ($.13 per share) (757) (757) Warrants issued 41 Repayment of ESOP loan 65 Net income 5,147 5,147 - - -------------------------------------------------------------- Balance, September 30, 1996 $12,458 $31,123 Treasury shares issued 449 Issuance of common stock 35,094 Treasury shares acquired (11,448) Cash dividends ($.13 per share) (1,404) (1,404) Repayment of ESOP loan 64 Net income 10,951 10,951 - - -------------------------------------------------------------- Balance, September 30, 1997 $22,005 $64,829 Treasury shares issued 338 Issuance of common stock 151,308 Treasury shares acquired (4,435) Net Unrealized loss on investment (43) 3-for-1 stock split effected in the form of a 200% stock dividend (135) - Loan to ESOP (1,302) Tax benefit of stock option plan 405 Cash dividends ($.13 per share) (2,297) (2,297) Repayment of ESOP loan 64 Net income 27,611 27,611 - - -------------------------------------------------------------- Balance, September 30, 1998 $47,184 $236,478 ======= ========
See accompanying notes to Consolidated Financial Statements 69 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1998 1997 1996 ---- ---- ---- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................... $ 27,611 $ 10,951 $ 5,147 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization..................... 2,641 1,614 1,368 Amortization of discount on senior note and deferred finance costs.......................... 1,045 657 75 Provision for losses.............................. 2,213 653 7 Deferred income taxes............................. (1,736) (2,206) 1,059 Accretion of discount............................. (6,520) (4,124) (954) Collection of interest............................ 5,229 2,932 3,722 Extraordinary gain on debt extinguishment......... (239) - - Gain on asset dispositions ....................... (42,082) (11,375) (3,650) Property impairments and abandonments............. 260 38 71 Change in operating assets and liabilities: Increase in accounts receivable................... (118) (935) (175) Increase in prepaid expenses and other current assets........................ (1,618) (103) (310) Increase (decrease) in accounts payable.......... 1,740 754 (137) Increase in accrued income taxes................. 2,311 3,716 377 Increase in other liabilities..................... 920 4,451 81 --------- -------- -------- Net cash (used in) provided by operating activities.. (8,343) 7,023 6,681 CASH FLOWS FROM INVESTING ACTIVITIES: Net cash acquired (paid) in business acquisitions.... 9,061 (1,226) - Cost of equipment acquired for lease................. (92,648) (34,567) (731) Capital expenditures................................. (4,127) (1,791) (1,097) Principal payments on notes receivable............... 84,782 9,031 9,377 Proceeds from sale of assets......................... 335,963 34,264 5,478 Increase in other assets............................. (12,196) (3,319) (152) Investments in real estate loans..................... (420,920) (69,857) (17,650) Increase in other long-term liabilities.............. 2,026 - - Payments received (revenue recognized) in excess of revenue recognized (cash received) on leases....... 3,696 1,394 (7) --------- -------- ---------- Net cash used in investing activities................ (94,363) (66,071) (4,782) CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings................................. 60,000 129,320 536 Short term borrowings................................ 82,652 - - Dividends paid....................................... (2,297) (1,404) (756) Principal payments on long-term borrowings........... (70,317) (22,148) (27) Principal payment on short-term borrowings........... (72,487) - - Purchase of treasury stock........................... (4,435) - (17) Increase in other assets............................. (1,220) (5,376) (31) Proceeds from issuance of stock...................... 119,611 23,781 93 -------- --------- --------- Net cash provided by (used in) financing activities.. 111,507 124,173 (202) -------- -------- ------- Increase in cash and cash equivalents................ 8,801 65,125 1,697 Cash and cash equivalents at beginning of year....... 69,279 4,154 2,457 -------- -------- -------- Cash and cash equivalents at end of year............. $78,080 $ 69,279 $ 4,154 ======= ======== =======
See accompanying notes to Consolidated Financial Statements 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1-NATURE OF OPERATIONS Resource America, Inc. (the "Company") is engaged in three lines of business: (1) real estate finance, including the acquisition of commercial real estate loans and, beginning in the fiscal year ended September 30, 1998, the origination, acquisition and sale of residential loans; (2) commercial equipment leasing, and (3) energy operations, including natural oil and gas production. Based on net assets and net income, real estate finance currently is the dominant business line. The markets for the Company's business lines are as follows: in real estate finance, the Company obtains its commercial mortgage loans on properties located throughout the United States from various financial institutions and other organizations, while its residential mortgage loans are originated through outbound telemarketing and several wholesale channels to potential borrowers throughout the United States; in commercial equipment leasing, the Company markets its equipment leasing products nationwide through equipment manufacturers, distributors and other vendors; and in energy, gas is sold to a number of customers such as gas brokers and local utilities and oil is sold at the well site to regional oil refining companies in the Appalachian basin. The Company's ability to acquire commercial mortgage loans, originate residential mortgage loans and to fund equipment lease transactions will be dependent on the continued availability of funds. The availability of third-party financing for each of these businesses will be dependent upon a number of factors over which the Company has limited or no control, including conditions in the capital markets (both generally and as they pertain to the Company), the size and liquidity of the market for the types of real estate loans or equipment leases in the Company's portfolio and the respective financial performance of the Company's loans and equipment leases. The Company's growth will also depend on its continued ability to generate attractive opportunities for acquiring commercial mortgage loans and to originate equipment leases. The availability of loans for acquisition on terms acceptable to the Company will be dependent upon a number of factors over which the Company has no control, including economic conditions, interest rates, the market for and value of properties securing loans which the Company may seek to acquire, and the willingness of financial institutions to dispose of troubled or under-performing loans in their portfolios. Mortgage loans and equipment leases are subject to the risk of default in payment by borrowers and lessees. Mortgage loans are further subject to the risk that declines in real estate values could result in the Company being unable to realize the property values projected. 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its pro rata share of the assets, liabilities, income, and expenses of the partnerships in which the Company has an interest. All material intercompany transactions have been eliminated. All per share amounts and references to numbers of shares give effect to a three-for-one stock split (effected in the form of a 200% stock dividend) in June 1998. Use of Estimates Preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that an asset's estimated future cash flows will not be sufficient to recover its carrying amount, an impairment charge will be recorded to reduce the carrying amount for that asset to its estimated fair value. Stock-Based Compensation The Company recognizes compensation expense with respect to stock option grants to employees using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25; stock-based compensation with respect to non-employees is recognized under the fair value method prescribed by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation." Equity Securities The Company has classified its investment in Resource Asset Investment Trust ("RAIT"), a real estate investment trust sponsored by the Company, as available-for-sale. As such, it is carried at market value and the unrealized gain or loss is reported net of tax as a separate component of stockholders' equity. 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS New Accounting Standards In fiscal 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income in the basic financial statements. Comprehensive income will adjust net income for changes in equity during the period from transactions and other events and circumstances from nonowner sources. The Company is required to adopt the provisions of SFAS No. 130 for the fiscal year ending September 30, 1999, beginning with the quarter ending December 31, 1998, and to restate any prior period financial statements included for comparative purposes to reflect the application of SFAS No. 130. As the adoption of this pronouncement will only modify disclosures, there will be no effect on the Company's consolidated financial position, results of operations or cash flows. In fiscal 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 revises the manner in which an entity determines the operating segments it must report and also requires the disclosure of additional segment information. The Company is required to adopt the provisions of SFAS No. 131 for the fiscal year ending September 30, 1999, and to restate any prior period financial statements included for comparative purposes to reflect the application of SFAS No. 131. As the adoption of this pronouncement will only modify disclosures, there will be no effect on the Company's consolidated financial position, results of operations or cash flows. In fiscal 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides guidance on the recognition of revenue for the licensing, selling, leasing and marketing of computer software to customers. The Company is required to adopt the provisions of SOP 97-2 for the fiscal year ending September 30, 1999. Management believes that the adoption of this pronouncement will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. In fiscal 1998, the AICPA issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires the capitalization of certain costs incurred in the development of software used by a company for its own internal operations. The Company is required to adopt the provisions of SOP 98-1 for the fiscal year ending September 30, 1999. Management believes that the adoption of this pronouncement will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. In fiscal 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging". SFAS No. 133 provides accounting and reporting standards for derivative instruments. This standard will require the Company to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. The Company is required to adopt the provisions of SFAS No. 133 during the first quarter of fiscal 1999. Management believes that the adoption of this pronouncement will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In fiscal 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities ("SOP 98-5"). SOP 98-5 requires costs of start-up activities and organization costs, as defined, to be expensed as incurred. The Company is required to adopt the provisions of SOP 98-5 during the first quarter of fiscal 2000. Management believes that the adoption of this pronouncement will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. Oil and Gas Properties The Company follows the successful efforts method of accounting. Accordingly, property acquisition costs, costs of successful exploratory wells, all development costs, and the cost of support equipment and facilities are capitalized. Costs of unsuccessful exploratory wells are expensed when such wells are determined to be nonproductive. The costs associated with drilling and equipping wells not yet completed are capitalized as uncompleted wells, equipment, and facilities. Geological and geophysical costs and the costs of carrying and retaining undeveloped properties, including delay rentals, are expensed as incurred. Production costs, overhead, and all exploration costs other than costs of exploratory drilling are charged to expense as incurred. Unproved properties are assessed periodically to determine whether there has been a decline in value and, if such decline is indicated, a loss is recognized. The Company compares the carrying value of its oil and gas producing properties to the estimated future cash flow, net of applicable income taxes, from such properties in order to determine whether their carrying values should be reduced. No adjustment was necessary during any of the fiscal years in the three year period ended September 30, 1998. On an annual basis, the Company estimates the costs of future dismantlement, restoration, reclamation, and abandonment of its gas and oil producing properties. Additionally, the Company evaluates the estimated salvage value of equipment recoverable upon abandonment. At both September 30, 1998 and 1997 the Company's evaluation of equipment salvage values was greater than or equal to the estimated costs of future dismantlement, restoration, reclamation, and abandonment. Depreciation, Depletion and Amortization Proved developed oil and gas properties, which include intangible drilling and development costs, tangible well equipment, and leasehold costs, are amortized on the unit-of-production method using the ratio of current production to the estimated aggregate proved developed oil and gas reserves. Depreciation of property and equipment, other than oil and gas properties, is computed using the straight-line method over the estimated economic lives, which range from three to 39 years. 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other Assets Included in other assets are intangible assets that consist primarily of contracts acquired through acquisitions recorded at fair value on their acquisition dates, the excess of the acquisition cost over the fair value of the net assets of a business acquired (goodwill) and deferred financing costs. The contracts acquired are being amortized on a declining balance method, except for syndication network which is being amortized on a straight-line basis, over their respective estimated lives, ranging from five to 30 years, goodwill is being amortized on a straight-line basis over periods ranging from 15 to 30 years, deferred financing costs are being amortized over the terms of the related loans (two to seven years) and other costs are being amortized over varying periods of up to five years. Other assets at September 30, 1998 and 1997 were: 1998 1997 ---- ---- (in thousands) Contracts acquired (including syndication network).... $14,943 $ 1,636 Goodwill.............................................. 29,335 709 Deferred financing costs.............................. 4,312 5,240 Investment in real estate partnerships................ 1,781 1,827 Restricted cash....................................... 950 1,052 Other ................................................ 2,052 1,792 -------- ------- Total............................................ $53,373 $12,256 ======== ======= Fair Value of Financial Instruments The following methods and assumptions were used by the Company in estimating the fair value of each class of financial instruments for which it is practicable to estimate fair value. For cash and cash equivalents, receivables and payables, the carrying amounts approximate fair value because of the short maturity of these instruments. For long-term debt, including current maturities, the fair value of the Company's long-term debt approximates historically recorded cost since interest rates approximate market. Based upon available market information and appropriate valuation methods, the Company believes the carrying cost of investments in direct financing leases approximates fair value. For investments in real estate loans, the Company believes the carrying amounts of the loans are reasonable estimates of their fair value considering the nature of the loans and the estimated yield relative to the risks involved. 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of periodic temporary investments of excess cash. The Company places its temporary excess cash investments in high quality short-term money market instruments, principally at Jefferson Bank (see Note 3), and other high quality financial institutions. The amounts of these instruments are in excess of the Federal Deposit Insurance Corporation ("FDIC") insurance limit. At September 30, 1998, the Company had $53.8 million in deposits at Jefferson Bank, of which $52.3 million is over the FDIC insurance limit. In addition, the Company had deposits of $10.1 million and $9.7 million at two unaffiliated banks, of which $10.0 million and $9.6 million are over the FDIC insurance limit, respectively. No losses have been experienced on such investments. Revenue Recognition Real Estate Finance The difference between the Company's cost basis in a commercial mortgage loan and the sum of projected cash flows therefrom is accreted into interest income over the estimated life of the loan using a method which approximates the level interest method. Projected cash flows, which include amounts realizable from the underlying properties, are reviewed on a regular basis, as are property appraisals. Changes to projected cash flows reduce or increase the amounts accreted into interest income over the remaining life of the loan. Gains on the sale of a senior lien interest in a commercial mortgage loan are recognized based on an allocation of the Company's cost basis between the portion of the loan sold or refinanced and the portion retained based upon the fair value of those respective portions on the date of sale or refinance. Any gain recognized on a sale of a senior lien interest or a refinancing is credited to income at the time of such sale or refinancing. Loan origination fees and certain direct loan origination costs for residential mortgage loans held for sale are deferred until the related loan is sold. Gain on the sale of residential mortgage loans is recorded at the trade date in the amount by which the sales price exceeds the carrying value of the underlying mortgage loan. 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Equipment Leasing Direct Financing Leases. The Company's lease transactions are classified as direct financing leases (as distinguished from sales-type or operating leases). These leases transfer substantially all benefits and risks of equipment ownership to the customer. A lease is a direct financing lease if the creditworthiness of the customer and the collectibility of lease payments are reasonably certain and it meets one of the following criteria: (i) the lease transfers ownership of the equipment to the customer by the end of the lease term; (ii) the lease contains a bargain purchase option; (iii) the lease term at inception is at least 75% of the estimated economic life of the leased equipment; or (iv) the present value of the minimum lease payments is at least 90% of the fair market value of the leased equipment at inception of the lease. The Company's net investment in direct financing leases consists of the sum of the total future minimum lease payments receivable and the estimated unguaranteed residual value of leased equipment, less unearned income. Unearned lease income, which is recognized as revenue over the term of the lease by the effective interest method, represents the excess of the total future minimum lease payments plus the estimated unguaranteed residual value expected to be realized at the end of the lease term over the cost of the related equipment. Initial direct costs incurred in consummating a lease are capitalized as part of the investment in direct financing leases and amortized over the lease term as a reduction in the yield. Residual Values. Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or disposition of the leased equipment. The estimates are based upon available industry data and senior management's prior experience with respect to comparable equipment. The estimated residual values are recorded as investment in direct financing leases, on a net present value basis. Current estimates of residual values will vary from the original recorded estimates. Residual values are reviewed periodically to determine if the equipment's fair market value is below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market value. Generally accepted accounting principles do not permit upward adjustments to residual values. Sales of Leases. The Company sells a large percentage of the leases it originates through indirect securitization transactions and other structured finance techniques. In a securitization transaction, the Company sells and transfers a pool of leases to a bankruptcy remote separate entity (an "Intermediate Purchaser"). Typically, the Intermediate Purchaser will have no material assets apart from the leases sold to it. The Intermediate Purchaser in turn simultaneously sells and transfers its interest in the leases (excluding the residual values) to a financial institution in return for cash equal to a percentage of the aggregate present value of the finance lease receivables being sold. The consideration received by the Company for each pool of leases and residuals sold consists of the cash received by the Intermediate Purchaser from the financial institution plus an interest bearing note from the Intermediate Purchaser. Through March 1998, the Company's lease sales included residual values. In April 1998, the Company commenced retaining for its own account the residual interest in leases sold by it and anticipates that it will derive a significant portion of its leasing profits (if any) from residuals. Currently, repayment of notes received by the Company from Intermediate Purchasers in earlier sales 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS depends, to a significant extent, on realization of residuals. The Company anticipates that residuals will principally involve the original end-users; however, equipment not sold or re-leased to end-users will be disposed of in the secondary market. While residual realization is generally higher with original end-users than in the secondary market, the secondary market (essentially, networks of distributors and dealers in various equipment categories) is well developed in the product categories the Company currently pursues and transactions in these product categories have historically resulted in residual recoveries, on average, equal to the book value of the equipment. Equipment reacquired by the Company prior to lease termination (through lease default or otherwise) will be sold in the secondary market. Gains on the sales of equipment leases are recorded at the date of sale in the amount by which the sales price exceeds the book value of the underlying leases. Subsequent to a sale, the Company has no remaining interest in the pool of the leases or equipment except for (i) residuals retained on post-March 1998 sales, (ii) security interests retained in the lease pool sold when a note is received as part of the sale proceeds and (iii) under certain circumstances, the obligation to replace, non-performing leases in the pool. The Company maintains an allowance for possible losses in connection with payments due under leases held in the Company's portfolio, its retained interest in leases securitized or sold and its replacement obligation for non-performing leases sold. The allowance is determined by management's estimate of future uncollectible lease contracts, based on factors including the Company's historical loss experience, an analysis of delinquencies, economic conditions and trends, industry statistics and lease portfolio (including leases under the Company's management) characteristics. The Company's policy is to charge off to the allowance those leases which are delinquent and for which management has determined the probability of collection to be remote. Recoveries on leases previously charged off are restored to the allowance. Leasing revenues also consist of management fees, brokerage fees and a share of net income from partnerships in which a subsidiary of the Company serves as general partner. Management fees are earned for management services provided to the partnerships. Such fees are recognized as earned (see Limited Partnerships). Energy Operations Working interest, royalties and override revenues are recognized as production and delivery take place. Well service income is recognized as revenue as services are performed. 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cash Flow Statements The Company considers temporary investments with a maturity at the date of acquisition of 90 days or less to be cash equivalents. Supplemental disclosure of cash flow information:
Year Ended September 30, -------------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Cash paid during the year for: Interest............................................................... $17,677 $ 2,727 $797 Income taxes........................................................... 12,762 2,094 770 Non-cash activities include the following: Notes received in exchange for: Sales of leases..................................................... $ 9,277 $13,275 - Sales of residential mortgage loans................................. 7,794 - - Debt assumed upon acquisition of real estate loan.......................................................... -- 2,381 - Receipt of note in satisfaction of a real estate sale..................................................... - 3,500 - Note payable issued in acquisition..................................... - 925 - Stock issued in acquisitions........................................... 32,034 315 - Details of acquisitions: Fair value of assets acquired.......................................... $78,180 $ 2,466 - Debt issued............................................................ - (925) - Stock issued........................................................... (32,034) (315) - Liabilities assumed.................................................... (46,016) - - Amounts due seller..................................................... (9,191) - - -------- ------- ---- Net cash (acquired) paid............................................... ($9,061) $ 1,226 $ - ======== ====== ====
Limited Partnerships The Company conducts certain energy and leasing activities through, and a portion of its revenues are attributable to, limited partnerships ("Partnerships"). The Company serves as general partner of the Partnerships and assumes customary rights and obligations for the Partnerships. As the general partner, the Company is liable for Partnership liabilities and can be liable to limited partners if it breaches its responsibilities with respect to the operations of the Partnerships. 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company is entitled to receive management fees, reimbursement for administrative costs incurred, and to share in the Partnerships' revenue and costs and expenses according to the respective Partnership agreements. Such fees and reimbursements are recognized as income and are included in energy services and equipment leasing revenues. Amounts reimbursed for costs incurred as operator of certain oil and gas partnership properties and as the general partner in certain equipment leasing partnerships for the years ended September 30, 1998, 1997 and 1996 approximated $2.0 million, $1.8 million, and $1.6 million, respectively. The Company includes in its operations the portion of the oil and gas Partnerships' revenues and expenses applicable to its interests therein. Income Taxes The Company records deferred tax assets and liabilities, as appropriate, to account for the estimated future tax effects attributable to temporary differences between the financial statement and tax bases of assets and liabilities and the value at currently enacted tax rates, of operating loss carryforwards. The deferred tax provision or benefit each year represents the net change during that year in the deferred tax asset and liability balances. Earnings Per Share In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share." This statement is effective for financial statements issued for periods ending after December 15, 1997; earnings per share data included herein have been restated to reflect the new standard. Under this statement the previous calculation of primary earnings per share ("EPS") is changed to exclude the dilutive effect of stock options and is referred to as Basic EPS. Basic EPS is determined by dividing net income by the weighted average number of common shares outstanding during the period. Earnings per share - diluted are computed by dividing net income by the sum of the weighted average number of shares outstanding and dilutive potential common shares issuable during the period. Dilutive potential common shares consist of the excess of common shares issuable under the terms of various stock option and warrant agreements over the number of such shares that could have been reacquired (at the weighted average price of the Company's Common Stock during the period) with the proceeds received from the exercise of the options and warrants (see Notes 8 and 9). The computations of basic and diluted earnings per share for each year were as follows:
Year Ended September 30, 1998 1997 1996 ---- ---- ---- (in thousands) Income before extraordinary item ................................ $ 27,372 $ 10,951 $ 5,147 Extraordinary gain on early extinguishment of debt .............. 239 -- -- -------- -------- -------- Net income $ 27,611 $ 10,951 $ 5,147 ======== ======== ======== Basic average shares of common stock outstanding ................ 16,703 10,435 5,671 Dilutive effect of stock options and award plans ................ 565 2,639 2,600 -------- -------- -------- Diluted average shares of common stock outstanding .............. 17,268 13,074 8,271 ======== ======== ========
Reclassifications Certain reclassifications have been made to the fiscal years 1997 and 1996 consolidated financial statements to conform with the fiscal 1998 presentation. NOTE 3-CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS In the ordinary course of its business operations, the Company has ongoing relationships with several related entities, primarily a property management firm, a bank and RAIT. As particular opportunities have arisen, the Company has purchased commercial mortgage loans from lenders, or involving borrowers which are, affiliated with officers of the Company. In two instances 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (excluding sales to RAIT) the Company has sold senior or junior lien interests in commercial loans to purchasers affiliated with officers of the Company. At September 30, 1998, loans held with respect to related borrowers or acquired from related lenders constitute 33% ($62.2 million), by book value, of the Company's commercial loan portfolio, while the participation interests sold to related purchasers constituted 1% ($1.9 million) of all participation interests with respect to the Company's commercial loan portfolio. Transactions with affiliates must be approved by the Company's entire Board of Directors including a majority of the outside directors. In addition, acquisitions of commercial mortgage loans must be approved by the Investment Committee of the Board of Directors (which consists of three outside directors). The Company believes that the terms of its transactions with related parties are no less favorable than those available with unrelated third parties. A more detailed description of these relationships and transactions is set forth below. Relationship with Brandywine Construction & Management, Inc. ("BCMI"). The properties underlying 26 of the Company's commercial mortgage loans are managed by BCMI, a firm in which the Chairman of the Company is the Chairman of the Board of Directors and a minority stockholder (approximately 8%). The Company has advanced funds to certain borrowers for improvements on their properties, which have been performed by BCMI. The President of BCMI (or an entity affiliated with him) has also acted as the general partner, president or trustee of eight of the borrowers; an entity affiliated with him is the general partner of the sole limited partner of an ninth borrower. In addition, BCMI owns an 11% limited partnership interest in another borrower. BCMI has agreed to subordinate its management fees to receipt by the Company of minimum required debt service payments under the obligations held by the Company. Relationship with Jefferson Bank. The Company maintains a normal banking and borrowing relationship with Jefferson Bank, a subsidiary of JeffBanks, Inc. The Company anticipates that it may effect other borrowings in the future from Jefferson Bank. The Company, through its residential mortgage subsidiary, subcontracts any residential mortgage loan servicing to Jefferson Bank. The Chairman of the Company and his spouse are officers and directors of JeffBanks, Inc. (and his spouse is Chairman and Chief Executive Officer of Jefferson Banks and JeffBanks, Inc.), and are principal stockholders thereof. The President of the Company is a director of Jefferson Bank. Jefferson Bank is also a tenant at two properties which secure loans held by the Company and subleases space at one such property to RAIT. Relationship with RAIT. The Company sponsored the formation and the January 1998 initial public offering of common shares of beneficial interest of RAIT. The Company acquired 15% of RAIT's outstanding shares in the initial offering for an investment of approximately $7.0 million. In June 1998, the Company acquired additional common shares in a secondary offering for $5.0 million, and currently holds approximately 14% of RAIT's outstanding common shares. The spouse of the Chairman of the Company is Chairman and Chief Executive Officer of RAIT. The Company has the right to nominate one person for election to the Board of Trustees until such time as its ownership of RAIT's outstanding common shares is less than 5%. A Vice President of the Company, who is also the son of the Chairman of the Company and the brother of its President, currently serves as the Company's nominee. The Company advanced funds to RAIT for legal, accounting and filing fees and for certain other expenses, salaries of RAIT's executive officers, rent and other organizational expenses. The Company also incurred expenses in sponsoring RAIT. These advances and expenses were repaid, without interest, from the proceeds of RAIT's offering. 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In connection with RAIT's initial offering, the Company sold ten loans and senior lien interests in two other loans to RAIT at an aggregate purchase price of $20.1 million (including $2.1 million attributable to senior lien interests acquired by the Company in connection with the sales to RAIT). One of the loans and one of the senior lien interests were originated for RAIT and sold to it by the Company at cost. The Company realized a total gain on the sale of the loans and senior lien interests of $3.1 million. The Company has engaged in the following transactions with RAIT subsequent to the sale of the initial investments: o The Company sold senior lien interests in three loans to RAIT at an aggregate purchase price of $18.0 million and recognized aggregate gains on sale of $5.1 million. o The Company and RAIT jointly acquired a loan at a purchase price of $85.5 million, $10.0 million of which was contributed by RAIT. o The Company sold to RAIT two loans, both of which it had originated for RAIT in connection with its sponsorship of RAIT, at their aggregate carrying value of $7.7 million. The Company retained a $1.3 million junior lien interest in one of these loans, which interest is subordinate to RAIT's $4.0 million interest and the $12.0 million interest of an unaffiliated party. o The Company made a first mortgage loan to OSEB Associates, L.P. ("OSEB"), which is owned by RAIT (89%) and BCMI (11%). The loan bears interest at 10% per annum on stated principal in the amount of $65.0 million. OSEB obtained outside financing to reduce the loan by $44.0 million; the balance of the loan is secured by a second mortgage and pledge of partnership interests in OSEB. The Company anticipates that it will sell additional loans and senior lien interests in loans to RAIT, and participate with it in other transactions. 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Relationships with Certain Borrowers. The Company has from time to time purchased loans in which affiliates of the Company are affiliates of the borrowers. In September 1998, the Company acquired a defaulted loan in the original principal amount of $91.0 million. In connection with the acquisition of the loan, the Company acquired the right to transfer the equity interest in the borrower. Currently, a subsidiary of the Company is the general partner of the borrower. Pending transfer of the limited partnership interests, the Vice Chairman of the Company holds legal title to those interests. In March 1998, the Company acquired a loan under a plan of bankruptcy. An order of the bankruptcy court in effect when the Company acquired the loan required that legal title to the property underlying the loan be transferred on or before June 30, 1998. In order to comply with that order and to maintain control of the property, Evening Star Associates took title to the property on or about June 19, 1998. A subsidiary of the Company serves as general partner to Evening Star Associates and holds a 1% interest; the Chairman, Vice Chairman and President of the Company hold a 94% limited partnership interest. The latter have agreed to list their interests in Evening Star Associates for sale through a qualified real estate broker until December 31, 1999. Any amounts received by the limited partners for their interests in excess of the original capital contributions plus a 6% return will be paid to Evening Star Associates. If no such sale occurs by December 31, 1999, the limited partners may retain their interests. In August 1997, the Company, acquired a loan with a face amount of $2.3 million from Jefferson Bank at a cost of $1.6 million. The loan is secured by a property owned by a partnership in which the Company's Vice Chairman and the Chairman, together with the Chairman's spouse, are limited partners. The Vice Chairman was previously the general partner of such partnership. The Company leases its headquarters space at such property. The lease provides for rents of $114,800 per year through May 2000. Ledgewood Law Firm, P.C., a law firm which provides legal services to the Company, is a tenant at such property. 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In June 1997, the Company acquired a loan with a face amount of $7.0 million from a partnership in which the Vice Chairman and Chairman, together with the Chairman's wife, are limited partners. The Vice Chairman was previously the general partner of such partnership. The Company acquired such loan at a cost of $3.0 million. In December 1996, the Company acquired a loan with a face amount of $52.7 million from an unaffiliated third party at a cost of $19.3 million. The property securing such loan is owned by two partnerships: the Building Partnership, which owns the office building, and the Garage Partnership, which owns the parking garage. Pursuant to a loan restructuring agreement entered into in 1993, an affiliate of the holder of the loan is required to hold, as additional security for the loan, general partnership interests in both the Building Partnership and the Garage Partnership. The partnership interest in the Building Partnership was assigned to a limited partnership of which a subsidiary of the Company is general partner and RPI Partnership is a limited partner. The partnership interest in the Garage Partnership was assigned to a limited partnership of which a subsidiary of the Company is general partner and RPI Partnership is limited partner. RPI Partnership is a limited partnership in which the Vice Chairman of the Company is the general partner and the Chairman and President are limited partners. Although the Company does not anticipate any economic benefit to RPI Partnership, any which may be received will be assigned and transferred to the Company. Relationships with Certain Lienholders. The Company has sold two senior lien interests and one junior lien interest in its commercial loans to entities in which officers of the Company have minority interests as discussed in the following paragraphs. In December 1997, the Company purchased from third parties, for an aggregate of $1.52 million, two loans in the aggregate original principal amount of $2.0 million and with an aggregate outstanding balance at the time of purchase of $1.95 million. The loans are secured by an apartment building. The Company sold a senior lien interest in one of the loans for $1.0 million to a limited partnership in which the Chairman and Vice Chairman of the Company beneficially own a 14.4% interest, reducing the Company's net investment to $518,000 and leaving the Company with a retained interest in outstanding loan receivables of $1.0 million (at a book value of $803,000). The Company recognized a gain of $322,900 on the sale of this loan. From November 1996 to June 1997 the Company acquired from third parties loans relating to one property in the aggregate original principal amount of $5.8 million (and with aggregate outstanding balances at the respective times of purchase of $7.6 million) for an investment of $2.5 million. The Company sold, for $2.2 million, a senior lien interest in one of the loans and recognized a $28,900 gain on the sale. The purchaser was a limited partnership in which the Chairman and Vice Chairman of the Company beneficially own an 18.3% limited partnership interest. The senior lien interest was paid off in December 1997. 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In June 1996, for an investment of $2.4 million, the Company acquired from third parties a loan in the original principal amount of $3.3 million (and with a then outstanding balance of $3.3 million). The Company sold, at book value, a junior lien interest in the loan for $875,000, to a limited partnership in which the Chairman and Vice Chairman of the Company beneficially own a 21.3% limited partnership interest. Relationship with Financing Institution. The Company has in the past obtained material amounts of financing from Physicians Insurance Company of Ohio ("PICO") by the sale to PICO, in May 1994, of an $8.0 million principal amount 9.5% senior note and by the sale, in fiscal years 1995 and 1996, of $12.0 million of senior lien interests in seven of the Company's portfolio loans, together with warrants to purchase 2.9 million shares of Common Stock. In July 1997, the Company repaid the senior note in full and PICO exercised, and subsequently sold, the Common Stock underlying the warrants to institutional investors in private transactions. Following such transactions, John R. Hart, an executive officer and director of PICO who had become a director of the Company in connection with the PICO financings, resigned from the Board of Directors of the Company. An outside director of the Company became a director of PICO on November 20, 1998. Management believes that any other such commercial real estate transactions and balances involving parties that may be considered to be related parties are not material. Relationship with Law Firm. Until April 1996, the Chairman of the Company was of counsel to Ledgewood Law Firm, P.C. ("LLF"), which provides legal services to the Company. LLF was paid $1.2 million, $803,000 and $402,000 during fiscal 1998, 1997 and 1996, respectively, for legal services rendered to the Company. The Chairman of the Company receives certain debt service payments from LLF related to the termination of his affiliation with such firm and its redemption of his interest therein. NOTE 4-INVESTMENTS IN REAL ESTATE LOANS The Company has primarily focused its real estate activities on the purchase of income producing commercial mortgages at a discount from both the face value of such mortgages and the appraised value of the properties underlying the mortgages. The Company records as income the accretion of a portion of the difference between its cost basis in a commercial mortgage and the sum of projected cash flows therefrom. Cash received by the Company for payment on each mortgage is allocated between principal and interest. This accretion of discount amounted to $6.5 million and $4.1 million during the years ended September 30, 1998 and 1997, respectively. As the Company sells senior lien interests or receives funds from refinancings in such mortgages, a portion of the cash received is employed to reduce the cumulative accretion of discount included in the carrying value of the Company's investments in real estate loans. In October 1997, the Company commenced residential mortgage lending operations. 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At September 30, 1998 and 1997, the Company held real estate loans having aggregate face values of $679.6 million and $233.7 million, respectively, which were being carried at aggregate costs of $202.1 million and $88.8 million, including cumulative accretion. Amounts receivable, net of senior lien interests and deferred costs, were $344.3 million and $178.1 million at September 30, 1998 and 1997, respectively. The following is a summary of the changes in the carrying value of the Company's investments in real estate loans for the years ended September 30, 1998 and 1997. Year Ended September 30, ------------------------ 1998 1997 ---- ---- (in thousands) Balance, beginning of year (commercial mortgage loans only).............. $ 88,816 $21,798 New loans...................................... 337,087 71,720 Additions to existing loans.................... 6,181 1,860 Provision for possible losses.................. (505) (400) Accretion of discount.......................... 6,520 4,124 Collections of principal....................... (76,915) (517) Cost of loans sold............................. (172,533) (9,769) -------- ------- Balance, end of year (commercial mortgage loans only).............. 188,651 88,816 Investments in residential mortgage loans (less an allowance for possible losses of $286)..................................... 13,399 - -------- ------- Balance, end of year (all real estate loans)... $202,050 $88,816 ======== ======= A summary of activity in the Company's allowance for possible losses related to real estate loans for the years ended September 30, 1998 and 1997 are as follows: 1998 1997 ---- ---- Balance, beginning of year..................... $400 $ - Provision for possible losses.................. 791 400 Writeoffs...................................... - - ------ ---- Balance, end of year........................... $1,191 $400 ====== ==== 86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5-INVESTMENT IN LEASES AND NOTES RECEIVABLE Components of the net investment in direct financing leases and notes receivable as of September 30, 1998 and 1997, as well as future minimum lease payments receivable, including residual values, are as follows: September 30, -------------------- 1998 1997 ---- ---- (in thousands) Total minimum lease payments receivable............. $10,011 $4,186 Initial direct costs, net of amortization........... 153 75 Unguaranteed residual............................... 6,338 310 Unearned lease income............................... (4,061) (932) ------- ----- Net investment in direct financing leases........... 12,441 3,639 Notes receivable.................................... 14,138 4,761 Allowance for possible losses....................... (1,602) (248) ------- ------ Investment in leases and notes receivable........... $24,977 $8,152 ======= ====== At September 30, 1998, minimum lease payments for each of the five succeeding fiscal years are as follows (in thousands): 1999 - $3,549; 2000 - $3,009; 2001- $1,806; 2002 - $993; and 2003 - $654. The amount of unguaranteed residual value actually realized at contract termination will depend on the then fair market value of the related equipment and may vary from the recorded estimate. Residual values are reviewed periodically to determine if the equipment's fair market is below its recorded value (see Note 2). Certain of the leases include options to purchase the underlying equipment at the end of the lease term at fair value or the stated residual which is not less that the book value at termination. A summary of activity in the Company's allowance for possible losses related to direct financing leases and notes receivable for the years ended September 30, 1998 and 1997 are as follows: Year Ended September 30, ------------------------ 1998 1997 ---- ---- (in thousands) Balance, beginning of year....................... $ 248 $ 7 Provision for possible losses.................... 1,422 253 Write offs....................................... (68) (12) ------ ---- Balance, end of year............................. $1,602 $248 ====== ==== 87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6-LONG-TERM DEBT AND OTHER BORROWINGS Long-term debt consists of the following: September 30, ------------- 1998 1997 ---- ---- (in thousands) 12% senior unsecured notes payable, interest due semi- annually, principal due August 2004......................... $104,400 $115,000 Term loan payable to bank, secured by certain oil and gas properties; quarterly payments of $350 plus interest at LIBOR plus 1.5% (7.09% at September 30, 1998) due September, 2003............................................. 7,000 - Revolving credit loans, secured by certain oil and gas properties; interest ranging from 7.06% to 9.0% due June 1999, April 2003 and September 2003......................... 24,975 - Other....................................................... 3,905 4,494 -------- -------- 140,280 119,494 Less current maturities..................................... 7,264 708 -------- -------- $133,016 $118,786 ======== ======== As of September 30, 1998, long-term debt maturing over the next five fiscal years is as follows (in thousands): 1999 - $7,264; 2000 - $1,818; 2001 - $1,835; 2002 - $1,834; and 2003 - $21,753. In July 1997, the Company issued $115.0 million of 12% Senior Notes (the "12% Notes") due August 2004 in a private placement. Provisions of the 12% Notes limit dividend payments, mergers and indebtedness, place restrictions on liens and guarantees and require the maintenance of certain financial ratios. At September 30, 1998, the Company was in compliance with such provisions. In November 1997, the Company exchanged the privately placed 12% Notes with a like amount of 12% Notes which were registered under the Securities Act of 1933. Oil and Gas Credit Facilities. Prior to its acquisition by the Company, The Atlas Group, Inc. ("Atlas") maintained a $40.0 million credit facility (with $27.0 million of permitted draws) at PNC Bank ("PNC"). This line has been continued by the Company. The credit facility is divided into two principal parts: a revolving credit facility and a term loan facility. The resolving credit facility has $20.0 million of permitted draws, with a term ending in 2001 and with draws bearing interest at one of two rates (elected at borrower's option) which increase as the amount outstanding under the facility increases: (i) PNC prime rate plus between 0 to 50 basis points, or (ii) LIBOR plus between 137.5 to 212.5 basis points. The term loan facility has $7.0 million of permitted draws, with a term ending in 2003, and with draws bearing interest at one of two rates (elected at borrower's option), which increase as the amount outstanding under the facility increases: (i) PNC prime rate plus between 12.5 to 62.5 basis points, or (ii) LIBOR plus between 150 to 225 basis points. The credit facility contains certain financial covenants 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS of Atlas, including maintaining a current ratio of .75 to 1.0, a ratio of fixed charges to earnings of 2.0 to 1.0 and a leverage ratio (essentially a ratio of debt to equity) of not less than 3.75 to 1.0, reducing to 3.50 to 1.0 in January 1999, 3.25 to 1.0 in October 1999 and 3.0 to 1.0 in March 2000. The credit facility also imposes the following limits: (a) Atlas' exploration expense can be no more than 20% of capital expenditures plus exploration expense, without PNC's consent; (b) sales, leases or transfers of property by Atlas are limited to $1.0 million without PNC's consent; and (c) Atlas cannot incur debt in excess of $2.0 million to lenders other than PNC without PNC's consent. As of September 30, 1998, there was $20.0 million outstanding under the revolving credit facility and $7.0 million outstanding under the term loan facility. The Company also maintains a $5.0 million credit facility with KeyBank for purposes of acquiring oil and gas assets. The credit facility permits draws based on a percentage of reserves of oil and gas properties pledged as security for the facility. Draws under the facility bear interest at KeyBank's prime rate plus 25 basis points. The facility which terminates on June 30, 1999, contains certain financial covenants with which the Company believes it has substantially complied at September 30, 1998. As of September 30, 1998, the Company had $5.0 million outstanding under this line. Other borrowings consist of the following: Commercial Mortgage Loan Credit Facility. In March 1998, the Company, through certain operating subsidiaries, established an $18.0 million revolving credit facility (with current credit availability of $5.0 million) with Jefferson Bank for its commercial mortgage loan operations. The credit facility bears interest at the prime rate reported in the Wall Street Journal plus .75%, and is secured by the borrowers' interests in certain commercial loans and by a pledge of their outstanding capital stock. In addition, repayment of the credit facility is guaranteed by the Company. Credit availability is based upon the amount of assets pledged as security for the facility and is subject to approval by Jefferson Bank of additional collateral. The facility expires on April 1, 1999. As of September 30, 1998 there were no borrowings under this facility. Lease Financing Credit Facility. The Company's equipment leasing subsidiary, Fidelity Leasing, Inc. ("FLI"), maintains a $20.0 million revolving credit facility with term loan availability with First Union National Bank and European American Bank. The facility has, in addition to customary covenants, the following principal terms: (i) no single advance may exceed the lesser of (a) 95% of the cost of the leases being financed or (b) $500,000 or, in the case of leases to investment grade lessees, $1,000,000; (ii) revolving credit loans bear interest, at FLI's election, at (a) an adjusted LIBOR rate plus 150 basis points or (b) the rate for one month U.S. dollar deposits as reported by Telerate (London) plus 150 basis points, while term loans bear interest at the adjusted LIBOR rate plus 150 basis points; (iii) term loans must be for not less than $2.0 million per loan; (iv) the loans are secured by a first lien on the equipment leases being financed (and on the underlying equipment), a guaranty by the Company and a pledge of the capital stock of FLI and Resource Leasing, Inc. (the direct parent of FLI and a wholly-owned subsidiary of the Company); (v) revolving credit loans may be converted to term loans and paid in accordance with applicable amortization schedules; (vi) adjustable rate term loans may, at the option of FLI, be converted into fixed rate term loans at then quoted rates; 89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and (vii) FLI will be required to maintain a debt (excluding non-recourse debt) to "worth" ratio of 5.5 to 1.0 or less, a minimum tangible net worth equal to $8.0 million plus 75% of FLI's net income, and a ratio of cash flow (income before taxes, depreciation, amortization and extraordinary items, plus interest expense) to the sum of interest expense, mandatory principal payments and 25% of outstanding obligations under the revolving line of credit, of 1.5 to 1.0. The facility expires on March 31, 2000 but may be renewed for additional 18 month periods by the lenders. In fiscal 1998, there was an aggregate of $33.8 million in borrowings under this line, all of which were repaid prior to September 30, 1998. In October 1997, the Company's residential mortgage subsidiary, established a $15.0 million warehouse credit facility with a financial institution, bearing interest at LIBOR or, if unavailable, the interbank eurodollars market rate, plus 90 basis points. The facility was collateralized by a first lien interest in the loans being financed by facility draws. The facility expired in November 1998. As of September 30, 1998, $5.2 million was outstanding under this line. It was repaid on November 30, 1998. NOTE 7-INCOME TAXES The following table details the components of the Company's income tax expense for the fiscal years 1998, 1997 and 1996.
Year Ended September 30, --------------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Provision for federal income tax: Current................................... Federal.................................. $14,871 $6,186 $1,147 State.................................... 345 - - Deferred.................................. (1,736) (2,206) 1,059 ------- ------ ------ $13,480 $3,980 $2,206 ======= ====== ======
A reconciliation between the statutory federal income tax rate and the Company's effective income tax rate is as follows:
Year Ended September 30, --------------------------------------- 1998 1997 1996 ---- ---- ---- Statutory tax rate................................ 35% 34% 34% Statutory depletion............................... - (2) (4) Non-conventional fuel and low-income housing credits................................. (2) (3) - Tax-exempt interest............................... (1) (2) - State income tax.................................. 1 --- --- --- 33% 27% 30% === === ===
90 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of the net deferred tax liability are as follows:
September 30, --------------------------- 1998 1997 ---- ---- (in thousands) Deferred tax assets: Tax credit carryforwards............................ $ 507 $ 507 Alternative minimum tax credit carryforwards...................................... 1,555 -- Statutory depletion................................. 187 -- Interest receivable................................. 1,952 1,490 Net operating loss carryforwards.................... 988 357 Provision for losses................................ 1,233 220 Less valuation allowance............................ (1,618) -- -------- ------ $ 4,804 $2,574 -------- ------ Deferred tax liabilities: Fixed asset basis difference........................ (6,470) (2,290) ESOP benefits....................................... (98) (120) Other items, net..................................... -- (164) -------- ------ (6,568) (2,574) -------- ------ Net deferred tax liability......................... ($1,764) $ -- ======== =======
SFAS No. 109 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Tax rules impose limitations on the use of tax carryforwards following certain changes in ownership. Due to mergers (see Note 11), there will be limitations on the amount of net operating loss and alternative minimum tax credit carryforwards that can be utilized in any given year to reduce further taxes. NOTE 8-STOCKHOLDERS' EQUITY In April 1998, the Company completed a public offering of 5.9 million shares of its Common Stock. The Company received net proceeds (after underwriting discounts and commissions) of $120.1 million before offering expenses of $917,000. In March 1998, the Company's stockholders authorized an amendment to the Certificate of Incorporation of the Company to increase the total authorized capital stock to 50.0 million shares, of which 49.0 million shares were Common Stock and 1.0 million shares were Preferred Stock. 91 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In July 1997, the Company issued 2.9 million unregistered shares of the Company's Common Stock pursuant to the exercise of warrants held by the holder of the Company's 9.5% senior secured note payable due 2004. The Company realized proceeds of $3.66 million from the exercise of the warrants. The 2.9 million shares were subsequently sold by the holder in a separate private placement to a small group of institutional investors. In December 1996, the Company completed a public offering of 5.0 million shares of its Common Stock. The Company received net proceeds of $20 million, before offering expenses of $515,000, from the offering. On December 20, 1995 and March 12, 1996, the Board of Directors declared 6% stock dividends on the Common Stock. Furthermore, on May 9, 1996 and May 12, 1998, the Board of Directors authorized a five-for-two stock split effected in the form of a 150% stock dividend and a three-for-one stock split effected in the form of a 200% stock dividend, respectively. These stock dividends resulted in the issuance of 14.6 million additional shares of Common Stock. Earnings per share and weighted average shares outstanding reflect the above transactions. NOTE 9-EMPLOYEE BENEFIT PLANS Employee Stock Ownership Plan The Company sponsors an Employee Stock Ownership Plan ("ESOP"), which is a qualified non-contributory retirement plan established to acquire shares of the Company's Common Stock for the benefit of all employees who are 21 years of age or older and have completed 1,000 hours of service for the Company. Contributions to the ESOP are made at the discretion of the Board of Directors. In prior years the ESOP borrowed funds to purchase shares from the Company, which in turn borrowed the funds for the ESOP loan from a bank. The loan from the bank to the Company is payable in semiannual installments through February 1, 2003. The loan from the Company to the ESOP was fully repaid in August 1996. Both the loan obligation and the unearned benefits expense (a reduction in shareholders' equity) will be reduced by the amount of any loan principal payments made by the Company. On September 28, 1998, the Company loaned $1.3 million to the ESOP, which the ESOP used to acquire 105,000 shares of the Company's Common Stock. The Common Stock purchased by the ESOP with the money borrowed is held by the ESOP trustee in a suspense account. On an annual basis, a portion of the Common Stock is released from the suspense account and allocated to participating employees. Any dividends on ESOP shares are used to pay principal and interest on the loan. As of September 30, 1998, there were 271,000 shares allocated to participants which constitute substantially all shares prior to the 105,000 shares acquired on September 28, 1998. Compensation expense related to the plan amounted to $50,400, $50,400 and $50,300 for the years ended September 30, 1998, 1997 and 1996, respectively. 92 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Employee Savings Plan The Company sponsors an Employee Retirement Savings Plan and Trust under Section 401(k) of the Internal Revenue Code which allows employees to defer up to 10% of their income (subject to certain limitations) on a pretax basis through contributions to the savings plan. The Company matches up to 100% of each employee's contribution. Included in general and administrative expenses are $305,600, $131,900 and $44,700 for the Company's contributions for the years ended September 30, 1998, 1997 and 1996, respectively. Stock Options The Company has three employee stock option plans, those of 1984, 1989 and 1997. The 1984 and 1989 plans authorize the granting of up to 168,540 and 1,769,670 (as amended during the fiscal year ended September 30, 1996) shares, respectively, of the Company's Common Stock in the form of incentive stock options ("ISO's"), non-qualified stock options and stock appreciation rights ("SAR's"). No further grants may be made under these two plans. In April 1997, the stockholders approved the Resource America, Inc., 1997 Key Employee Stock Option Plan ("Employee Plan"). This plan, for which 825,000 shares were reserved, provides for the issuance of ISO's and non-qualified stock options. In fiscal 1998 and 1997, options for 669,115 and 75,000 shares were issued under this plan, respectively. Options under the 1984, 1989 and 1997 plans become exercisable as to 25% of the optioned shares each year after the date of grant, and expire not later than ten years after grant. Transactions for all three stock option plans are as follows:
Year Ended September 30, ------------------------------------------------------------------------------------------------ 1998 1997 1996 --------------------------------- -------------------------------- --------------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Outstanding - beginning of year 685,959 $ 3.85 1,044,948 $ 2.07 606,744 $ .96 Granted 669,115 $22.21 75,000 $13.17 606,744 $2.86 Exercised (33,708) $ 2.73 (433,989) $ 1.17 (84,270) $ .92 Cancelled - - - (84,270) $ .92 --------- --------- --------- Outstanding - end of year 1,321,366 $13.18 685,959 $ 3.85 1,044,948 $2.07 ========= ========= ========= Exercisable, at end of year 292,629 $ 3.22 190,662 $ 2.35 328,653 $ .97 ========= ========= ========= Available for grant 80,885 750,000 - ========= ========= ========= Weighted average fair value per share of options granted during the year $ 19.41 $11.98 $2.17 ======= ====== =====
93 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Outstanding Exercisable -------------------------------------------- --------------------------- Weighted Average Weighted Weighted Range of Contractual Average Average Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price - - --------------- ------ ----------- -------------- ------ -------------- $.92 50,562 4.56 $ .92 50.562 $ .92 $2.73-3.00 526,689 4.66 $ 2.88 223,317 $ 2.91 $13.17 75,000 8.91 $ 13.17 18,750 $13.17 $15.08-15.58 135,615 9.21 $ 15.55 - $15.55 $22.67-$27.81 533,500 4.79 $ 23.91 - $23.91 --------- ------- 1,321,366 292,629 ========= =======
On October 20, 1998, the options granted under the 1997 Stock Option Plan were cancelled. These options were replaced with an identical number of new options with an exercise price of $8.08 per share, which amount represents the market value of the Company's Common Stock at that date. The new options will vest 25% per year commencing October 20, 1999. In connection with the acquisition of Atlas (see Note 11), the Company issued 120,213 options at $.11 per share to certain employees of Atlas who held options of Atlas prior to its acquisition by the Company. In addition, a key employee of FLI, a wholly owned subsidiary of the Company, has received options to purchase 10% of the common stock of FLI (1.0 million shares) at an aggregate price of $220,000 and, should FLI declare a dividend, will receive payments on the options in an amount equal to the dividends that would have been paid on the shares subject to the options had they been issued. In the event that, prior to becoming a public company, FLI issues stock to anyone other than the Company or the key employee, the employee is entitled to receive such additional options as will allow him to maintain a 10% equity position in FLI upon exercise of all options held by such employee (excluding shares issuable pursuant to the employee option plan referred to below), at an exercise price equal to the price paid or value received in the additional issuance. FLI does not anticipate making any such issuances. The options issued to the FLI key employee vest 25% per year and will be fully vested in March 2000; they will terminate in March 2005. The options become fully vested and immediately exercisable in the event of a change in control of FLI. The key employee has certain rights, commencing after March 5, 2000, to require FLI to register his option shares under the Securities Act of 1933. In the event FLI does not become a public company by March 5, 2001, the key employee may require that FLI thereafter buy, for cash, FLI shares subject to his options at a price equal to ten times FLI's net earnings (as defined in the agreement) per share for the fiscal year ended immediately prior to the giving of notice of his exercise of this right. FLI is required to purchase 25% of such employee's shares in each year following such employee's exercise of this right. FLI has also established another option plan providing for the granting of options, at the discretion of FLI's board of directors, for up to 500,000 shares of common stock to other employees of FLI. As of September 30, 1998, options for 416,000 shares had been issued to certain employees. 94 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Transactions for both FLI stock option plans are as follows:
Year Ended September 30, --------------------------------------------------------------------------- 1998 1997 1996 ---------------------- ------------------------ ----------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Outstanding-beginning of year 1,393,000 $ .22 1,000,000 $.22 - $ - Granted 23,000 $1.07 393,000 $.22 1,000,000 $.22 Exercised - $ - - $ - - $ - Cancelled - $ - - $ - - $ - --------- --------- --------- Outstanding - end of year 1,416,000 $ .23 1,393,000 $.22 1,000,000 $.22 ========= ========= ========= Exercisable, at end of year 598,300 $ .22 250,000 $.22 - $ - ========= ========= ========= Available for grant 84,000 107,000 500,000 ========= ========= ========= Weighted average fair value per share of options granted during the year $ .50 $ .11 $ .10 ========== ========== ========== Outstanding Exercisable -------------------------------------------- --------------------------- Weighted Average Weighted Weighted Range of Contractual Average Average Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price - - --------------- ------ ----------- -------------- ------ -------------- $.22 - $1.07 1,416,000 7.52 $.23 598,300 $.22 ========= =======
Fidelity Mortgage Funding, Inc. ("FMF"), another wholly-owned subsidiary of the Company (and in which the Company owns 25.5 million shares of common stock), has established an option plan pursuant to which 4.5 million shares of FMF's common stock (representing 18% of FMF's common stock on a fully-diluted basis) have been reserved for options which may be issued to key employees. These amounts reflect a three-for-two stock split effected in the form of a 150% stock dividend declared by the Board of Directors in October 1997. Under the program, a director and officer of the Company who is also the Chairman of FMF has received options to purchase 3.0 million shares (representing 12% of FMF's common stock on a fully-diluted basis) at an aggregate price of $236,000 ($.079 per share) and, should FMF declare a dividend, will receive payments on the options in an amount equal to the dividends that would have been paid on the shares subject to the options had they been issued. The options generally will have the same terms as those relating to the FLI options, except that (i) the option term and vesting period commenced in April 1997 and (ii) the period during which the officer/director may sell FMF shares to FMF will commence in April 2002. The options become fully vested and immediately exercisable in the event of a change in control or potential change in control of FMF or the Company. In addition, as part of the program, at September 30, 1998, FMF had granted options to (i) its President and Chief Operating Officer to purchase 1.2 million shares at an aggregate price of $94,000 ($.079 per share) (representing 5% of FMF's common stock on a fully-diluted basis), and (ii) to certain other of its employees to purchase 185,000 shares at an aggregate price of $23,000 ($.125 per share), leaving 115,000 shares reserved for issuance of options under the plan at September 30, 1998. 95 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Transactions for the FMF stock option plan are as follows:
Year Ended September 30, ---------------------------------------------------------------- 1998 1997 ----------------------------- ------------------------------ Weighted Weighted Average Average Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- Outstanding - beginning of year 4,345,000 $ .08 - $ - Granted 80,000 $ .12 4,345,000 $.08 Exercised - $ - - $ - Cancelled (40,000) $(.12) - $ - --------- --------- Outstanding - end of year 4,385,000 $ .08 4,345,000 $.08 ========= ========= Exercisable, at end of year 1,076,300 $.08 - $ - ========= ========= Available for grant 115,000 155,000 ========= ========= Weighted average fair value per share of options granted during the year $ .06 $ .06 ========= ========= Outstanding Exercisable -------------------------------------------- --------------------------- Weighted Average Weighted Weighted Range of Contractual Average Average Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price - - --------------- ------ ----------- -------------- ------ -------------- $.079 - $.12 4,385,000 8.57 $.08 1,076,300 $.08 ========= =========
As discussed in Note 2, the Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for these employee stock arrangements. SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net income and earnings per share as if the Company had adopted the fair value method for stock options granted after June 30, 1996. No such options were granted in fiscal 1996. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 5 or 10 years following vesting; stock volatility, 99%, 96% and 87% in 1998, 1997 and 1996, respectively; risk free interest rate, 5.8%, 6.6% and 6.0% in 1998, 1997 and 1996, respectively; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the awards had been amortized to expense over the vesting period of the awards, pro forma net income would have been $26.2 million ($1.52 per share) and $10.5 million ($.80 per share) in fiscal 1998 and 1997, respectively. 96 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In addition to the various stock option plans, in May 1997 the stockholders approved the Resource America, Inc. Non-Employee Director Deferred Stock and Defined Compensation Plan (the "Director Plan") for which 75,000 shares were reserved for issuance. Each director vests in shares granted under the Director Plan on the fifth anniversary of the date of grant. If a director terminates service prior to such fifth anniversary, all of the shares granted are forfeited. In May 1998, 15,000 shares were granted under the Director Plan to each of the Company's four non-employee directors. The fair value of the grants ($24.25 per share, $363,800 in total) is being charged to operations over the five-year vesting period. The tax benefit associated with the exercise of non-statutory stock options and disqualifying dispositions by employees of shares issued reduced taxes payable by $405,000 in fiscal 1998. Such benefits are reflected as additional paid-in capital. NOTE 10-COMMITMENTS AND CONTINGENCIES The Company leases office space under leases with varying expiration dates through 2002 (see Note 3). Rental expense was $749,800, $238,600 and $188,900 for the years ended September 30, 1998, 1997 and 1996, respectively. At September 30, 1998, future minimum rental commitments for the next five fiscal years were as follows: 1999...................... $1,645,800 2000...................... 1,292,800 2001...................... 975,900 2002...................... 848,300 2003...................... 772,800 As of September 30, 1998, the Company had outstanding commitments to fund the purchase of equipment which it intends to lease, with an aggregate cost of $13.2 million. The Company believes, based on its past experience, that approximately $9.5 million will be funded. The Company has an employment agreement with its Chairman pursuant to which the Company has agreed to provide him with a supplemental employment retirement plan ("SERP") and with certain financial benefits upon termination of his employment. Under the SERP, he will be paid an annual benefit of 75% of his Average Income after he has reached Retirement Age (each as defined in the employment agreement). Upon termination, he is entitled to receive lump sum payments in various amounts of between 25% and five times Average Compensation (depending upon the reason for termination) and, for termination due to disability, a monthly benefit equal to the SERP benefit (which will terminate upon commencement of payments under the SERP). During fiscal 1998 and 1997, operations were charged $204,000 and $240,000, respectively, with respect to these commitments. 97 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Actions have been filed against the Company, its directors and executive officers and the Company's independent auditors by certain of the Company's shareholders. The complaints seek unspecified damages. The complaints seek unspecified damages. The Company believes that the complaints are without merit and intends to defend itself vigorously. The Company is also party to various routine legal proceedings arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the financial condition or operations of the Company. NOTE 11-ACQUISITIONS On September 29, 1998, the Company acquired all the common stock of Atlas in exchange for 2,063,496 shares of the Company's Common Stock and the assumption of Atlas debt as described below. Atlas is a company primarily involved in the energy finance business through the syndication of oil and gas properties in the Appalachian Basin. The Atlas acquisition was recorded under the purchase method of accounting and accordingly the results of operations of Atlas are included in the Company's consolidated financial statements commencing September 29, 1998. The effect on the Company's operations for fiscal 1998 was nominal. The purchase price has been allocated to assets acquired and liabilities assumed based on their fair market values, at the date of acquisition as summarized below (in thousands). Estimated fair value of assets acquired $ 74,635 Liabilities assumed (45,968) Amounts due seller (9,191) Common Stock issued (29,534) -------- Net cash acquired ($10,058) ======== 98 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table reflects unaudited pro forma combined results of operations of the Company and Atlas presented as if that the acquisition had taken place on October 1, 1996:
Year Ended September 30, -------------------------- 1998 1997 ---- ---- (unaudited) (in thousands, except per share amounts) Revenues $148,413 $96,958 Net income 29,874 14,140 Net income per common share-diluted $1.54 $ .93 Shares used in computation 19,451 15,257
These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments to: (i) depletion, depreciation and amortization expense attributable to allocation of the purchase price; (ii) general and administrative expenses for certain cost reductions realized from the combining of operations; and (iii) interest expense for additional borrowings. They do not purport to be indicative of the results of operations which actually would have resulted had the combination been consummated on October 1, 1996, or of future results of operations of the consolidated entities. In April 1997, the Company acquired all the outstanding shares of Bryn Mawr Resources, Inc. ("BMR") for 1,738,869 shares of Common Stock. BMR's only asset was 1,768,869 shares of the Company's Common Stock held by subsidiaries of BMR (excluding 11,421 shares of the Company's Common Stock attributable to minority interests held by third parties in BMR's subsidiaries). This acquisition was immaterial to the results of operations of the Company, and therefore pro forma information is excluded. On December 15, 1998, the Company entered into an agreement to acquire JLA credit corporation ("JLA") for a combination of cash, including financing to be arranged by the Company, and assumption of JLA debt. The Company believes that the value of the transaction is approximately $350.0 million. Subject to a financing contingency, the Company anticipates that the transaction will close in January 1999. NOTE 12-EXTRAORDINARY ITEM During fiscal 1998 the Company acquired $10.6 million of its 12% Notes at a discount. In addition the Company repaid another long-term borrowing at a premium. These transactions resulted in a net extraordinary gain of $239,000 net of taxes of $112,000. 99 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13-INDUSTRY SEGMENT INFORMATION AND MAJOR CUSTOMERS The Company operates in three principal industry segments - real estate finance, equipment leasing and energy. Segment data for the years ended September 30, 1998, 1997 and 1996 are as follows:
Year Ended September 30, ------------------------------------------ 1998 1997 1996 -------- -------- -------- (in thousands) Revenue: Real estate finance $ 62,856 $ 19,144 $ 7,171 Equipment leasing 13,561 7,162 4,466 Energy 6,734 5,608 5,157 Corporate 4,316 1,031 204 -------- -------- ------- $ 87,467 $ 32,945 $16,998 ======== ======== ======= Depreciation, Depletion and Amortization: Real estate finance $ 773 $ 36 $ 38 Equipment leasing 610 398 204 Energy 1,273 1,202 1,061 Corporate (15) (22) 65 -------- -------- ------- $ 2,641 $ 1,614 $ 1,368 ======== ======== ======= Operating Profit (Loss): Real estate finance $ 46,972 $ 16,546 $ 6,281 Equipment leasing 5,921 2,457 1,916 Energy 1,659 1,699 1,646 Corporate (13,812) (5,771) (2,490) -------- -------- ------- $ 40,740 $ 14,931 $ 7,353 ======== ======== ======= Identifiable Assets: Real estate finance $211,251 $ 92,287 $22,087 Equipment leasing 29,608 10,647 3,019 Energy 90,408 15,016 12,675 Corporate 95,180 77,169 6,178 -------- -------- ------- $426,447 $195,119 $43,959 ======== ======== ======= Capital Expenditures (excluding assets acquired in business acquisitions): Real estate finance $ 1,141 $ 59 $ 17 Equipment leasing 891 585 531 Energy 2,095 640 501 Corporate - 507 48 -------- -------- ------- $ 4,127 $ 1,791 $ 1,097 ======== ======== =======
100 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Operating profit (loss) represents total revenue less costs attributable thereto, including interest and provision for possible losses, and less depreciation, depletion and amortization, excluding general corporate expenses. The Company's natural gas is sold under contract to various purchasers. For the years ended September 30, 1998, 1997 and 1996, gas sales to two purchasers accounted for 35% and 14%, 29% and 12%, and 29% and 13% of the Company's total production revenues, respectively. In commercial mortgage loan acquisition and resolution, no revenues from a single borrower exceeded 10% of total revenues. In fiscal 1997, revenues from a single borrower approximated 20% of total revenues, while for fiscal 1996 revenues from a (different) single borrower approximated 24% of total revenues. NOTE 14-SUPPLEMENTAL OIL AND GAS INFORMATION Results of operations for oil and gas producing activities:
Year Ended September 30, ------------------------------------------ 1998 1997 1996 ---- ---- ---- (in thousands) Revenues................................. 4,682 $3,936 $3,421 Production costs......................... (2,022) (1,636) (1,421) Exploration expenses..................... (503) (187) (161) Depreciation, depletion, and amortization.......................... (809) (712) (781) Income taxes............................. (263) (197) (96) ------ ------ ------ Results of operations for producing activities.................. $1,085 $1,204 $ 962 ====== ====== ======
101 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitalized Costs Related to Oil and Gas Producing Activities The components of capitalized costs related to the Company's oil and gas producing activities (less impairment reserve of $20,000 in fiscal 1998, $28,000 in fiscal 1997 and $22,000 in fiscal 1996), are as follows:
September 30, ------------------------------------------ 1998 1997 1996 ---- ---- ---- (in thousands) Proved properties........................ $42,458 $23,254 $22,549 Unproved properties...................... 1,164 846 482 Pipelines, equipment and other interests............................. 7,645 2,445 2,540 ------- ------- ------- Total.................................... 51,267 26,545 25,571 Accumulated depreciation, depletion and amortization....................... (15,611) (15,145) (14,306) -------- ------- ------- Net capitalized costs................ $35,656 $11,400 $11,265 ======= ======= =======
Costs Incurred in Oil and Gas Producing Activities The costs incurred by the Company in its oil and gas activities during fiscal years 1998, 1997 and 1996 are as follows:
Year Ended September 30, ----------------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Property acquisition costs: Unproved properties....................... $ 378 $321 $ 2 Proved properties......................... 19,436 782 157 Exploration costs........................... 816 238 317 Development costs........................... 416 144 176
Oil and Gas Reserve Information (unaudited) The Company's estimates of net proved oil and gas reserves and the present value thereof have been verified by Wright & Company, Inc. in fiscal 1998 and by E.E. Templeton & Associates, Inc. in fiscal 1997 and 1996. Both are petroleum engineering firms. The Company did not estimate the value of its proven undeveloped reserves in fiscal 1997 and 1996. The Company's oil and gas reserves are located within the United States. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future net revenues and the timing of development expenditures. The reserve data presented represent estimates only and 102 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS should not be construed as being exact. In addition, the standardized measures of discounted future net cash flows may not represent the fair market value of the Company's oil and gas reserves or the present value of future cash flows of equivalent reserves, due to anticipated future changes in oil and gas prices and in production and development costs and other factors for which effects have not been provided. The standardized measure of discounted future net cash flows is information provided for the financial statement user as a common base for comparing oil and gas reserves of enterprises in the industry.
Gas Oil (mcf) (bbls) ---------- ------- Balance at September 30, 1995........................ 12,782,482 301,159 Purchase of reserves in-place........................ 293,602 8,880 Current additions.................................... 237,070 726 Sales of reserves in-place........................... (18,645) (1,885) Revision to previous estimates....................... 723,242 35,002 Production........................................... (1,165,477) (33,862) ---------- ------- Balance at September 30, 1996........................ 12,852,274 310,020 Purchase of reserves in-place........................ 1,903,853 45,150 Current additions.................................... 15,984 0 Sales of reserves in-place........................... (1,393) 0 Revision to previous estimates....................... 1,614,704 38,654 Production........................................... (1,227,887) (35,811) ---------- ------- Balance at September 30, 1997........................ 15,157,535 358,013 Purchase of reserves in-place........................ 74,894,968 194,270 Current additions.................................... 217,508 41,406 Sales of reserves in-place........................... (53,320) (2,523) Revision to previous estimates....................... 1,151,890 29,461 Production........................................... (1,485,008) (48,113) ---------- ------- Balance September 30, 1998........................... 89,883,573 572,514 ========== ======= Proved developed reserves at September 30, 1998................................. 49,868,113 572,514 September 30, 1997................................. 15,157,535 358,013 September 30, 1996................................. 12,852,274 310,020
103 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Presented below is the standardized measure of discounted future net cash flows and changes therein relating to proved oil and gas reserves. The estimated future production is priced at year-end prices. The resulting estimated future cash inflows are reduced by estimated future costs to develop and produce the proved reserves based on year-end cost levels. The future net cash flows are reduced to present value amounts by applying a 10% discount factor.
Year Ended September 30, ------------------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Future cash inflows............................ $240,922 $42,634 $ 34,516 Future production and development costs........................... (102,557) (21,585) (16,764) Future income tax expense...................... (14,278) (2,740) (2,732) --------- ------- -------- Future net cash flows.......................... 124,087 18,309 15,020 Less 10% annual discount for estimated timing of cash flows............... (80,313) (8,186) (6,671) ---------- ------- -------- Standardized measure of discounted future net cash flows........................ $ 43,774 $10,123 $ 8,349 ======== ======= ========
104 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the changes in the standardized measure of discounted future net cash flows from estimated production of proved oil and gas reserves after income taxes.
Year Ended September 30, -------------------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Balance, beginning of year...................... $10,123 $ 8,349 $7,810 Increase (decrease) in discounted future net cash flows: Sales and transfers of oil and gas net of related costs.......................... (2,822) (2,411) (1,928) Net changes in prices and production costs......................................... 171 512 1,392 Revisions of previous quantity estimates..................................... 597 2,483 697 Extensions, discoveries, and improved recovery less related costs................... 194 10 145 Purchases of reserves in-place.................. 34,935 1,474 242 Sales of reserves in-place, net of tax effect.................................... (30) (1) (26) Accretion of discount........................... 1,012 997 851 Net change in future income taxes............... (3,770) (14) (924) Other........................................... 3,364 (1,276) 90 ------- ------- ------ Balance, end of year............................ $43,774 $10,123 $8,349 ======= ======= ======
105 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - QUARTERLY RESULTS (unaudited)
Dec 31 March 31 June 30 Sept. 30 ------ -------- ------- -------- (in thousands except per share data) Year ended September 30, 1998: Revenues $15,080 $21,305 $25,130 $25,952 Costs and Expenses 9,354 12,111 13,013 12,249 -------- -------- ------- ------- Income before taxes and extraordinary item 5,726 9,194 12,117 13,703 Income taxes 1,775 2,875 3,750 4,968 -------- ------- ------- ------- Income before extraordinary item 3,951 6,319 8,367 8,735 Extraordinary item, gain on early extinguishment of debt, net of taxes - - - 239 ------- ------- ------- ------- Net income $ 3,951 $ 6,319 $ 8,367 $ 8,974 ======== ======= ======= ======= Net income per common share- Basic Income before extraordinary item $0.28 $0.44 $ 0.46 $ 0.44 Extraordinary item - - - 0.01 ----- ------ ----- ------ Net income per common share - basic $0.28 $0.44 $ 0.46 $ 0.45 ===== ===== ======= ======= Diluted Income before extraordinary item $0.27 $0.43 $ 0.45 $ 0.42 Extraordinary item - - - 0.01 ----- ------- ------- ------- Net income per common share - diluted $0.27 $0.43 $ 0.45 $ 0.43 ===== ======= ======= ======= Year ended September 30, 1997: Revenues $ 5,932 $ 6,843 $ 7,828 $12,342 Costs and Expenses 3,072 3,534 3,754 7,654 ------- ------- ------- ------- Income before taxes 2,860 3,309 4,074 4,688 Income taxes 575 775 1,144 1,486 ------- ------- ------- ------- Net Income $ 2,285 $ 2,534 $ 2,930 $ 3,202 ======= ======= ======= ======= Net income per common share - Basic $ 0.30 $ 0.24 $ 0.27 $ 0.24 ======= ======= ======= ======= Diluted $ 0.22 $ 0.18 $ 0.21 $ 0.22 ======= ======= ======= =======
106 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT The information required by this item will be set forth in Company's definitive proxy statement with respect to its 1999 annual meeting of stockholders, to be filed on or before January 29, 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 in the Proxy Statement, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item will be set forth in the Proxy Statement, and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form 10-K: 1. Financial Statements Report of Independent Certified Public Accountants Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 107 2. Financial Statement Schedules a. Inapplicable b. Schedule IV - Mortgage Loans on Real Estate All other schedules are not applicable or are omitted since either (i) the required information is not material or (ii) the information required is included in the consolidated financial statements and the Notes thereto.
3. Exhibit No. Description ----------- ----------- 2.1 Agreement and Plan of Merger among Tri-Star Financial Services, Inc., Frank Pellegrini, Resource Tri-Star Acquisition Corp. and the Registrant(1) 2.2 Agreement and Plan of Merger among Registrant, Atlas America, Inc., The Atlas Group, Inc. and certain shareholders of The Atlas Group, Inc.(2) 3.1 Restated Certificate of Incorporation of the Registrant.(3) 3.2 Bylaws of the Registrant, as amended.(3) 4.1 Indenture with respect to 12% Senior Notes due 2004 (including form of note).(4) 10.1 1984 Key Employee Stock Option Plan, as amended.(5) 10.2 1989 Key Employee Stock Option Plan, as amended.(5) 10.3 Employee Stock Ownership Plan.(6) 10.4 1997 Key Employee Stock Option Plan.(7) 10.5 1997 Stock Option Plan for Directors.(7) 10.6 1997 Non-Employee Director Deferred Stock and Defined Compensation Plan.(7) 10.7 Employment Agreement between Edward E. Cohen and Registrant(8) 10.8 Contribution Agreement between Resource Leasing, Inc. and Abraham Bernstein.(3) 10.9 Employment Agreement between Fidelity Leasing, Inc. and Abraham Bernstein.(3) 10.10 Employment Agreement between Fidelity Mortgage Funding, Inc. and Daniel G. Cohen.(8)
108
10.11 Loan Agreement between Registrant and KeyBank, N.A.(9) 10.12 Loan Agreement between Atlas and PNC Bank. 10.13 Loan Agreement between Fidelity Leasing, Inc. and First Union National Bank, as Agent. 11 Calculation of Basic and Diluted Earnings per Share. 12 Computation of Ratios 21 List of Subsidiaries. 23.1 Consent of Wright & Company, Inc. 23.2 Consent of E. E. Templeton & Associates, Inc. 27 Financial Data Schedule. (1) Filed previously as an Exhibit to the Company's Annual Report in Form 10-K for the year ended September 30, 1997. (2) Filed previously as an Exhibit to the Company's Current Report on Form 8-K for September 29, 1998. (3) Filed previously as an Exhibit to the Company's Registration Statement on Form S-1 (Registration No. 333-13905) and by this reference incorporated herein. (4) Filed previously as an Exhibit to the Company's Registration Statement on Form S-4 (Registration No. 333-40231) and by this reference incorporated herein. (5) Filed previously as an Exhibit to the Company's Registration Statement on Form S-8 May 2, 1996 and by this reference incorporated herein. (6) Filed previously as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1989 and by this reference incorporated herein. (7) Filed previously as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and by this reference incorporated herein. (8) Filed previously as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and by this reference incorporated herein. (9) Filed previously as an Exhibit to the Company's Annual report on Form 10-K for the year ended September 30, 1997 and by this reference incorporated herein.
109 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RESOURCE AMERICA, INC. (Registrant) December ___, 1998 By: /s/ Edward E. Cohen -------------------------------------------- Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of December ___, 1998. /s/ Edward E. Cohen Chairman of the Board and Chief Executive - - ------------------------- Officer EDWARD E. COHEN /s/ Daniel G. Cohen - - ------------------------- President, Chief Operating Officer and Director DANIEL G. COHEN /s/ Scott F. Schaeffer - - ------------------------- Vice Chairman of the Board and Executive Vice SCOTT F. SCHAEFFER President /s/ Michael L. Staines - - ------------------------- Senior Vice President and Director MICHAEL L. STAINES /s/ Carlos C. Campbell - - ------------------------- Director CARLOS C. CAMPBELL /s/ Andrew M. Lubin - - ------------------------- Director ANDREW M. LUBIN /s/ P. Sherrill Neff - - ------------------------- Director P. SHERRILL NEFF /s/ Alan D. Schrieber - - ------------------------- Director ALAN D. SCHRIEBER /s/ John S. White - - ------------------------- Director JOHN S. WHITE /s/ Steven J. Kessler - - ------------------------- Senior Vice President and Chief Financial STEVEN J. KESSLER Officer /s/ Nancy J. McGurk - - ------------------------- Vice President-Finance and Chief Accounting NANCY J. McGURK Officer 110 INDEX EXHIBIT
3. Exhibit No. Description ----------- ----------- 2.1 Agreement and Plan of Merger among Tri-Star Financial Services, Inc., Frank Pellegrini, Resource Tri-Star Acquisition Corp. and the Registrant(1) 2.2 Agreement and Plan of Merger among Registrant, Atlas America, Inc., The Atlas Group, Inc. and certain shareholders of The Atlas Group, Inc.(2) 3.1 Restated Certificate of Incorporation of the Registrant.(3) 3.2 Bylaws of the Registrant, as amended.(3) 4.1 Indenture with respect to 12% Senior Notes due 2004 (including form of note).(4) 10.1 1984 Key Employee Stock Option Plan, as amended.(5) 10.2 1989 Key Employee Stock Option Plan, as amended.(5) 10.3 Employee Stock Ownership Plan.(6) 10.4 1997 Key Employee Stock Option Plan.(7) 10.5 1997 Stock Option Plan for Directors.(7) 10.6 1997 Non-Employee Director Deferred Stock and Defined Compensation Plan.(7) 10.7 Employment Agreement between Edward E. Cohen and Registrant(8) 10.8 Contribution Agreement between Resource Leasing, Inc. and Abraham Bernstein.(3) 10.9 Employment Agreement between Fidelity Leasing, Inc. and Abraham Bernstein.(3) 10.10 Employment Agreement between Fidelity Mortgage Funding, Inc. and Daniel G. Cohen.(8) 10.11 Loan Agreement between Registrant and KeyBank, N.A.(9) 10.12 Loan Agreement between Atlas and PNC Bank. 10.13 Loan Agreement between Fidelity Leasing, Inc. and First Union National Bank, as Agent. 11 Calculation of Basic and Diluted Earnings per Share. 12 Computation of Ratios 21 List of Subsidiaries. 23.1 Consent of Wright & Company, Inc. 23.2 Consent of E. E. Templeton & Associates, Inc. 27 Financial Data Schedule. (1) Filed previously as an Exhibit to the Company's Annual Report in Form 10-K for the year ended September 30, 1997. (2) Filed previously as an Exhibit to the Company's Current Report on Form 8-K for September 29, 1998. (3) Filed previously as an Exhibit to the Company's Registration Statement on Form S-1 (Registration No. 333-13905) and by this reference incorporated herein. (4) Filed previously as an Exhibit to the Company's Registration Statement on Form S-4 Registration No. 333-40231) and by this reference incorporated herein. (5) Filed previously as an Exhibit to the Company's Registration Statement on Form S-8 May 2, 1996 and by this reference incorporated herein. (6) Filed previously as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1989 and by this reference incorporated herein. (7) Filed previously as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and by this reference incorporated herein. (8) Filed previously as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and by this reference incorporated herein. (9) Filed previously as an Exhibit to the Company's Annual report on Form 10-K for the year ended September 30, 1997 and by this reference incorporated herein.
SCHEDULE IV RESOURCE AMERICA, INC. & SUBSIDIARIES MORTGAGE LOANS ON REAL ESTATE September 30, 1998 (in thousands)
FINAL PERIODIC INTEREST MATURITY PAYMENT DESCRIPTION RATE DATE TERMS ----------- ---- ---- ----- FIRST MORTGAGES Hotel/Commercial Office, GA Fixed interest rate of 14% 12/31/15 (a) Hotel GA Fixed interest rate of 14% 12/1/02 (a) Hotel, NE Fixed interest rate of 14.5% 9/30/02 (a) Condominium units, NC Fixed interest rate of 8% 3/31/02 (a) Apartment bldg. PA Fixed interest rate of 14% 10/1/02 (a) Office bldg., PA Interest at 85% of Prime 9/30/14 (a) Apartment bldg., IL, 3 loans Fixed interest rate of 7.5% 9/30/02 (a) JUNIOR LIEN LOANS Apartment bldg., FL Fixed interest rate of 13% 7/1/00 (a) Office bldg., NC Fixed interest rate of 11.5% 12/31/11 (a) Apartment bldg. NJ, 2 loans Fixed interest rates of 11.25% 9/1/05 (a) and Prime plus 1% Apartment bldg., CN Fixed interest rate of 10.85% 9/1/05 (a) Apartment bldg., PA Fixed interest rate of 14.5% 12/31/02 (a) Apartment bldg., NJ Fixed interest rate of 9% 1/1/03 (a) Apartment bldg., NJ, 2 loans Fixed rates of 8% and 24% 10/31/08 (a) Apartment bldg., IL Fixed interest rate of 7.5% 4/30/03 (a) Office bldg. PA Federal Funds rate plus 2.875% 10/01/03 (a) Office bldg., PA 3 loans Fixed rates ranging from 6.85% 8/1/08 to 12% Office bldg., PA Fixed interest rate of 10.6% 2/07/01 (a) Office bldg., DC Interest rate of Prime plus 3% 6/1/00 (a) Office bldg., NJ, 3 loans Fixed interest rate of 9.75%% 2/7/01 (a) Office bldg., PA, 3 loans Rate ranging from 12% to 85% of 9/30/03 (a) the rate for $100,000 CD's Office bldg., PA 3 loans Fixed interest rate of 8% 1/1/02 (a) Apartment bldg. CN Fixed interest rate of 7.5% 7/1/03 (a) Apartment bldg., M Fixed interest rate of 10% 6/30/08 (a) Apartment bldg., PA, 2 loans Interest rates of 7% and 15% 12/17/02 (a) Apartment bldg., PA Fixed interest rate of 9% 12/31/02 (a) Apartment bldg., PA 31 loans Fixed interest rate of 12% 7/1/16 (a) Apartment bldg., PA 85% of 30 day $100,000 rate CD 10/31/98 plus 2.75% Apartment bldg., PA Fixed interest rate of 9.28% 11/1/22 Condominium Units, NC Fixed interest rate of 8.0% 3/31/02 (a) Office bldg., Washington, DC, Fixed interest rate of 12% and Two 11/30/98 (a) 2 loans thirds of the 30 day Treasury Rate Office bldg., PA Fixed interest rate of 9% 9/25/02 (a) Industrial bldg., Pasadena, CA 2.75% over the average cost of 5/1/01 (a) funds to FSLIC-insured savings and loan institutions Office bldg., Washington, DC Fixed interest rate of 15% 8/1/08 (a) Retail bldg., VA, 2 loans Fixed rates of 9.25% and 14.8% 12/1/02 (a) Retail bldg., VA Fixed interest rate of 9% 2/1/21 (a) Retail bldg., MN Fixed interest rate of 10% 12/31/14 (a) Retail bldg., WVA Fixed interest rate of 12% 12/31/16 (a) Retail bldg., CA Fixed interest rate of 9% 12/1/00 (a) Office/Retail bldg., PA Interest rate of 5% plus 90% of 7/1/02 (a) Prime Office Bldg., WVA Fixed interest rate of 8.5% 12/31/00 (a) Single family residential Fixed interest rates ranging from Various housing 304 loans 7.74% to 16.75% Note Receivable Fixed interest rate of 7.5% 12/31/27
[RESTUBBED TABLE]
FACE CARRYING SUBJECT TO PRIOR AMOUNT OF AMOUNT OF DELINQUENT DESCRIPTION LIENS MORTGAGES MORTGAGES INTEREST ----------- ----- --------- --------- -------- FIRST MORTGAGES Hotel/Commercial Office, GA $ -- $5,800 $6,284 -- Hotel GA -- 3,625 1,453 -- Hotel, NE -- 6,005 4,082 -- Condominium units, NC -- 1,670 1,724 49 Apartment bldg. PA -- 400 402 -- Office bldg., PA -- 6,000 3,754 -- Apartment bldg., IL, 3 loans -- 17,460 17,333 -- JUNIOR LIEN LOANS Apartment bldg., FL 2,096 4,100 1,214 -- Office bldg., NC 1,750 3,500 1,800 -- Apartment bldg. NJ, 2 loans 5,962 11,615 4,500 -- Apartment bldg., CN 1,800 7,520 3,918 -- Apartment bldg., PA 2,570 4,500 2,633 -- Apartment bldg., NJ 625 1,798 735 93 Apartment bldg., NJ, 2 loans 2,136 3,375 1,200 -- Apartment bldg., IL 10,000 24,083 10,580 -- Office bldg. PA 60,000 31,000 35,082 -- Office bldg., PA 3 loans 43,925 44,000 16,378 -- Office bldg., PA 840 5,400 817 -- Office bldg., DC 685 900 749 -- Office bldg., NJ, 3 loans 2,387 4,800 2,244 -- Office bldg., PA, 3 loans 2,213 3,116 1,312 -- Office bldg., PA 3 loans 17,784 40,644 13,576 -- Apartment bldg. CN 11,942 14,500 6,600 -- Apartment bldg., M 16,000 1,300 1,374 -- Apartment bldg., PA, 2 loans 1,000 1,454 880 -- Apartment bldg., PA 2,997 5,000 1,760 -- Apartment bldg., PA 31 loans 2,860 -- 1,081 -- Apartment bldg., PA 3,113 3,205 982 -- Apartment bldg., PA 2,478 3,155 809 -- Condominium Units, NC -- 3,550 3,564 13 Office bldg., Washington, DC, 6,548 13,283 6,889 -- 2 loans Office bldg., PA 1,750 1,150 570 -- Industrial bldg., Pasadena, CA 2,000 3,000 338 -- Office bldg., Washington, DC 80,684 100,971 20,041 -- Retail bldg., VA, 2 loans 34,960 45,000 8,358 -- Retail bldg., VA 1,413 3,961 671 -- Retail bldg., MN 2,088 1,776 602 -- Retail bldg., WVA 994 1,400 488 -- Retail bldg., CA 1,969 2,271 942 -- Office/Retail bldg., PA 2,611 3,400 1,299 -- Office Bldg., WVA 2,400 6,398 538 -- -------- -------- -------- ---- 332,580 446,085 189,556 155 Single family residential housing, 304 loans (d) 12,114 12,235 -- Note Receivable (d) 8,267 1,450 -- -------- -------- -------- ---- Balance at September 30, 1998 $332,580 $466,466 $203,241(c) $155 ======== ======== ======== ==== Reconciliation of the total carrying amount of real estate loans for the year follow: Balance at October 1, 1997 $ 89,216 Additions during the period: New mortgage loans $337,087 Accretion of discount 6,520 Additions of residential mortgage loans 13,685 Additions of existing loans 6,181 363,473 ------------------------- Deductions during the period: Collections of principal ( 76,915) Cost of mortgage old (172,533) (249,448) ------------------------- Balance at September 30, 1998 $203,241(c) ======== (a) All net cash flows from the property (b) Cost for Federal Income tax purposes equals $212,303 (c) Reconciliation shown without allowance for possible losses. (d) Not practical to determine.
EX-10 2 EXHIBIT 10.12 NINTH AMENDED AND RESTATED LOAN AGREEMENT Dated as of September 28, 1998 By and Among THE ATLAS GROUP, INC., ATLAS ENERGY CORPORATION, ATLAS RESOURCES, INC., TRANSATCO CORPORATION, ATLAS GAS MARKETING, INC., PENNSYLVANIA INDUSTRIAL ENERGY, INC., AIC, INC., ATLAS ENERGY GROUP, INC., MERCER GAS GATHERING, INC., AED INVESTMENTS, INC., And ARD INVESTMENTS, INC., as the Borrowers And PNC BANK, NATIONAL ASSOCIATION, as Agent And THE BANKS SIGNATORY HERETO NINTH AMENDED AND RESTATED LOAN AGREEMENT ----------------------------------------- TABLE OF CONTENTS ----------------- Page ---- SECTION 1. LOANS .......................................................... 2 1.1 REVOLVING CREDIT LOANS ........................................... 2 1.2 TERM LOAN ........................................................ 4 1.3 SEVEN-YEAR TERM LOAN ............................................. 5 1.4 DISCOUNTED FUTURE NET INCOME ..................................... 6 1.5 MANDATORY PREPAYMENTS ............................................ 7 1.6 INTEREST RATE OPTIONS, INTEREST PAYMENTS AND CERTAIN RELATED PAYMENTS PERTAINING TO THE LOANS ................................. 8 1.7 CAPITAL ADEQUACY REQUIREMENTS ....................................15 1.8 TIME, PLACE AND MANNER OF PAYMENTS ...............................16 1.9 LOAN ACCOUNT .....................................................16 1.10 LETTER OF CREDIT SUBFACILITY .....................................16 1.11 DEFINITIONS; CONSTRUCTION ........................................21 SECTION 2. REPRESENTATIONS AND WARRANTIES .................................28 2.1 EXISTENCE AND AUTHORITY 2.2 STOCK OWNERSHIP AND SUBSIDIARIES .................................28 2.3 RIGHTS, TITLES AND INTERESTS .....................................29 2.4 FINANCIAL STATEMENTS .............................................29 2.5 LITIGATION .......................................................30 2.6 VALIDITY OF AGREEMENT, NOTES, MORTGAGE, SECURITY AGREEMENT (PARTNERSHIPS), SECURITY AGREEMENT (NOTE), PLEDGE AGREEMENT, FINANCING STATEMENTS AND OTHER LOAN DOCUMENTS ....................30 2.7 PERMITS ..........................................................30 2.8 OPERATION OF WELLS AND THE PIPELINE ..............................31 2.9 PUBLIC UTILITY HOLDING COMPANY ...................................31 2.10 ERISA ............................................................31 2.11 REGULATION U .....................................................31 2.12 COMPLIANCE WITH LAW ..............................................31 2.13 TAXES ............................................................31 2.14 RELATIONSHIP OF BORROWER .........................................31 2.15 STATUS AS PRODUCERS OF GAS .......................................32 2.16 Year 2000 ........................................................32 2.17 ENVIRONMENTAL MATTERS ............................................32 2.18 INVESTMENT COMPANY ACT ...........................................32 SECTION 3. SECURITY. ......................................................32 3.1 MORTGAGE, SECURITY AGREEMENT (PARTNERSHIPS), SECURITY AGREEMENT (NOTE) AND PLEDGE AGREEMENT ......................................32 3.2 SET-OFF ..........................................................33 3.3 ADDITIONAL SECURITY ..............................................34 3.4 OPERATING ACCOUNTS ...............................................34 -i- SECTION 4. AFFIRMATIVE COVENANTS ..........................................34 4.1 FIRST LIEN UNDERTAKINGS ..........................................34 4.2 PROTECTION OF RIGHTS, TITLES AND INTERESTS .......................34 4.3 OPERATION AND MAINTENANCE ........................................34 4.4 PERMITS ..........................................................35 4.5 COMPLIANCE WITH LAW ..............................................35 4.6 STATUS AS PRODUCERS OF GAS .......................................35 4.7 EXISTENCE AND OWNERSHIP ..........................................35 4.8 REPORTS, CERTIFICATIONS AND OTHER INFORMATION ....................35 4.9 RECORDS AND ACCESS ...............................................36 4.10 PAYMENT OF TAXES AND MECHANICS' CLAIMS ...........................36 4.11 INSURANCE ........................................................37 4.12 DUTY TO PLUG .....................................................37 4.13 EXPENSES, FEES AND DISBURSEMENTS .................................37 4.14 ASSIGNED PAYMENTS ................................................37 4.15 NOTIFICATION .....................................................38 4.16 CURRENT RATIO ....................................................38 4.17 DEBT To EBITDA ...................................................38 4.18 FIXED CHARGE COVERAGE RATIO ......................................39 4.19 ADDITIONAL DOCUMENTS .............................................39 4.20 ENVIRONMENTAL MATTERS ............................................39 SECTION 5. NEGATIVE COVENANTS .............................................41 5.1 ALIENATION .......................................................41 5.2 ENCUMBRANCES .....................................................41 5.3 GUARANTY .........................................................42 5.4 DEBT .............................................................42 5.5 LOANS; INVESTMENTS ...............................................42 5.6 BUSINESS ACTIVITIES ..............................................42 5.7 CONSOLIDATION OR MERGER; CHANGE OF CONTROL .......................43 5.8 ACQUISITIONS .....................................................43 5.9 REDEMPTION .......................................................43 5.10 DISTRIBUTIONS ....................................................43 5.11 LEASES ...........................................................43 5.12 CAPITAL EXPENDITURES .............................................44 5.13 NEGATIVE PLEDGES .................................................44 SECTION 6. BORROWING REQUIREMENTS .........................................44 6.1 CONDITIONS To BORROWING ..........................................44 SECTION 7. DISBURSEMENT ...................................................45 7.1 PROCEDURE ........................................................45 7.2 USE OF PROCEEDS ..................................................46 7.3 CHARGING ACCOUNT .................................................46 SECTION 8. DEFAULTS .......................................................46 SECTION 9. REMEDIES .......................................................49 -ii- SECTION 10. MISCELLANEOUS .................................................49 10.1 WAIVER AND MODIFICATION ..........................................49 10.2 NOTICES ..........................................................49 10.3 CERTAIN TAXES ....................................................50 10.4 RIGHT TO CURE ....................................................50 10.5 VENUE AND JURISDICTION; WAIVER OF JURY TRIAL .....................50 10.6 APPLICABLE LAW ...................................................51 10.7 SEVERABILITY .....................................................51 10.8 SUCCESSORS AND ASSIGNS ...........................................51 10.9 NATURE AND SURVIVAL OF REPRESENTATIONS ...........................52 10.10 NUMBER AND GENDER ................................................52 10.11 JOINT AND SEVERAL LIABILITY ......................................52 10.12 TAX WITHHOLDING ..................................................53 10.13 HEADINGS .........................................................53 10.14 CONFIDENTIALITY ..................................................53 SECTION 11. AGREEMENT AMONG BANKS .........................................54 11.1 APPOINTMENT AND GRANT OF AUTHORITY ...............................54 11.2 RELIANCE By AGENT ON BANKS FOR FUNDING ...........................54 11.3 NON-RELIANCE ON AGENT ............................................54 11.4 RESPONSIBILITY OF AGENT AND OTHER MATTERS ........................55 11.5 ACTION ON INSTRUCTIONS ...........................................55 11.6 REQUIRED BANKS ...................................................56 11.7 ACTION UPON OCCURRENCE OF AN EVENT OF DEFAULT ....................56 11.8 INDEMNIFICATION ..................................................56 11.9 AGENT's RIGHTS AS A BANK .........................................56 11.10 PAYMENT To BANKS .................................................56 11.11 PRO RATA SHARING .................................................57 11.12 SUCCESSOR AGENT ..................................................57 11.13 AMENDMENTS AND WAIVERS ...........................................57 11.14 AGENT's FEES .....................................................58 11.15 FUNDING By BRANCH, SUBSIDIARY OR AFFILIATE .......................58 -iii- LIST OF EXHIBITS ---------------- EXHIBIT A - REVOLVING CREDIT NOTE EXHIBIT B - TERM NOTE EXHIBIT C - Seven-Year Term Note EXHIBIT D - Mortgages EXHIBIT E - Security Agreement (Partnership) EXHIBIT F - Security Agreement (Note) EXHIBIT G - Pledge Agreement EXHIBIT H - Compliance Certificate of Financial Statement EXHIBIT I - Assignment and Assumption Agreement LIST OF SCHEDULES ----------------- SCHEDULE 2.2 - Ownership/Subsidiaries SCHEDULE 2.5 - Litigation ANNEX I - Interest Rate Margins - iv - NINTH AMENDED AND RESTATED LOAN AGREEMENT ----------------------------------------- This Agreement dated as of this 28th day of September, 1998, and made and entered into by and among ATLAS ENERGY GROUP, INC., an Ohio corporation ("AEG"), ATLAS RESOURCES, INC., a Pennsylvania corporation ("ARI"), TRANSATCO CORPORATION, an Ohio corporation, ATLAS ENERGY CORPORATION, an Ohio corporation, MERCER GAS GATHERING, INC., a Pennsylvania corporation, ATLAS GAS MARKETING, INC., a Pennsylvania corporation, PENNSYLVANIA INDUSTRIAL ENERGY, INC., a Pennsylvania corporation, THE ATLAS GROUP, INC. (f/k/a "AEG Holdings, Inc."), a Pennsylvania corporation, AED INVESTMENTS, INC., a Delaware corporation, ARD INVESTMENTS, INC., a Delaware corporation, and AIC, INC., a Delaware corporation, having offices and places of business at 311 Rouser Road, Coraopolis, Allegheny County, Pennsylvania 15108 (hereinafter sometimes referred to collectively and individually as the "Borrower") and PNC BANK, NATIONAL ASSOCIATION, a national banking association having an office at One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Allegheny County, Pennsylvania 15222 ("PNC") in its capacity as the initial bank hereunder (together with any other financial institutions that hereafter become a Bank hereunder in accordance with Section 10.8 below, the "Banks", and each individually, a "Bank" and PNC BANK, NATIONAL ASSOCIATION, in its capacity as agent for the Banks (in such capacity, the "Agent"). WITNESSETH: WHEREAS, pursuant to an Eighth Amended and Restated Loan Agreement dated as of July 31, 1995 (the Eighth Amended and Restated Loan Agreement is hereinafter referred to as the "Original Loan Agreement"), as amended by an Amendment dated as of December 1, 1997, and certain letter agreements among Borrower and PNC (the Original Loan Agreement, as amended, the "Existing Loan Agreement") PNC agreed to lend to Borrower certain amounts; and WHEREAS, the Borrower and PNC, as the initial Bank hereunder, wish to, inter alia, (i) continue the loans made pursuant to the Existing Loan Agreement, (ii) provide for the joinder of additional "Banks" as lenders with respect to such loans, and (iii) appoint PNC as Agent for such Banks now or hereafter party hereto; and WHEREAS, the Borrower, the Banks and the Agent desire to amend and restate the Existing Loan Agreement as herein set forth. NOW, THEREFORE, in consideration of the mutual covenants contained herein, and with the intent to be legally bound hereby, the parties hereto hereby agree that the Existing Loan Agreement is hereby amended and restated as follows: SECTION 1. LOANS. - - ----------------- 1.1 Revolving Credit Loans. (a) Credit. Subject to the terms and conditions hereof (including but not limited to the conditions contained in Section 7.1 hereof), and relying on the representations and warranties herein contained, the Banks agree to, and shall be obligated to, lend to Borrower, from time to time and upon request of Borrower as provided in Section 7.1, during the period (the "Revolving Credit Period") commencing on the date hereof and ending on September 28, 2001 (the "Termination Date"), an amount or amounts (the "Revolving Credit") not exceeding in the aggregate at any one time outstanding the lesser of (i) FORTY MILLION ($40,000,000) DOLLARS or (ii) the then current Collateral Value (as such term is defined in Section 1.5 hereof), less in each case the sum of (x) the aggregate Stated Amounts of outstanding Letters of Credit, (y) the aggregate amount of unreimbursed Draws under the Letters of Credit and (z) the aggregate outstanding principal amounts of the Term Notes; provided, however, that notwithstanding the foregoing provisions, the aggregate principal amount of advances outstanding under the Revolving Credit shall not exceed TWENTY MILLION ($20,000,000) DOLLARS at any time from the date of this Agreement until the next redetermination of the Collateral Value by Agent pursuant to Section 1.5(iii) below. Each Bank agrees, for itself only, and subject to the terms and conditions of this Agreement, to make revolving credit loans to the Borrower from time to time not to exceed an aggregate principal amount at any one time outstanding equal to the amount of its Commitment Percentage of the Revolving Credit. For the purposes of this Agreement, the term "Commitment Percentage(s)" shall mean, with respect to each Bank, its percentage commitment of the Revolving Credit, the Term Credit and the Seven-Year Term Credit which shall be the percentage initially set forth opposite its name on the signature page hereto signed by such Bank, and thereafter as shown on the most recent Assignment and Assumption Agreement. The term "Ratable Share" shall mean the proportion that a Bank's Commitment Percentage of the Revolving Credit bears to the total Revolving Credit. The obligation of the Borrower to repay the aggregate unpaid principal amount of the advances to the Borrower under the Revolving Credit (each such advance under the Revolving Credit, a "Revolving Credit Loan" and collectively the "Revolving Credit Loans") by each Bank, together with interest thereon, shall be evidenced by one or more revolving credit notes executed in favor of each Bank in the maximum amount of that Bank's Commitment Percentage of the Revolving Credit and substantially in the form of Exhibit "A" attached hereto and made a part hereof with appropriate insertions (each, a "Revolving Credit Note" and collectively, the "Revolving Credit Notes"). Notwithstanding the aggregate principal amount of the Revolving Credit Notes as stated on the faces thereof in the amount of FORTY MILLION ($40,000,000) DOLLARS, the actual principal amount due from the Borrower to each Bank on account of such Bank's Revolving Credit Note, as of any date of computation, shall be the sum of all advances then and theretofore made on account thereof by such Bank less all payments of principal actually received by such Bank in collected funds during the same period all as shown on such Bank's Loan Account established pursuant to Section 1.9 hereof. During the Revolving Credit Period, Borrower may borrow, repay and reborrow funds under the Revolving Credit, provided, however, that at no time shall the aggregate unpaid principal balance outstanding under the Revolving Credit Notes exceed the lesser of (i) FORTY MILLION ($40,000,000) DOLLARS or (ii) the Collateral Value, less in each -2- case the sum of (x) the aggregate Stated Amounts of outstanding Letters of Credit, (y) the aggregate amount of unreimbursed Draws under the Letters of Credit and (z) the aggregate outstanding principal amounts of the Term Notes. The Borrower may from time to time repay the Revolving Credit Loans outstanding upon compliance with the terms of this Subsection 1.1 (a) and Subsection 1.6(f) hereof. The Borrower shall not be permitted to repay any Euro-Rate Portion of the Revolving Credit Loans other than at the end of the relevant Euro-Rate Interest Period, unless such payment is accompanied by the prepayment premium provided for in Subsection 1.6(f). Except as set forth in the preceding sentence and so long as each repayment is in a minimum amount of FIFTY THOUSAND ($50,000) DOLLARS or the outstanding principal balances of, and unpaid and accrued interest on, the Revolving Credit Notes, whichever is less, the Borrower, upon proper notice as provided in Subsection 1.6(f), may repay, without premium or penalty, (i) any Base Rate Portion of the Revolving Credit Loans at any time, and (ii) any Euro-Rate Portion of the Revolving Credit Loans at the end of the Euro-Rate Interest Period therefor. (b) Interest. The principal balance outstanding under each Revolving Credit Note shall bear interest, on the actual unpaid principal amount thereof from time to time outstanding, from the date thereof until payment in full, at the rates of interest set forth in Section 1.6. The Borrower shall pay accrued interest on the unpaid principal balance of each Revolving Credit Note in arrears (i) with respect to each Base Rate Portion, at the Adjusted Base Rate (A) on the last Business Day of each March, June, September and December during the Revolving Credit Period, (B) at maturity, whether by acceleration or otherwise, of such Revolving Credit Note, and (C) after maturity, on demand until paid in full, and (ii) with respect to each Euro-Rate Portion, at the Adjusted Euro-Rate (A) on the last day of each Euro-Rate Interest Period (provided, however, if the Euro-Rate Interest Period chosen for a Euro-Rate Portion exceeds three (3) months, interest on that Euro-Rate Portion shall be due and payable every three (3) months during such Euro-Rate Interest Period and on the last day of such Euro-Rate Interest Period), (B) at maturity, whether by acceleration or otherwise, of such Revolving Credit Note, and (C) after maturity, on demand until paid in full. (c) Repayment. The entire principal balance outstanding under the Revolving Credit Notes, and all unpaid and accrued interest thereon on the Termination Date, shall be due and payable on such date. (d) Commitment Fee; Voluntary Reductions. During and for the Revolving Credit Period, Borrower shall pay to the Agent for the ratable account of each Bank a commitment fee ("Commitment Fee") computed on the actual number of days elapsed on the basis of a 360 day year and at the Commitment Fee Rate per annum on the average daily difference between (i) the lesser of (x) Forty Million ($40,000,000) Dollars and (y) the then Current Collateral Value and (ii) the sum of (w) the aggregate principal balances outstanding under the Revolving Credit Notes plus (x) the aggregate Stated Amount of Letters of Credit outstanding plus (y) the aggregate amount of unreimbursed Draws under the Letters of Credit plus (z) the aggregate principal balances outstanding under the Term Notes. The Commitment Fee shall be due and payable quarter-annually beginning on the last Business Day of September, 1998 and on the last Business Day of each December, March, June and September thereafter and on the Termination Date. For the purposes of this section, the term "Commitment Fee Rate" shall mean a rate per annurn equal to (i) thirty-seven and five-tenths (37.5) basis points (.375%) if the then current Utilization Rate is less than 55%, and (ii) fifty (50) basis points (.5%) if the then current Utilization Rate is equal to or greater than 55%; provided, however, that in the event the Term Loans are repaid in full by the Borrower on or before the -3- sixtieth (60th) day from the date of this Agreement, the Commitment Fee Rate shall thereafter equal thirty-seven and five-tenths (37.5) basis points (.375%), notwithstanding the foregoing provisions. To the extent that the Borrower has availability under the Revolving Credit, as it may be reduced pursuant to Section 1.1(a), the Borrower may, by written notice to the Agent at least ten (10) Business Days prior to the date on which such reduction is to become effective, notify the Agent that the Borrower desires to reduce permanently all or a portion of the Revolving Credit available to it [provided, however, such reduction shall be in the amount of One Million ($1,000,000) Dollars or an integral multiple thereof] and thereafter the Banks shall have no obligation whatsoever to advance any funds (or to issue any Letters of Credit) hereunder to Borrower for the portion of the Revolving Credit that has been terminated; further, the Commitment Fee for that terminated portion shall not be payable for any period of time after such termination becomes effective. 1.2 Term Loan. (a) Term Credit. Subject to the terms and conditions hereof (including but not limited to the conditions contained in Section 7.1 hereof), and relying on the representations and warranties herein contained, the Banks agree to make term loans to the Borrower in an aggregate principal amount equal to SEVEN MILLION ($7,000,000) DOLLARS (the "Term Credit"); provided, that each Bank's obligation to advance loans hereunder shall not exceed such Bank's Commitment Percentage of the Term Credit. The loans (each, a "Term Loan" and collectively, the "Term Loans") under the Term Credit shall be evidenced by one or more term notes executed in favor of each Bank in the maximum amount of that Bank's Commitment Percentage of the Term Credit and substantially in the form of Exhibit "B" attached hereto and made a part hereof with appropriate insertions (each, a "Term Note" and collectively, the "Term Notes"). (b) Interest. The principal balance under each Term Note shall bear interest, on the actual unpaid principal amount thereof from time to time outstanding, from the date thereof until payment in full, at the rates of interest set forth in Section 1.6. The Borrower shall pay accrued interest on the unpaid principal balance of each Term Note in arrears (i) with respect to each Base Rate Portion, at the Adjusted Base Rate (A) on the last Business Day of each March, June, September and December during the term thereof, (B) at maturity, whether by acceleration or otherwise, of such Term Note, and (C) after maturity, on demand until paid in full, and (ii) with respect to each Euro-Rate Portion, at the Adjusted Euro-Rate (A) on the last day of each Euro-Rate Interest Period (provided, however, if the Euro-Rate Interest Period chosen for a Euro-Rate Portion exceeds three (3) months, interest on that Euro-Rate Portion shall be due and payable every three (3) months during such Euro-Rate Interest Period and on the last day of such Euro-Rate Interest Period), (B) at maturity, whether by acceleration or otherwise, of such Term Note, and (C) after maturity, on demand until paid in full. (c) Repayment. The aggregate principal balances outstanding under the Term Notes, and all unpaid and accrued interest thereon, is to be repaid in twenty (20) consecutive quarterly installments, in an amount equal to all unpaid and accrued interest plus $350,000, beginning on the last day of December, 1998, and thereafter on the last day of each December, March, June and September until repaid in full; provided, however, that notwithstanding anything to the contrary herein contained, the entire principal balance -4- outstanding under the Term Notes, and all unpaid and accrued interest thereon, on September 30, 2003 shall be due and payable on such date. (d) Prepayment. The Borrower may from time to time prepay the Term Loan outstanding upon compliance with the terms of this Subsection 1.2(d) and Subsection 1.6(f) hereof. The Borrower shall not be permitted to repay any Euro-Rate Portion of the Term Loan other than at the end of the relevant Euro-Rate Interest Period, unless such prepayment is accompanied by the prepayment premium provided for in Subsection 1.6(f). Except as set forth in the preceding sentence and so long as each prepayment is in a minimum amount of FIFTY THOUSAND ($50,000) DOLLARS or the aggregate outstanding principal balances of the Term Notes, whichever is less, plus the accrued and unpaid interest on the principal amounts prepaid, accrued to the prepayment date, the Borrower, upon proper notice as provided in Subsection 1.6(f), may prepay, without premium or penalty, (i) any Base Rate Portion of the Term Loan at any time, and (ii) any Euro-Rate Portion of the Term Loan at the end of the Euro-Rate Interest Period therefor. Each partial prepayment on the Term Loan shall be applied in payment of (x) the Portions of the Term Loan as the Borrower may select, and (y) the last amounts of principal to be paid under the Term Notes. 1.3 Seven-Year Term Loan. (a) Seven-Year Term Credit. Subject to the terms and conditions hereof (including but not limited to the conditions contained in Section 7.1 hereof), and relying on the representations and warranties herein contained, the Banks agree to continue to have on loan to Borrower SEVEN HUNDRED TWENTY SEVEN THOUSAND THREE HUNDRED EIGHTY and 97/100 ($727,380.97) DOLLARS (the "Seven-Year Term Credit"). The loan (the "Seven-Year Term Loan") under the Seven-Year Term Credit, which was in the original principal amount of $1,300,000, shall be evidenced by one or more notes executed in favor of each Bank in the maximum amount of that Bank's Commitment Percentage of the Seven-Year Term Credit and substantially in the form of Exhibit "C" attached hereto and made a part hereof (each, a "Seven-Year Term Note" and collectively, the "Seven-Year Term Notes"). (b) Interest. The principal balance under each Seven-Year Term Note has borne, and will continue to bear interest, on the actual unpaid principal amount thereof from time to time outstanding, from the date thereof until payment in full, at the rates of interest set forth in Section 1.6. The Borrower shall pay accrued interest on the unpaid principal balance of each Seven-Year Term Note in arrears (i) with respect to each Base Rate Portion, at the Adjusted Base Rate (A) on the last Business Day of each month during the term thereof, (B) at maturity, whether by acceleration or otherwise, of such Seven-Year Term Note, and (C) after maturity, on demand until paid in full, and (ii) with respect to each Euro-Rate Portion, at the Adjusted Euro-Rate (A) on the last day of each Euro-Rate Interest Period (provided, however, if the Euro-Rate Interest Period chosen for a Euro-Rate Portion exceeds three (3) months, interest on that Euro-Rate Portion shall be due and payable every three (3) months during such Euro-Rate Interest Period and on the last day of such Euro-Rate Interest Period), (B) at maturity, whether by acceleration or otherwise, of such Seven-Year Term Note, and (C) after maturity, on demand until paid in full. -5- In the event that Borrower elects to have the Seven-year Term Loan bear interest at a Fixed Rate Option as provided in Subsection 1.6(e) below, the Borrower shall pay accrued interest on the unpaid principal balance of each Seven-Year Term Note in arrears at the applicable Fixed Rate (A) on the last Business Day of each month during the remaining term thereof, (B) at maturity, whether by acceleration or otherwise, of such Seven-Year Term Note, and (C) after maturity, on demand until paid in full. (c) Repayment. (i) The aggregate principal balances outstanding under the Seven-Year Term Notes, and all unpaid and accrued interest thereon, was to be repaid in eighty-four (84) consecutive monthly installments in amounts equal to all unpaid and accrued interest plus the Seven-Year Term Loan Payment Amount [as such term is defined in clause (ii) below], the first such payment having been due on the first day of September, 1995 and thereafter on the first day each month until repaid in full; provided, however, that notwithstanding anything to the contrary herein contained, the entire aggregate principal balances outstanding under the Seven-Year Term Notes, and all unpaid and accrued interest thereon, on the first day of August, 2002 shall be due and payable on such date. (ii) For the purposes of this Section 1.3(c), the term "Seven-Year Term Loan Payment Amount" shall mean (a) FIFTEEN THOUSAND FOUR HUNDRED SEVENTY-SIX AND 19/100 ($15,476.19) DOLLARS prior to the Fixed Rate Effective Date [as such term is defined in Subsection 1.6(e) below] with respect to any election by Borrower to have the Seven-Year Term Loan bear interest at the Adjusted Amortization Fixed Rate, and (b) thereafter, an amount equal to the quotient (rounded to the nearest dollar) of (x) the outstanding principal balance of the Seven-Year Term Loan as of such Fixed Rate Effective Date divided by (y) the number of months included in the period from and including the month after such Fixed Rate Effective Date to and including August, 2005. (d) Prepayment. The Borrower may from time to time prepay the Seven-Year Term Loan outstanding upon compliance with the terms of this Subsection 1.3(d) and Subsection 1.6(f) hereof. The Borrower shall not be permitted to repay any Euro-Rate Portion of the Seven-Year Term Loan other than at the end of the relevant Euro-Rate Interest Period, or to repay any Fixed Rate Portion of the Seven-Year Term Loan other than at the maturity thereof, unless such prepayment is accompanied by the prepayment premium provided for in Subsection 1.6(f). Except as set forth in the preceding sentence with respect to prepayments of any Euro-Rate Portion of the Seven-Year Term Loan, and so long as each prepayment is in a minimum amount of FIFTY THOUSAND ($50,000) DOLLARS or the aggregate outstanding principal balances of the Seven-Year Term Notes, whichever is less, plus the accrued and unpaid interest on the principal amounts prepaid, accrued to the prepayment date, the Borrower, upon proper notice as provided in Subsection 11.6(f) may prepay, without premium or penalty, (i) any Base Rate Portion of the Seven-Year Term Loan at any time, and (ii) any Euro-Rate Portion of the Seven-Year Term Loan at the end of the Euro-Rate Interest Period therefor. Each partial prepayment on the Seven-Year Term Loan shall be applied in payment of (x) the Portion of the Seven-Year Term Loan as the Borrower may select, and (y) the last amounts of principal to be paid under the Seven-Year Term Notes. 1.4 Discounted Future Net Income. Promptly after September 30, 1998 and September 30 of each year thereafter, and in any event prior to the thirty-first (31st) day of December of each year, the Borrower shall furnish to the Agent such information as the Agent may request in order to enable the Agent to prepare, or cause to be prepared, at Borrower's sole cost and expense, reports in form and substance and based upon assumptions satisfactory to the Agent, which reports shall be dated as of January of such year and shall set forth (i) the remaining proven and producing gas and oil (as defined in Section 1.11 hereof) reserves attributable to each of the wells (the "Wells") in which the Borrower now or hereafter has an interest, whether directly or indirectly, as an owner of a working interest, royalty or overriding royalty, as a general or limited partner of a -6- partnership, as a co-venturer of a joint venture or otherwise, and a projection of the rate of gas and oil production from the Wells as well as a projection of the total future net operating income payable to the Borrower with respect thereto for a thirty (30) year period ("Future Net Income") and (ii) projected fees, revenues and proceeds payable to Borrower and derived from, in connection with and/or relating to (x) the transportation, compression and/or sale of gas transported through pipeline in which the Borrower now or hereafter has an interest, (y) the operation by Borrower of gas and oil wells and (z) the management and administration by Borrower of any partnerships, in each case as of such dates. In addition, at any time and from time to time upon request of Agent, the Borrower shall furnish to the Agent such information as the Agent may request in order to enable the Agent to prepare, or cause to be prepared, at Borrowers sole cost and expense if requested by Agent after the occurrence of a default under Section 8 hereof, interim reports in form and substance and based upon assumptions satisfactory to the Bank, which reports shall be dated as of the last day of the month preceding the month in which Agent makes the request and shall set forth the remaining proven and producing gas and oil reserves attributable to the Wells, and a projection of the rate of gas and oil production from the Wells as well as a projection of the Future Net Income therefrom, as of such dates. After the preparation of such report(s) [Engineering Report(s)], the Agent shall make a determination, as set forth in the following paragraph, of the Discounted Future Net Income as of such dates. For the purpose of this Agreement, the "Discounted Future Net Income" shall be (i) an amount based upon the remaining proven and producing gas and oil reserves attributable to the Wells and the Partnerships (as such term is defined below in this paragraph) in which the Bank has valid and perfected first liens and security interests free and clear of all other encumbrances and improvements, as set forth in the Engineering Reports and determined by Agent in accordance with its usual and customary engineering practices and methods and economic parameters plus (ii) an amount determined by Agent in its sole discretion and based upon the actual and/or expected fees, revenues and proceeds in which the Agent has valid and perfected first liens and security interests, paid and payable to Borrower and derived from, in connection with and/or relating to (x) the transportation, compression and/or sale of gas transported through the gathering lines (herein referred to collectively and individually as the "Pipeline") described in the Mortgage (as such term is defined in Section 3.1 hereof), (y) the operation by Borrower of gas and oil wells and (z) the management and administration by Borrower of any partnerships. The Agent shall determine in its sole discretion whether any oil and gas reserves, revenues and proceeds are encumbered or impaired in favor of others and the Agent may conclude that oil and gas reserves in which the Borrower does not have a direct interest as the owner of a working interest, royalty or overriding royalty are encumbered or impaired even though such oil and gas reserves are not subject to any liens or security interests; as an example, and without limiting the Agent's right to make such a determination in other instances, the Agent may conclude that oil and gas reserves owned by a partnership or joint venture (hereinafter referred to individually as a "Partnership" and collectively as "Partnerships") in which the Borrower is a partner or co-venturer are impaired if such Partnership suffers any loss or incurs any liability other than reasonable charges of trade creditors incurred and paid in the normal course of business. 1.5 (i) Mandatory Prepayments. In the event that the total of the aggregate principal balances outstanding under the Revolving Credit Notes plus the aggregate principal balances outstanding under the Term Notes plus the aggregate Stated Amounts of the Letters of Credit outstanding (the total of such amounts is herein referred to as the "Aggregate Outstandings"), shall, at any time, be in excess of the then current Collateral Value (as such -7- term is defined in clause (ii) below) (the difference between such amounts shall be referred to herein as the "Deficiency Amount"), the Borrower shall (x) within ninety (90) days after such occurrence, make a payment first on the Term Notes [such payment to be applied in the manner set forth in Section 1.2(d)], and then on the Revolving Credit Notes, in an aggregate amount equal to at least one-half (1/2) of the Deficiency Amount (plus interest on such amount accrued to the date of payment) and (y) within one hundred eighty (180) days after such occurrence, make a payment first on the Term Notes [such payment to be applied in the manner set forth in Section 1.2(d)], and then on the Revolving Credit Notes, in an aggregate amount equal to the remaining amount of the Deficiency Amount (plus interest on such amount accrued to the date of payment) such that, after giving effect to such payment, the Aggregate Outstandings shall not exceed the Collateral Value. (ii) "Collateral Value" Definition. For the purposes of this Agreement, the term "Collateral Value" shall mean the amount of indebtedness for borrowed money that the Agent shall determine in its reasonable judgment and in accordance with its customary standards can be supported by the Discounted Future Net Income, as such amount is determined pursuant to Section 1.4 above; provided, that from the date hereof until the next determination of the Collateral Value pursuant to clause (iii) below, the Collateral Value shall be Twenty-Seven Million ($27,000,000) Dollars. (iii) "Collateral Value" Redetermination. The Agent shall redetermine the Collateral Value annually based upon the Discounted Future Net Income determination made pursuant to Section 1.4 above; provided, however, that (x) the Agent shall also redetermine the Collateral Value upon the request of Borrower one additional time per year thereafter (in addition to the annual redetermination provided for above), (y) the Agent may, at its option, make one additional redetermination of the Collateral Value each year and (z) the Agent may redetermine the Collateral Value at any time after the occurrence of a default under Section 8 hereof. 1.6 Interest Rate Options, Interest Payments and Certain Related Payments Pertaining to the Loans. (a) Interest. Each of the Revolving Credit Notes, the Seven-Year Term Notes and the Term Notes (hereinafter referred to collectively as the "Notes" and individually as a "Note") shall bear interest, on the actual unpaid principal amount thereof from time to time outstanding, from the date thereof until payment in full, at the rates of interest set forth in this Section 1.6. The Borrower may call the Agent to receive an indication of the rates then in effect, but it is acknowledged that any such projection shall not be binding on the Banks nor affect the rate of interest which thereafter is actually in effect when the election is made. The Borrower shall pay accrued interest on the unpaid principal balance of each Note in arrears as set forth in Subsection 1.1(b), Subsection 1.2(b) or Subsection 1.3(b), as the case maybe. If at any time the designated rate applicable to the Revolving Credit Loans, the Seven-Year Term Loan, or the Term Loan, as the case may be, made by any Bank exceeds such Bank's highest lawful rate, the rate of interest on the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, shall be limited to such Bank's highest lawful rate. (b) Interest Rate Options. The unpaid principal amount of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan then outstanding shall bear interest, for each day until due, at one or more rates selected, at any time or from time to time, by the Borrower from among the Options set forth below subject to the provisions of Subsections -8- 1.6(c), 1.6(d) and 1.6(e) below; it being understood that, subject to the provisions of this Agreement, the Borrower may select different Options, subject to the provisions of Subsections 1.6(c), 1.6(d) and 1.6(e) below, to apply simultaneously to different Portions of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, and may select different Euro-Rate Interest Periods to apply simultaneously to different Portions of the Euro-Rate Portions of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be. (i) Base Rate Option: A fluctuating rate per annum (computed upon the basis of a year of 365/366 days, and the actual number of days elapsed) equal to (A) the sum of (I) the Base Rate, plus (II) the Applicable Base Rate Margin, with respect to the Revolving Credit Loans outstanding, (B) the sum of (I) the Base Rate, plus (II) the Applicable Base Rate Margin, plus (III) twelve and five-tenths (12.5) basis points (.125%) per annum, with respect to the Term Loan outstanding, and (C) the sum of (I) the Base Rate, plus (II) fifty (50) basis points (.5%) per annum, with respect to the Seven-Year Term Loan outstanding. The foregoing rate shall be adjusted automatically from time to time upon each change in the Base Rate. (ii) Euro-Rate Option: A rate per annum (computed upon the basis of a year of 360 days and the actual number of days elapsed) equal to (A) the sum of (I) the Euro-Rate, plus (II) the Applicable Euro-Rate Margin, with respect to the Revolving Credit Loans outstanding, (B) the sum of (I) the Euro-Rate, plus (II) the applicable Euro-Rate Margin, plus (III) twelve and five-tenths (12.5) basis points (.125%) per annum with respect to the Term Loan outstanding. and (C) the sum of (I) the Euro-Rate, plus (II) two hundred twenty-five (225) basis points (2.25%) per annum with respect to the Seven-Year Term Loan outstanding. (iii) Fixed Rate Option. The rate of interest (computed upon the basis of a year of 360 days and the actual number of days elapsed) on all amounts borrowed and outstanding under the Seven-Year Term Loan under this Option shall be an amount equal to the sum of (a) the Banks' fully-absorbed cost of funds (as determined by the Banks in accordance with their respective customary practices, which determination shall be conclusive and binding on the Borrower) plus (b) the Applicable Fixed Rate Margin as specified by Borrower in accordance with Subsection 1.6(e) below. (c) Euro-Rate Interest Periods, Limitations on Elections. At any time when the Borrower shall select, convert to or renew the Euro-Rate Option to apply to all or any Portion of the outstanding Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, it shall fix one or more periods during which such Option shall apply, such periods to be (x) one (1) month if the Borrower selects the Euro-Rate Option during the Syndications Period and (ii) one (1), two (2), three (3), or six (6) months if the Borrower selects the Euro-Rate Option after the Syndications Period has ended, in each case commencing on the borrowing, conversion or renewal date. All of the foregoing, however, is subject to the following: (i) any Euro-Rate Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next Business Day unless such Business Day falls in the succeeding calendar month in which case such Euro-Rate Interest Period shall end on the next preceding Business Day; (ii) any Euro-Rate Interest Period which begins on the last day of a calendar month or on a day for which there is no numerically corresponding day in the subsequent calendar month during which such Euro-Rate Interest Period is to end shall end on the last Business Day of such subsequent month; and -9- (iii) in the case of the renewal of a Euro-Rate Option at the end of a Euro-Rate Interest Period, the first day of the new Euro-Rate Interest Period shall be the last day of the preceding Euro-Rate Interest Period, without duplication in payment of interest for such day. Elections by the Borrower of the Euro-Rate Option shall be subject to the following further limitations: (i) The Euro-Rate Portion for each Euro-Rate Interest Period shall be in an aggregate principal amount of $500,000 or more; provided, however, that each incremental unit in excess of $500,000 shall be $100,000 or an integral multiple thereof; (ii) No Euro-Rate Interest Period may be elected with regard to amounts outstanding under the Revolving Credit Note which Interest Period would end after the Termination Date; (iii) No Euro-Rate Interest Period may be elected with regard to amounts outstanding under the Term Note or the Seven-Year Term Note which Euro-Rate Interest Period would end after the then last scheduled principal payment of the Term Loan or the Seven-Year Term Note (as the case may be); (iv) The Borrower shall maintain a Base Rate Portion, or must schedule the expiration of Euro-Rate Interest Periods with sufficient principal portions, or must cause the existence of a combination of a Base Rate Portion plus expirations of Euro-Rate Interest Periods with sufficient principal portions, equal to the next scheduled principal payment of the Term Loan and the Seven-Year Term Loan; (v) Upon the occurrence of a default set forth in items A or B of Section 8 hereof, or upon the declaration of default pursuant to items C through and including L of Section 8 hereof, the ability of the Borrower to elect the Euro-Rate Option shall cease; and (vi) At no time may there be more than ten (10) Euro-Rate Interest Periods in effect. (d) Election, Conversion or Renewal of Euro-Rate and Base Rate Interest Rate Options. Elections of or conversions to the Base Rate Option shall continue in effect until converted as hereinafter provided. Elections of, conversions to or renewals of the Euro-Rate Option shall expire as to each Euro-Rate Portion at the expiration of the applicable Euro-Rate Interest Period. At any time with respect to the Base Rate Portion or at the expiration of the applicable Euro-Rate Interest Period with respect to any Euro-Rate Portion, the Borrower, subject to Subsection 1.6(c), may cause all or any part of the principal amount of such Portion to be converted to and/or (in the case of a Euro-Rate Portion) to be renewed under the -10- Euro-Rate Option by notice to the Agent as hereinafter provided. Such notice (i) shall be oral or in writing and if oral immediately confirmed in writing to the Agent, (ii) shall be irrevocable, (iii) shall be given not later than 11:00 A.M., Pittsburgh, Pennsylvania time not less than two (2) Business Days prior to the proposed effective date for conversion to or renewal of, either in whole or in part, the Euro-Rate Option and (iv) shall set forth: (A) the effective date, which shall be a Business Day; (B) the new Euro-Rate Interest Period(s) selected; and (C) with respect to each such Euro-Rate Interest Period, the aggregate principal amount of the corresponding Euro-Rate Portion. At the expiration of each Euro-Rate Interest Period, any part (including the whole) of the principal amount of the corresponding Euro-Rate Portion, as to which no notice of conversion or renewal has been received as provided above, shall automatically be converted to the Base Rate Option. The Agent shall promptly notify the Borrower and the Banks of any such automatic conversion. (e) Election of Fixed Rate Option. The Borrower shall have the option once during the term of this Agreement with respect to the Seven-Year Term Loan to elect to have the entire principal balance outstanding under the Seven-Year Term Loan, on the effective date of such election (the "Fixed Rate Effective Date"), bear interest for the remaining term thereof at a Fixed Rate Option, subject to the other provisions of this Agreement. It is understood that if the Borrower makes such an election pursuant to this clause (e) of Subsection 1.6, then from and after the Fixed Rate Effective Date the Seven-Year Term Loan shall bear interest at the applicable Fixed Rate until paid in full, and the Borrower shall have no further right to elect either the Base Rate Option or the Euro-Rate Option hereunder with respect to any Portion of the Seven-Year Term Loan. Notice of the Borrower's election of the Fixed Rate Option shall be made to the Agent in writing at least three (3) Business Days prior to the proposed Fixed Rate Effective Date; such notice shall set forth the Fixed Rate Effective Date and the Applicable Fixed Rate Margin elected by Borrower and such notice of election and choice of Applicable Fixed Rate Margin shall be irrevocable and shall commit the Borrower to the election of the Fixed Rate Option hereunder. (f) Repayments and Prepayments. The Borrower, upon (i) one (1) Business Day's oral or written notice to the Agent, in the case of Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, bearing interest at the Adjusted Base Rate or (ii) three (3) Business Days' oral or written notice to the Agent, in the case of Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, bearing interest at the Adjusted Euro-Rate, followed immediately thereafter by the Borrower's written confirmation to the Agent of any oral notice, may repay, or prepay, as the case may be, the outstanding amount of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, in whole or in part with accrued interest, fees and other amounts then due and payable on the amount repaid or prepaid, as the case may be, to the date of such repayment or prepayment, as the case may be, all as set forth below. The Borrower may repay, or prepay, as the case may be, a Portion of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, bearing interest at the Adjusted Base Rate without premium or penalty. If the Borrower shall -11- repay, or prepay, as the case may be, a Portion of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, bearing interest at the Adjusted Euro-Rate prior to the end of the Euro-Rate Interest Period relating to such Euro-Rate, the Borrower shall pay (in addition to principal and interest) such additional amounts as may be necessary to compensate each Bank for any loss and any direct or indirect costs, including the cost of reemployment of funds so prepaid at rates lower than the cost to such Bank of such funds. Such losses and costs shall be specified in writing (setting forth the manner of calculation) to the Borrower by such Bank and, absent manifest error in computation, shall be binding and conclusive on the Borrower. If the Borrower shall prepay any portion of the Seven-Year Term Loan bearing interest at the Fixed Rate, the Borrower shall pay within thirty (30) days from the date of such prepayment a Fixed Rate Prepayment Premium (as defined below) on the amount of such prepayment. For the purposes of this Subsection 1.6(f), the term "Fixed Rate Prepayment Premium" shall mean an amount equal to the present value, if positive, of the product of (i) the difference between (x) the yield of a security issued by the United States Treasury and selected by the Agent in its sole discretion (including bonds, notes and bills), available to the public at the time the Borrower elected to convert the Seven-Year Term Loan into a Fixed Rate Option, and maturing on or about the final maturity date of the Seven-Year Term Loan and (y) the yield of a similar type of security issued by the United States Treasury and selected by the Agent in its sole discretion (including bonds, notes and bills), available to the public at the time of the prepayment, and maturing on or about the final maturity date of the Seven-Year Term Loan and (ii) the principal amount of such prepayment to be applied to the reduction of the Seven-Year Term Loan and (iii) the number of years computed on the actual number of days on the basis of a 360-day year (including any fractional year) from the time of the prepayment to the final maturity date of the Seven-Year Term Loan. Such losses and costs shall be specified in writing (setting forth the manner of calculation) to the Borrower by the Agent and, absent manifest error in computation, shall be binding and conclusive on the Borrower. (g) Yield Protection. If any Governmental Rule or the interpretation or application thereof by any court or by any Governmental Person charged with the administration thereof: (i) subjects any Bank to any tax, levy, impost, charge, fee, deduction or withholding of any kind hereunder (other than a tax imposed or based upon the income of such Bank) or changes the basis of taxation of any Bank with respect to the payments by the Borrower of principal or interest due hereunder (other than any change which affects, and to the extent that it affects, the taxation of the total net income of such Bank); or (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirements against assets held by any Bank; or (iii) imposes upon any Bank any other condition with respect to this Agreement, such Bank shall notify the Agent in writing as soon as practicable after such Bank becomes aware thereof; and if the result of any of the foregoing is to increase the cost to such Bank, -12- reduce the income receivable by such Bank or impose any expense upon such Bank, with regard to all or any portion of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, bearing interest at either the Adjusted Euro-Rate or the Fixed Rate, by an amount determined by such Bank in good faith and which such Bank in good faith deems material, such Bank shall notify, from time to time, the Agent and the Borrower of the amount determined by such Bank (which determination, absent manifest error in computation, shall be conclusive) to be necessary to compensate it (on an after-tax basis) for such increase in cost, reduction in income or additional expense, setting forth the calculations and the reasons therefor. The Borrower shall pay such amount to such Bank, as additional consideration hereunder, within ten (10) days of the Borrower's receipt of such notice. (h) Euro-Rate Unascertainable. (i) If on any date on which a Euro-Rate would otherwise be determined, the Agent shall have determined (which determination shall be final and conclusive) that: (a) adequate and reasonable means do not exist for ascertaining such Euro-Rate, or (b) a contingency has occurred which materially and adversely affects the London interbank market relating to the Euro-Rate, or (ii) if at any time any Bank shall have determined (which determination shall be final and conclusive) that: (a) the making, maintenance or funding of the Portion of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, to which a Euro-Rate Option applies has been made impracticable or unlawful by compliance by such Bank in good faith with any Governmental Rule or any interpretation or application thereof by any Governmental Person or with any request or directive of any such Governmental Person (whether or not having the force of law), or (b) such Euro-Rate Option will not adequately and fairly reflect the cost to such Bank of the establishment or maintenance of the Portions of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, to which a Euro-Rate Option applies or (c) after making all reasonable efforts that deposits of the relevant amount in Dollars for the relevant Euro-Rate Interest Period for the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, to which a Euro-Rate Option applies, respectively, are not available to such Bank at the effective cost of funding a proposed Euro-Rate Interest Period, in the London interbank market, then, in the case of any event specified in part (a) above, the Agent shall promptly so notify the Borrower and the other Banks thereof; and in the case of any event specified in part (b) above, the affected Bank shall promptly so notify the Agent thereof, and the Agent shall send a copy of such notice to the Borrower and the other Banks. Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given) the obligation of the Banks -13- to allow the Borrower to select, convert to or renew a Euro-Rate Option shall be suspended until the Agent or such Bank (as the case may be) shall have later notified the Borrower of the Bank's determination (which determination shall be final and conclusive) that the circumstances giving rise to such previous determination no longer exist. If at any time the Agent or any Bank makes a determination under parts (a) or (b) of this Subsection 1.6(h) and the Borrower has previously notified the Agent of the Borrower's selection of, conversion to or renewal of a Euro-Rate Option and such Option has not yet gone into effect, such notification shall be deemed to provide for selection of, conversion to or renewal of the Base Rate Option otherwise available with respect to the Portion of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be. On the date of the occurrence of any event described in item (i) of part (b), the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, bearing interest at the Adjusted Euro-Rate then outstanding shall be automatically converted to the Base Rate Option and the Borrower shall pay to the Banks the accrued and unpaid interest on the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, to (but not including) the date of such conversion. The Borrower shall pay each Bank any additional amounts determined by such Bank in good faith to be reasonably necessary to compensate such Bank for any costs incurred by such Bank as a result of any conversion pursuant to item (i) of part (b) above on a day other than the last day of the relevant Euro-Rate Interest Period, including, but not limited to, any interest or fees payable by such Bank to lenders of funds obtained by it to loan or maintain the lending of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, so converted. The affected Bank shall furnish to the Borrower a certificate as to the amount necessary to compensate such Bank for such costs (which certificate shall set forth the calculation in reasonable detail, and, absent manifest error in computation, shall be conclusive), and the Borrower shall pay such amount to such Bank, as additional consideration hereunder, within ten (10) days of the Borrower's receipt of such certificate. (i) Indemnity. The Borrower shall indemnify the Agent and each Bank against all liabilities, losses or expenses (including loss of margin, any loss or expense incurred in liquidating or employing deposits from third parties and any loss or expense incurred in connection with funds acquired by a Bank to fund or maintain Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, subject to either the Fixed Rate Option or the Euro-Rate Option) which any Bank sustains or incurs as a consequence of any (a) payment, prepayment, conversion or renewal of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, to which the Euro-Rate Option applies on a day other than the last day of the corresponding Euro-Rate Interest Period (whether or not such payment or prepayment is mandatory, voluntary or automatic and whether or not such payment or prepayment is then due), (b) attempt by the Borrower to revoke (expressly, by later inconsistent notices or otherwise) in whole or part any notice relating to the making, maintenance, renewal or conversion of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, or the conversion of the Revolving Credit Loan to the Term Loan, or any voluntary prepayments of the Revolving -14- Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, or (c) default by the Borrower in the payment of any principal of, or interest on, the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, when due (whether by acceleration or otherwise). If any Bank sustains or incurs any such loss or expense it shall from time to time notify the Borrower and the Agent of the amount determined in good faith by such Bank (which determination shall be final and conclusive and may include such assumptions, allocations of costs and expenses and averaging or attribution methods as such Bank shall deem reasonable) to be necessary to indemnify such Bank for such loss or expense. Such notice shall set forth in reasonable detail the basis for such determination. Such amount shall be due and payable by the Borrower to such Bank ten (10) Business Days after such notice is given. In no event shall the indemnity payment provided for in this Subsection 1.6(i) require any payment to any Bank for a specific liability, loss or expense incurred by such Bank by the Borrower which duplicates the reimbursement of such Bank for any loss suffered by such Bank upon a voluntary prepayment of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, for which the Borrower has paid the prepayment premium required by Subsection 1.6(f) hereof. (j) Interest After Default; Maturity. Upon the occurrence of and during the continuance of an event of default under Section 8 hereof, and after the principal amount of all or any part of the Revolving Credit Loan, the Term Loan or the Seven-Year Term Loan shall have become due and payable, whether by acceleration or otherwise, the Revolving Credit Loan, the Term Loan and the Seven-Year Term Loan shall bear interest at a rate per annum which shall be two hundred (200) basis points (2%) per annum above the rate otherwise in effect under the Base Rate Option, such interest rate to change automatically from time to time, effective as of the effective date of each change in the Base Rate. 1.7 Capital Adequacy Requirements. If any law or guideline or interpretation or application thereof by any official body charged with the interpretation or administration thereof or compliance with any request or directive of any official body (whether or not having the force of law), now existing or hereafter adopted or imposed, modifies or deems applicable any capital adequacy, reserve requirements, special deposit or similar requirements against assets (funded or contingent) of, or credits extended by or commitments to extend credit by, any Bank and the result thereof is to have the effect of reducing the rate of return on such Bank's capital as a consequence of its obligations hereunder to make and continue the Revolving Credit Loan or to issue or participate in any Letter of Credit to a level below that which such Bank could have achieved but for such adoption, imposition or modification, taking into consideration such Bank's policies with respect to capital adequacy or reserve requirements or special deposit or similar requirements, by an amount which such Bank deems to be material, such Bank shall notify the Borrower of such events. After such Bank notifies Borrower of such events, such Bank shall promptly deliver to the Borrower a statement of the amount necessary to compensate such Bank for the reduction in the rate of return on its capital attributable to such Bank's obligations hereunder to make and continue the Revolving Credit Loan or to issue or participate in any Letter of Credit. Such Bank shall determine the capital compensation amount in good faith, using reasonable attribution and averaging methods. Such Bank shall from time to time notify the Borrower of the amount so determined and such amount -15- shall be due and payable by the Borrower to such Bank thirty (30) days after such notice is given; provided, however, that if the Borrower pays the Revolving Credit Loan in full (including principal and interest), and terminates the Revolving Credit and the commitment hereunder to issue Letters of Credit, within such thirty (30) day period, the Borrower shall not be liable to such Bank to pay such amount determined pursuant to this Section 1.7. All amounts determined in accordance with this Section 1.7 shall be effective from the date on which such Bank first gave notice to the Borrower of a reduction in such Bank's rate of return. 1.8 Time, Place and Manner of Payments. All payments and prepayments to be made by the Borrower hereunder or under any Note in respect of any principal, interest, or fee shall be made to the Agent for the ratable accounts of the Banks at the principal office of Agent in Pittsburgh, Pennsylvania. Such payments shall be made in immediately available funds no later than 12:00 noon (Pittsburgh, Pennsylvania time) on the date such payment is due. 1.9 Loan Account. Each Bank shall open and maintain on its books a loan account (each, a "Loan Account") in the name of the Borrower, with respect to advances made, payments and prepayments of principal, and the computations and payments of interest and all other amounts due and sums paid to such Bank hereunder or under its Notes. Such Loan Account, absent manifest error, shall be conclusive and binding on the Borrower as to the amount at any time due to such Bank from the Borrower. 1.10 Letter of Credit Subfacility. (a) Terms of Letter of Credit. The Agent shall issue, subject to the terms and conditions hereof (including but not limited to the conditions contained in Section 7.1 hereof) and at the request of the Borrower, Letters of Credit, all as more fully set forth in this Section 1.10. (i) No Letter of Credit shall be issued hereunder which has an expiry date more than one (1) year from the date of issuance and shall in no event expire later than five (5) Business Days prior to the Termination Date; provided, however, that any Letter of Credit with a one (1) year maturity may provide for the renewal thereof for an additional one (1) year period, which shall in no event extend beyond five (5) Business Days prior to the Termination Date. (ii) Each Letter of Credit, whether now outstanding or hereafter issued by the Agent upon written request received by the Agent not less than five (5) Business Days prior to the proposed date of issuance pursuant to this Section 1.10, has been or shall be issued in accordance with the Agent's then current practices relating to the issuance by the Agent of Letters of Credit, including but not limited to the execution and delivery by the Borrower of an application for and/or confirmation of standby letter of credit and the payment by the Borrower of the customary processing fees. Each issuance or renewal of a Letter of Credit hereunder shall be conditioned on (and be deemed to be a representation and warranty by Borrower as to) the following: that at the time of such issuance or renewal the representations and warranties contained in this Agreement are true and correct and no default set forth in Section 8 hereof shall have occurred and be continuing and no event which, with the giving of notice or lapse of time or both would become such a default, shall have occurred or shall have failed to occur and be continuing. -16- (iii) In no event shall (x) the aggregate undrawn face amount of the Letters of Credit exceed, at any one time, Two Million ($2,000,000) Dollars, or (y) the sum of the aggregate outstanding principal balance of the Revolving Credit Loans, the aggregate outstanding principal balance of the Term Loans, the aggregate unpaid balance of any unreimbursed Draws under the Letters of Credit and the aggregate Stated Amounts of the Letters of Credit exceed, at any one time, the lesser of (x) Forty Million ($40,000,000) Dollars or (y) the then current Collateral Value. The Stated Amount of each Letter of Credit, while the same is issued and outstanding, and any unreimbursed Draws under the Letters of Credit, shall reduce the maximum amount otherwise available under the Revolving Credit as set forth in Section 1.1(a) hereof. (b) Disbursements, Reimbursement. (i) Immediately upon the issuance of each Letter of Credit, each Bank shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Agent a participation in such Letter of Credit and each Draw thereunder in an amount equal to such Bank's Ratable Share of the maximum amount available to be drawn under such Letter of Credit and the amount of such Draw, respectively. (ii) In the event of any request for a Draw under a Letter of Credit by the beneficiary or transferee thereof, the Agent will promptly notify the Borrower. Provided that it shall have received such notice, the Borrower shall reimburse (such obligation to reimburse the Agent shall sometimes be referred to as a "Reimbursement Obligation") the Agent prior to 12:00 noon, Pittsburgh time on each date that an amount is paid by the Agent under any Letter of Credit (each such date, a "Drawing Date") in an amount equal to the amount so paid by the Agent. In the event the Borrower fails to reimburse the Agent for the full amount of any drawing under any Letter of Credit by 12:00 noon, Pittsburgh time, on the Drawing Date, the Agent will promptly notify each Bank thereof, and the Borrower shall be deemed to have requested that Revolving Credit Loans be made by the Banks under the Base Rate Option to be disbursed on the Drawing Date under such Letter of Credit, subject to the conditions set forth in Section 7 below, other than any notice requirements. Any notice given by the Agent pursuant to this paragraph may be oral if immediately confirmed in writing provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice. (iii) Each Bank shall upon any notice pursuant to paragraph (ii) above make available to the Agent an amount in immediately available funds equal to its Ratable Share of the amount of the drawing, whereupon the participating Banks shall (subject to paragraph (iv) below) each be deemed to have made a Revolving Credit Loan under the Base Rate Option to the Borrower in that amount. If any Bank so notified fails to make available to the Agent for the account of the Agent the amount of such Bank's Ratable Share of such amount by no later than 2:00 p.m., Pittsburgh time on the Drawing Date, then interest shall accrue on such Bank's obligation to make such payment, from the Drawing Date to the date on which such Bank makes such payment, (i) at a rate per annum equal to the Federal Funds Effective Rate in effect during the first three days following the Drawing Date and (iii) at a rate per annum equal to the rate applicable to Loans under the Base Rate Option on and after the fourth day following the Drawing Date. The Agent will promptly give notice of the occurrence of the Drawing Date, but failure of the Agent to give any such notice on the Drawing Date or in sufficient time to enable any Bank to effect such payment on such date shall not relieve such Bank from its obligation under this paragraph. -17- (iv) With respect to any unreimbursed Draw that is not converted into Revolving Credit Loans under the Base Rate Option to the Borrower in whole or in part as contemplated by paragraph (ii) above, because of the Borrower's failure to satisfy the conditions set forth in Section 7 below other than any notice requirements or for any other reason, the Borrower shall be deemed to have incurred from the Agent a Letter of Credit Borrowing in the amount of such Draw. Such Letter of Credit Borrowing shall be due and payable on demand (together with interest) and shall bear interest at the rate per annum applicable to the Revolving Credit Loans under the Base Rate Option. Each Bank's payment to the Agent pursuant to paragraph (iii) above, shall be deemed to be a payment in respect of its participation in such Letter of Credit Borrowing and shall constitute a Participation Advance from such Bank in satisfaction of its participation obligation under this Section 1.10. (c) Repayment of Participation Advances. (i) Upon (and only upon) receipt by the Agent for its account of immediately available funds from the Borrower (x) in reimbursement of any payment made by the Agent under the Letter of Credit with respect to which any Bank has made a Participation Advance to the Agent, or (y) in payment of interest on such a payment made by the Agent under such a Letter of Credit, the Agent will pay to each Bank, in the same funds as those received by the Agent, the amount of such Bank's Ratable Share of such funds, except the Agent shall retain the amount of the Ratable Share of such funds of any Bank that did not make a Participation Advance in respect of such payment by Agent. (ii) If the Agent is required at any time to return to Borrower, or to a trustee, receiver, liquidator, custodian, or any official in any insolvency or similar proceeding, any portion of the payments made by Borrower to the Agent pursuant to paragraph (i) immediately above in reimbursement of a payment made under the Letter of Credit or interest or fee thereon, each Bank shall, on demand of the Agent, forthwith return to the Agent the amount of its Ratable Share of any amounts so returned by the Agent plus interest thereon from the date such demand is made to the date such amounts are returned by such Bank to the Agent, at a rate per annum equal to the Federal Funds Rate in effect from time to time. (d) Documentation. The Borrower agrees to be bound by the terms of the Agent's application and agreement for letters of credit and the Agent's written regulations and customary practices relating to letters of credit, though such interpretation may be different from the Borrower's own. In the event of a conflict between such application or agreement and this Agreement, this Agreement shall govern. It is understood and agreed that, except in the case of gross negligence or willful misconduct, the Agent shall not be liable for any error, negligence and/or mistakes, whether of omission or commission, in following the Borrower's instructions or those contained in the Letters of Credit or any modifications, amendments or supplements thereto. (e) Determinations to Honor Drawing Requests. In determining whether to honor any request for drawing under any Letter of Credit by the beneficiary thereof, the Agent shall be responsible only to determine that the documents and certificates required to be delivered under such Letter of Credit have been delivered and that they comply on their face with the requirements of such Letter of Credit. -18- (f) Nature of Participation and Reimbursement Obligations. Each Bank's obligation in accordance with this Agreement to make the Revolving Credit Loans or Participation Advances, as contemplated by Section 1.10(b), as a result of a drawing under a Letter of Credit, and the obligations of the Borrower to reimburse the Agent upon a draw under a Letter of Credit, shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Section 1.10 under all circumstances, including the following circumstances: (i) any set-off, counterclaim, recoupment, defense or other right which such Bank may have against the Agent, the Borrower or any other Person for any reason whatsoever; (ii) the failure of Borrower or any other Person to comply, in connection with a Letter of Credit Borrowing, with the conditions set forth in Section 7.1 or as otherwise set forth in this Agreement for the making of a Revolving Credit Loan, it being acknowledged that such conditions are not required for the making of a Letter of Credit Borrowing and the obligation of the Banks to make Participation Advances under Section 1.10(b); (iii) any lack of validity or enforceability of any Letter of Credit; (iv) the existence of any claim, set-off, defense or other right which the Borrower or any Bank may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), the Agent or any Bank or any other Person or, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between the Borrower or any Subsidiary and the beneficiary for which any Letter of Credit was procured); (v) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect even if the Agent has been notified thereof; (vi) payment by the Agent under any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit; (vii) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of the Borrower or any Subsidiary; (viii) any breach of this Agreement or any other Loan Document by any party thereto; (ix) the occurrence or continuance of an insolvency or similar proceeding with respect to the Borrower; (x) the fact that a default or event of default under Section 8 hereof shall have occurred and be continuing; -19- (xi) the fact that the Termination Date shall have passed or this Agreement or the commitments hereunder shall have been terminated; and (xii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. (g) Liability for Acts and Omissions. As between the Borrower and the Agent, the Borrower assumes all risks of the acts and omissions of, or misuse of the Letters of Credit by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, the Agent shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for an issuance of any such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged (even if the Agent shall have been notified thereof); (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) the failure of the beneficiary of any such Letter of Credit, or any other party to which such Letter of Credit may be transferred, to comply fully with any conditions required in order to draw upon such Letter of Credit or any other claim of the Borrower against any beneficiary of such Letter of Credit, or any such transferee, or any dispute between or among the Borrower and any beneficiary of any Letter of Credit or any such transferee; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of the Agent, including any action of any Governmental Person, and none of the above shall affect or impair, or prevent the vesting of, any of the Agent's rights or powers hereunder. Nothing in the preceding sentence shall relieve the Agent from liability for the Agent's gross negligence or willful misconduct in connection with actions or omissions described in such clauses(i) through (viii) of such sentence. In furtherance and extension and not in limitation of the specific provisions set forth above, any action taken or omitted by the Agent under or in connection with the Letters of Credit issued by it or any documents and certificates delivered thereunder, if taken or omitted in good faith, shall not put the Agent under any resulting liability to the Borrower or any Bank. (h) Reimbursement for Charges and Fees. The Borrower agrees to pay or cause to be paid to the Agent on demand, all normal and customary transaction charges that the Agent may charge (i) for drawings under the Letters of Credit, (ii) for transfers of each respective Letter of Credit in accordance with its terms and (iii) for amendments of the Letters of Credit, payable without any requirement of notice or demand by the Agent on the day of such drawing, transfer or amendment. -20- (i) Letter of Credit Fees. The Borrower shall pay to the Agent for the ratable account of the Banks quarterly in arrears, on the last day of each September, December, March and June, a commission equal to the Applicable Euro-Rate Margin on the average daily aggregate Stated Amount of Letters of Credit outstanding during the three month period ending on such date; provided, however, that upon the occurrence of and during the continuance of an event of default under Section 8 hereof, the foregoing fee shall automatically be increased by two hundred (200) basis points (2%) per annum above the rate otherwise in effect. 1.11 Definitions: Construction. (a) Certain Definitions. For purposes of this Agreement, the following terms shall have the following meanings: "Accounts" shall have the meaning ascribed to it in Section 7.1. "Adjusted Amortization Fixed Rate" means the Fixed Rate Option elected by Borrower to incorporate an Applicable Fixed Rate Margin of three hundred (300) basis points (3%). "Agent" shall mean PNC Bank, National Association, and its successors and assigns. "Adjusted Base Rate" means the interest rate relating to the Base Rate Option as described in item (i) of Subsection 1.6(b). "Adjusted Euro-Rate" means the interest rate relating to the Euro-Rate Option as described in item (ii) of Subsection 1.6(b). "Applicable Base Rate Margin" shall mean that rate per annum shown in the appropriate place on Annex I, attached hereto and made a part hereof. "Applicable Euro-Rate Margin" shall mean that rate per annum shown in the appropriate place on Annex I, attached hereto and made a part hereof. "Applicable Fixed Rate Margin" means a rate per annum equal to either (i) two hundred eighty (280) basis points (2.8%) or (ii) three hundred (300) basis points (3%), as irrevocably specified by the Borrower in the notice of election of the Fixed Rate Option delivered pursuant to Section 1.6(e) hereof. "Authority" shall have the meaning ascribed to it in Section 4.20. "Bank" means initially PNC Bank, National Association, a national banking association, and any other financial institution from time to time a party hereto as "Bank." "Base Rate" means a rate per annum equal to the higher of (i) the Prime Rate and (ii) the sum of (x) the Federal Funds Rate plus (y) fifty (50) basis points (1/2 of 1%). The Base Rate shall be adjusted automatically from time to time upon each change in the Prime Rate or the Federal Funds Rate, as applicable. -21- "Base Rate Option" means the interest rate option described in item (i) of Subsection 1.6(b). "Base Rate Portion" means a Revolving Credit Loan, the Seven-Year Term Loan or the Term Loan, as the case may be, or a portion thereof which bears, or is to bear, interest at the Adjusted Base Rate. "Borrower" shall have the meaning ascribed to it in the first paragraph of this Agreement. "Borrower's Proceeds" shall mean (i) the Borrower's share [at least equal to the share on which the Discounted Future Net Income is determined] of the total gross proceeds generated in connection with the Wells and the Pipeline payable to Borrower including but not limited to the Borrower's share of such proceeds derived from, in connection with and/or relating to the production, sale, transportation and/or compression of gas and oil produced from the Wells and transported through the Pipeline and the Borrowers share (at least equal to the share on which the Discounted Future Net Income is determined) of reimbursements of all severance taxes relating thereto, less (ii) the share (no greater than the share on which the Discounted Future Net Income is determined) of the costs and expenses (including severance, real estate and windfall profits taxes but not income or other taxes) paid by the Borrower to others for the operation of the Wells and the Pipeline and the removal and sale of gas and oil produced from the Wells and the share (no greater than the share on which the Discounted Future Net Income is determined) of royalties and overriding royalties paid by Borrower to others for the production of gas and oil from the Wells, provided, however, that such costs and expenses (including royalties and overriding royalties) shall not exceed those customarily paid by prudent gas and oil operators, and prudent operators of pipelines, of established reputations in the areas in which the Wells and the Pipeline are located. "Business Day" means a day on which the Agent's principal office is open for the conduct of normal commercial banking business. "Collateral Value" shall have the meaning ascribed to it in Section 1.5. "Commitment Fee" shall have the meaning ascribed to it in Subsection 1.1(d). "Commitment Percentage" shall have the meaning ascribed to it in Subsection 1.1(a). "Discounted Future Net Income" shall have the meaning ascribed to it in Section 1.4. "Dollar(s)" or "$" means the legal tender of the United States of America. "Draw" shall mean a payment of funds by the Banks pursuant to a request by the beneficiary of any Letter of Credit for funds in accordance with the terms of such Letter of Credit. "ERISA" shall have the meaning ascribed to it in Section 2.10. -22- "Euro-Rate" means for any day, as used herein, for each segment of the Euro-Rate Portion corresponding to a proposed or existing Euro-Rate Interest Period, the interest rate per annum determined by the Agent by dividing (the resulting quotient to be rounded upward to the nearest 1/16 of 1%) (i) the rate of interest (which shall be the same for each day in such Euro-Rate Interest Period) determined in good faith by the Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the "offered" eurodollar rate as quoted by Exco-Noonan Incorporated (or appropriate successor or, if Exco-Noonan Incorporated or its successor cease to provide such quotes, a comparable replacement as determined by Agent) as evidenced on Dow Jones Markets Service display page 4756 (or any replacement display page) two (2) Business Days prior to the first day of such Euro-Rate Interest Period for an amount comparable to the Euro-Rate Portion for such Euro-Rate Interest Period and having a borrowing date and a maturity comparable to such Euro-Rate Interest Period by (ii) a number equal to 1.00 minus the Euro-Rate Reserve Percentage. The "Euro-Rate" may also be expressed by the following formula: [ Dow Jones Markets Service as quoted by Exco- ] Euro-Rate = [ Noonan Incorporated or appropriate successor ] ------------------------------------------------ [ 1.00 - Euro-Rate Reserve Percentage ] The Euro-Rate shall be adjusted automatically with respect to any Euro-Rate Portion outstanding on the effective date of any change in the Euro-Rate Reserve Percentage, as of such effective date. "Euro-Rate Interest Period(s)" means any individual period of one (1), two (2), three (3) or six (6) months selected by the Borrower commencing on the borrowing, conversion date or renewal date of a Euro-Rate Portion to which such period shall apply. "Euro-Rate Option" means the interest rate option described in item (ii) of Subsection 1.6(b). "Euro-Rate Portion(s)" means a Revolving Credit Loan, the Seven-Year Term Loan or the Term Loan, as the case may be, or portion thereof which bears, or is to bear, interest at the Euro-Rate. "Euro-Rate Reserve Percentage" means the maximum effective percentage (expressed as a decimal, rounded upward to the nearest 1/100 of 1%), as determined in good faith by the Agent (which determination shall be conclusive), which is in effect on such day as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements (including, without limitation, supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as "Eurocurrency liabilities"). "Existing Loan Agreement" shall have the meaning ascribed to it in the first "Whereas" clause to this Agreement. "Federal Funds Rate" shall mean, for any day, (i) the interest rate (rounded upward, if necessary, to the nearest 1/100 of 1%) determined by the Agent (such determination shall be conclusive absent manifest error) to be equal to the weighted average of -23- rates on federal funds transactions among members of the Federal Reserve System arranged by Federal funds brokers at or about 9:00 am (Pittsburgh, Pennsylvania time) on such day; provided, however, that if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate for such transactions on the immediately preceding Business Day or (ii) if no such rate shall be quoted by Federal funds brokers at such time, such other rate as determined by the Agent in accordance with its usual procedures (such determination shall be conclusive absent manifest error). "Financing Statements" shall have the meaning ascribed to it in item E. of Section 3.1. "Fixed Rate" means the interest rate relating to the Fixed Rate Option as described in item (iii) of Subsection 1.6(b). "Fixed Rate Option" shall mean the interest rate option described in item (iii) of Subsection 1.6(b). "Fixed Rate Portion" means the Seven-Year Term Loan which bears, or is to bear, interest at the Fixed Rate in accordance with Subsection 1.6(e). "Future Net Income" shall have the meaning ascribed to it in Section 1.4. "Gas and oil" or "oil and gas" shall mean gas, oil, casinghead gas, drip gasoline, natural gasoline and all other liquid and gaseous hydrocarbons. "Governmental Person" means the government of the United States or the government of any state or locality therein, any political subdivision or any governmental, quasi-governmental, judicial, public or statutory instrumentality, authority, body or entity, or other regulatory bureau, authority, body or entity of the United States or any state or locality therein, including the Federal Deposit Insurance Company, the Comptroller of the Currency or the Board of Governors of the Federal Reserve System, any central bank or any comparable authority. "Governmental Rule" means any law, statute, rule, regulation, ordinance, order, judgment, guideline or decision of any Governmental Person. "Hazardous Substances" shall have the meaning ascribed to it in Section 2.17. "Indebtedness" shall have the meaning ascribed to it in Section 3. "Letter(s) of Credit" means any standby letter(s) of credit as to which the account party, the issuing Bank and the beneficiary contemplate that the beneficiary will receive a direct payment from the account party and that the beneficiary shall draw upon the Letter of Credit only if the account party fails to honor its obligation to the beneficiary, including, but not limited to, standby letters of credit issued by the Agent in accordance with Section 1.10 hereof. "Letter of Credit Borrowing" shall mean an extension of credit resulting from a drawing under any Letter of Credit which shall not have been reimbursed on the date -24- when made and shall not have been converted into a Revolving Credit Loan under Section 1.10. "Letter of Credit Fee" shall mean that fee described in Section 1.10(i) hereof. "Loan" shall mean any of the Revolving Credit Loans, the Term Loan or the Seven-Year Term Loan. "Loan Documents" shall have the meaning ascribed to it in Section 2.6. "Mortgage" shall have the meaning ascribed to it in item A. of Section 3.1. "Note" and "Notes" shall have the meanings ascribed to each in Subsection 1.6(a). "Option(s)" means any one or more of the Base Rate Option, the Euro-Rate Option or the Fixed Rate Option. "Original Loan Agreement" shall have the meaning ascribed to it in the first "Whereas" clause to this Agreement. "Participation Advance" shall mean, with respect to any Bank, such Bank's payment in respect of its participation in a Letter of Credit Borrowing according to its Ratable Share pursuant to Section 1.10. "Partnership" and "Partnerships" shall have the meaning ascribed to each in Section 1.4. "Partnership Wells" shall have the meaning ascribed to it in Section 2.7. "PBGC" shall have the meaning ascribed to it in Section 2.10. "Pipeline" shall have the meaning ascribed to it in Section 1.3. "Plan" shall have the meaning ascribed to it in Section 2.10. "Pledge Agreement" shall have the meaning ascribed to it in item D. of Section 3.1. "Portion(s)" means any Base Rate Portion, Euro-Rate Portion, or Fixed Rate Portion, as the case may be or all three taken collectively. "Prime Rate" means the interest rate per annum announced from time to time by the Agent as its prime rate, which rate may not be the lowest rate of interest then being charged by the Agent. "Property" shall have the meaning ascribed to it in Section 2.3. "Quarterly Reports" shall have the meaning ascribed to it in Section 4.8. -25- "Ratable Share" shall have the meaning ascribed to it in Subsection 1.1(a). "Revolving Credit" shall have the meaning ascribed to it in Subsection 1.1(a). "Revolving Credit Loan" and "Revolving Credit Loans" shall have the meanings ascribed to each in Subsection 1.1 (a). "Revolving Credit Note" shall have the meaning ascribed to it in Subsection 1.1(a). "Revolving Credit Period" shall have the meaning ascribed to it in Subsection 1.1(a). "Security Agreement (Note)" shall have the meaning ascribed to it in item C. of Section 3.1. "Security Agreement (Partnerships)" shall have the meaning ascribed to it in item B. of Section 3.1. "Senior Indebtedness" shall have the meaning ascribed to it in Section 4.18. "Seven-Year Term Credit" shall have the meaning ascribed to it in Subsection 1.3(a). "Seven-Year Term Loan" shall have the meaning ascribed to it in Subsection 1.3(a). "Seven-Year Term Note" shall have the meaning ascribed to it in Subsection 1.3(a). "Stated Amount" shall mean the amount available to the beneficiaries of the Letters of Credit for one or more drawings thereunder as such amount is reduced and reinstated from time to time in accordance with the provisions of the Letters of Credit. "Stockholders" shall have the meaning ascribed to it in Section 2.2. "Subsidiary" and "Subsidiaries" shall have the meaning ascribed to each in Subsection 2.2(e). "Syndications Period" shall mean the period between the date of this Agreement and the earlier of the following dates: (a) the date on which PNC Bank, National Association has reduced its Commitment Percentage below 100%, or (b) the date which is one hundred twenty (120) days after the date of this Agreement. "Term Credit" shall have the meaning ascribed to it in Subsection 1.2(a). -26- "Term Loan" shall have the meaning ascribed to it in Subsection 1.2(a). "Term Note" shall have the meaning ascribed to it in Subsection 1.2(a). "Termination Date" shall have the meaning ascribed to it in Subsection 1.1(a). "Utilization Rate" means, at the time of determination by Bank, the quotient (expressed as a percentage) determined by dividing (i) the sum of (w) the aggregate principal balances outstanding under the Revolving Credit Notes plus (x) the aggregate Stated Amounts of Letters of Credit outstanding plus (y) the aggregate amount of unreimbursed Draws under the Letters of Credit plus (z) the aggregate principal balances outstanding under the Term Notes by (ii) the then current Collateral Value. "Wells" shall have the meaning ascribed to it in Section 1.4. (b) Construction. (i) Unless the context of this Agreement otherwise clearly requires, references to the plural include the singular, the singular the plural and the part the whole, "or" has the inclusive meaning represented by the phrase "and/or," and "including" has the meaning represented by the phrase "including without limitation." References in this Agreement to "determination" of or by the Agent or the Banks shall be deemed to include reasonable good faith estimates by the Agent or the Banks (in the case of quantitative determinations) and reasonable and good faith beliefs by the Agent or the Banks (in the case of qualitative determinations). Whenever the Agent or the Banks are granted the right herein to act in its or their sole discretion or to grant or withhold consent such right shall be exercised reasonably and in good faith. The words "hereof," "herein," "hereunder" and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. The article, section and other headings contained in this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation thereof in any respect. Article, Section, schedule and exhibit references are to this Agreement unless otherwise specified. Except as otherwise specified in this Agreement, all references in this Agreement (i) to any Person, other than the Borrower, shall be deemed to include such Person's successors and assigns, and (ii) to any Governmental Rule, agreement or contract specifically defined or referred to in Agreement shall be deemed references to such Governmental Rule, agreement or contract as the same may be amended, supplemented, modified, extended, waived, consolidated, replaced or renewed from time to time, but only to the extent permitted by, and effected in accordance with, the terms thereof. (ii) For purposes of this Agreement, all terms used in Article 9 of the UCC and not specifically defined in this Agreement shall herein have the meanings assigned to such terms in the UCC as from time to time in effect in the Commonwealth of Pennsylvania. (iii) References to "Writing" include printing, typing, lithography and other means of reproducing words in a tangible visible form. References to "written" include "printed", "typed", "lithographed" and other adjectives relating to words reproduced in a tangible visible form consistent with the preceding sentence and also include electronic images and images stored on computer disks, magnetic tape and like media. (c) Accounting Principles. Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters and all financial statements -27- to be delivered pursuant to this Agreement shall be made and prepared in accordance with GAAP (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP. SECTION 2. REPRESENTATIONS AND WARRANTIES. - - ------------------------------------------ To induce the Banks to enter into this Agreement and to make and continue the loans and to issue and renew the Letters of Credit, each as herein provided for, Borrower represents and warrants to the Banks that: 2.1 Existence and Authority. Borrower and the Subsidiaries are corporations or limited liability company duly organized, validly existing and in good standing under the laws of the states of their formation, and are duly qualified to do business, and are in good standing as foreign corporations, in all jurisdictions wherein their ownership of property or the nature of their businesses requires such qualification and have the right, power and authority to own, and hold under lease, their properties and to carry on their businesses as now being conducted. 2.2 Stock Ownership and Subsidiaries. (a) The authorized securities of The Atlas Group, Inc. consist of two million (2,000,000) shares of common stock and all issued and outstanding shares of such stock are owned by and issued to the persons shown on Schedule 2.2 attached hereto and made a part hereof. (b) The authorized securities of AIC, Inc. consist of one thousand (1,000) shares of common stock and all issued and outstanding shares of such stock are owned by and issued to The Atlas Group, Inc. (c) The authorized securities of AED Investments, Inc. consist of one thousand (1,000) shares of common stock and all issued and outstanding shares of such stock are owned by and issued to Atlas Energy Group, Inc. (d) The authorized securities of ARD Investments, Inc. consist of one thousand (1,000) shares of common stock and all issued and outstanding shares of such stock are owned by and issued to Atlas Resources, Inc. (e) AIC, Inc. is the legal and beneficial owner of all of the issued and outstanding securities of Atlas Energy Corporation, an Ohio corporation, Atlas Resources, Inc., a Pennsylvania corporation, Transatco Corporation, an Ohio corporation, Pennsylvania Industrial Energy, Inc., a Pennsylvania corporation, Atlas Information Management, LLC, a Pennsylvania Limited Liability Company, Atlas Energy Group, Inc., an Ohio corporation, Atlas Gas Marketing, Inc., a Pennsylvania corporation and Mercer Gas Gathering, Inc., a Pennsylvania corporation, and Atlas Information Management, LLC is the legal and beneficial owner of forty-nine (49%) percent of the issued and outstanding shares of each of Record Imaging, Ltd. and fifty (50%) percent of Atlas Technologies, LLC. [hereinafter referred to collectively as the "Subsidiaries" and individually as the "Subsidiary"; as used herein the terms Subsidiaries and Subsidiary shall also include any corporation with respect to which any Borrower owns directly or indirectly more than twenty-five (25%) percent of the outstanding stock issued by such corporation]; Borrower presently does not own directly or indirectly more than twenty-five (25%) percent of the outstanding stock issued by any other corporation. AIC, Inc. has good and marketable title to all the securities of the Subsidiaries issued to it, free and -28- clear of all liens and encumbrances, and all such securities have been duly and validly issued and are fully paid and nonassessable. The authorized securities of the Subsidiaries and the ownership thereof are as shown on Schedule 2.2 attached hereto and made a part hereof. 2.3 Rights, Titles and Interests. Borrower and the Subsidiaries have, and will have, good and marketable rights, titles and interests in and to all of their properties including all the property (the "Property") described in the Mortgage and the Security Agreement (as such terms are defined in Section 3.1 hereof) free and clear of all liens and encumbrances, except such liens and encumbrances, if any, set forth in writings heretofore delivered to, and acknowledged in writing to have been received by, the Banks, and which are acknowledged in writing to be acceptable to the Banks; as defined herein the term Property shall include but shall not be limited to the additional security provided by Borrower pursuant to Section 1.5 and Section 3.3 hereof. Borrower warrants that at its expense it will, and will cause the Subsidiaries to, defend generally their properties including the Property, and the rights, titles and interests of the Banks therein and thereto, against the claims and demands of all persons, corporations and any other entities whatsoever. No defaults have occurred under any of the documents or instruments pursuant to which, or establishing that, Borrower and the Subsidiaries acquired interests in their properties including the Property which have not been cured or waived and such documents and instruments are in full force and effect and they have not been modified or amended. 2.4 Financial Statements. The financial statements described below in this Section 2.4, together with the notes and reports thereto, (copies of which have been furnished to the Agent), are complete and correct, have been prepared in accordance with generally accepted accounting principles, practices and procedures consistently applied and present fairly the financial positions of the Borrower and the Subsidiaries as at the dates set forth below and the results of their operations for the periods set forth below, subject only to ordinary and usual year end audit adjustments in the case of the statements described in clause (ii) below: (i) Balance sheet as of July 31, 1997 and the related statements of income, changes in stockholders equity and changes in financial position for the fiscal year ended on such date, prepared and certified by McLaughlin & Courson, independent certified public accountants; and (ii) Balance sheet as of June 30, 1998 and the related statements of income, changes in stockholders equity and changes in financial position for the eleven (11) month period ended on such date, prepared by the chief financial officer of Borrower. Except as reflected or referred to in the above described financial statements, neither the Borrower nor any of the Subsidiaries has any contingent or disputed liabilities or unrealized or anticipated losses or commitments which in the aggregate are material. Since June 30, 1998 there has been no change in the condition, business or prospects, financial or otherwise, of the Borrower or the Subsidiaries as shown on the balance sheet as of such date and no change in the aggregate value of the property owned by the Borrower and the Subsidiaries, including the Property, except changes in the ordinary course of business. -29- 2.5 Litigation. Except as set forth on Schedule 2.5 attached hereto, there is no material litigation or proceeding of any kind whatsoever pending, nor to the knowledge of Borrower threatened, nor any judgment, order, writ, injunction, decree or award outstanding, which could adversely affect Borrower or the Subsidiaries or the operation of any of their businesses, or their properties including the Property, nor does the Borrower know or have reasonable grounds to know of any basis for any such action or any governmental investigation or any claim relating to the Borrower or the Subsidiaries or the operation of any of their businesses, or their properties including the Property. Except as set forth on Schedule 2.5 attached hereto, the Borrower and the Subsidiaries have each complied with all material provisions of all agreements to which they are parties or by which they are bound and are not in default under any of them or in the payment of any of their obligations. 2.6 Validity of Agreement, Notes, Mortgage, Security Agreement (Partnerships), Security Agreement (Note), Pledge Agreement, Financing Statements and Other Loan Documents. The execution and delivery of this Agreement, the Notes, the Mortgage, the Security Agreement (Partnerships), the Pledge Agreement, the Security Agreement (Note) and the Financing Statements (as such terms are defined in Section 3.1 hereof) and the documents and instruments referred to herein and therein to be executed and/or delivered by Borrower, as one or more may be amended, modified or supplemented (the "Loan Documents"), the borrowings under the Loan Documents, the performance by the Borrower of its obligations under the Loan Documents and the assignment of, and the grant of the liens on and security interests in, the Borrower's various rights, titles and interests, to the Agent (for the benefit of the Banks) by the Loan Documents, do not, and will not, contravene any provision of law, or of the articles of incorporation or by-laws of Borrower or any Subsidiary, or of any agreement, instrument or other document or of any judicial, arbitration or local, state or federal governmental requirement or restriction to which Borrower or any Subsidiary is a party or by which it is bound, or result in the creation or imposition of any lien or other encumbrance on any of the property of the Borrower or any Subsidiary including the Property except the liens and security interests granted by the Loan Documents; and any and all consents or approvals of any kind whatsoever, including approvals and consents of any local, state or federal governmental unit, commission, authority, agency or other body, required to be obtained in connection therewith have been obtained and are in full force and effect. This Agreement constitutes, and the other Loan Documents when duly executed will constitute, legal, valid and binding obligations of Borrower enforceable in accordance with their respective terms. Borrower is duly authorized to execute and deliver this Agreement and the other Loan Documents; all action necessary and proper to authorize the execution and delivery of the Loan Documents has occurred; and Borrower is, and will continue to be, duly authorized, and has, and shall continue to have, the right, power and authority, to execute and deliver the Loan Documents and to make the assignment and grant the liens and security interests pursuant to the Loan Documents as well as to borrow under the Loan Documents and to perform all of the other terms and conditions of the Loan Documents. 2.7 Permits. Borrower has obtained, or caused to be obtained, all permissions, licenses, easements, rights-of-way, leasehold and fee interests and all local, state and federal governmental approvals, authorizations, consents and permits as well as all other rights, titles and interests necessary to the ownership, development and operation of the properties of the Borrower and the Subsidiaries (including the Property) and the gas and oil wells (the "Partnership Wells") in which the Partnerships (as such term is defined in Section 1.4 hereof) have ownership interests, and the conduct of their businesses, all of which are in full force and effect. -30- 2.8 Operation of Wells and the Pipeline. The statements relating to the transportation of gas and oil through the Pipeline and the production of gas and oil from the Wells for the period ending January 1, 1998 heretofore furnished by Borrower to Bank are accurate; since January 1, 1998 there has been no damage, destruction or loss to the Pipeline or to any of the Wells; the Pipeline is currently in operation and the monthly transportation of gas and oil through the Pipeline has not materially changed; and except for temporary, involuntary shut-ins, all of the Wells are currently in production and the monthly production from each of the Wells has not materially changed. 2.9 Public Utility Holding Company. Neither the Borrower, nor any Subsidiary of the Borrower, is a holding company or a subsidiary of a holding company or a public utility company as such terms are defined in the Public Utility Holding Company Act of 1935. 2.10 ERISA. The Pension Benefit Guaranty Corporation ("PBGC") has not made a determination that, with respect to any Plan (as hereinafter defined) of the Borrower, or any Subsidiary or other affiliate of the Borrower, an event or condition has occurred which constitutes grounds under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") for the termination of, or for the appointment of a trustee to administer, any such Plan. As used herein, "Plan" shall be defined as any employee benefit plan or other plan maintained for employees of the Borrower, or any Subsidiary or other affiliate of the Borrower, covered by ERISA. 2.11 Regulation G, U, T and X. Neither the Borrower nor any Subsidiary is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation G, U, T or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any advance under the Loan Documents will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. 2.12 Compliance with Law. Borrower and the Subsidiaries have each complied with, and are in compliance with, all applicable local, state and federal laws, rules and regulations relating to all of their activities including, but not limited to, the operation of the Wells and the Pipeline and the offer and sale of securities. 2.13 Taxes. All tax returns and reports of the Borrower and the Subsidiaries required by law to be filed have been duly filed, and all taxes, assessments, fees and other governmental charges upon the Borrower and the Subsidiaries or upon any of the property of the Borrower and the Subsidiaries including the Property and upon any of the other assets, income or franchises of the Borrower and the Subsidiaries which are due and payable have been paid, except taxes, assessments, fees and other governmental charges being contested in good faith as set forth in Section 4.10 hereof unless required to be paid as set forth in such Section and subject to the reserve requirements set forth in Section 4.10 hereof. 2.14 Relationship of Borrower. The Borrowers are operated as part of one consolidated business entity and each Borrower is directly dependent upon each other Borrower for and in connection with their business activities and their financial resources; and each Borrower will receive a direct economic and financial benefit from the borrowings made under this Agreement, and such borrowings are in the best interests of each Borrower. -31- 2.15 Status as Producers of Gas. Atlas Energy Group, Inc., Atlas Energy Corporation and Atlas Resources, Inc. are producers of oil and/or natural gas; none of the Subsidiaries (other than Atlas Resources, Inc., Atlas Energy Group, Inc. and Atlas Energy Corporation) is a producer of oil and/or natural gas. 2.16 Year 2000. The Borrower and its Subsidiaries have reviewed the areas within their business and operations which could be adversely affected by, and have developed or are developing a program to address on a timely basis, the risk that certain computer applications used by the Borrower or its Subsidiaries (or any of their respective material suppliers, customers or vendors) may be unable to recognize and perform properly date-sensitive functions involving dates prior to and after December 31, 1999 (the "Year 2000 Problem"). The Year 2000 Problem will not result in any material adverse change in the business, properties, assets, financial condition, results of operations or prospects of the Borrower or its Subsidiaries, or impair materially the ability of the Borrower or its Subsidiaries to duly and punctually pay or perform the Indebtedness. 2.17 Environmental Matters. To the best of the Borrower's knowledge, (i) the Property is and has been in compliance, in all material respects, with all applicable local, state and federal environmental laws, rules and regulations, (ii) there have been no releases of any chemical, material, substance or waste which is a threat to the public health, safety or welfare or the environment or the health of living organisms, or any hazardous, toxic, contaminating or polluting substance as defined by any environmental law, rule or regulation (individually and collectively "Hazardous Substances") and (iii) there is no basis for the imposition of environmental liability against the Property or for the imposition of any environmental liability against any former, present or future owner or operator of the Property. 2.18 Investment Company Act. The Borrower is not an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended from time to time, or a company under the "control" of an "investment company", as those terms are defined in such Act, and shall not become such an "investment company" or under such "control". SECTION 3. SECURITY. - - -------------------- To secure the payment of principal of, and interest on, the Notes, all reimbursement and other obligations relating to the Letters of Credit, and all fees, costs, expenses and other charges to be paid or reimbursed by Borrower under the Loan Documents and all other indebtedness and other obligations of the Borrower to the Agent and the Banks under the Loan Documents (collectively, the "Indebtedness") and the performance of the terms of the Loan Documents and all other instruments and documents executed by Borrower in favor of, or for the benefit of, the Agent and the Banks with respect thereto: 3.1 Mortgage, Security Agreement (Partnerships), Security Agreement (Note) and Pledge Agreement. Borrower has executed and delivered, and hereby agrees to execute and deliver, or cause to be executed and delivered, to the Agent, on behalf of the Banks, the following: A. One or more mortgages and security agreements (and/or amendments thereto) substantially in the form of Exhibit "D" attached hereto and made a part hereof, as one or more may be amended, modified or supplemented from time to time (herein referred to -32- collectively and individually as the "Mortgage"), which shall assign to Agent, and grant to Agent, on behalf of the Banks, a lien on and security interest in, all the property of Borrower described in the Mortgage including the Wells, the Pipeline and the premises known as 311 Rouser Road, Coraopolis, Pennsylvania. B. One or more security agreements substantially in the form of Exhibit "E" attached hereto and made a part hereof, as one or more may be amended, modified or supplemented from time to time [herein referred to collectively and individually as the "Security Agreement (Partnerships)"], which shall assign to Agent, and grant to Agent, on behalf of the Banks, a security interest in, all the property of Borrower described in the Security Agreement including all rights, titles and interests of the Borrower in and to the Partnerships. C. One or more security agreements substantially in the form of Exhibit "F" attached hereto and made a part hereof, as one or more may be amended, modified or supplemented from time to time [herein referred to collectively and individually as the "Security Agreement (Note)"], which shall assign to Agent, and grant to Agent, on behalf of the Banks, a security interest in, all the property of Borrower described in the Security Agreement (Note) including all rights, titles and interests of the Borrower in and to certain intercompany notes. D. One or more pledge agreements substantially in the form of Exhibit "G" attached hereto and made a part hereof, as one or more may be amended, modified or supplemented from time to time (herein referred to collectively and individually as the "Pledge Agreement"), which assign to Agent, and grant to Agent, on behalf of the Banks, a lien on and security interest in, all the property of Borrower described in the Pledge Agreement including all of Borrower's rights, titles and interest in and to the stock of Transatco Corporation. E. All financing statements and all amendments and modifications thereof and all supplements thereto (herein referred to collectively and individually as the "Financing Statements") required by Agent in connection with the liens and security interests granted pursuant to the Mortgage, the Security Agreement (Partnerships), the Security Agreement (Note) and the Pledge Agreement. 3.2 Set-Off. Borrower hereby gives to each Bank a lien on, and security interest in, any and all property, credits, securities, monies and claims of Borrower which may at any time be delivered to, or be in the possession of, or owed to Borrower by, such Bank in any capacity whatsoever including the balances of any and all accounts maintained by Borrower with such Bank. Borrower authorizes each Bank in case of a default as defined in Section 8 hereof, at such Banks option, at any time and from time to time, to apply to the payment of the Indebtedness any such property, credits, securities, monies and claims. In the event that in the exercise of the rights set forth in this Section 3.2 any Bank applies to the payment of the Indebtedness any property, credits, securities, monies or claims which belong to a person, corporation or entity other than Borrower, such Bank shall promptly deliver such property, credits, securities, monies or claims (or at the option of such Bank, an amount of cash equivalent to the value thereof at the time such Bank makes such application) to the persons, corporations or other entities entitled thereto, or at the option of such Bank to the Borrower, upon being furnished with evidence satisfactory to such Bank of such property, credits, securities, monies or claims and the identity of the persons, corporations or other entities entitled thereto. -33- 3.3 Additional Security. In the event that Borrower is to provide additional security for the payment of the Indebtedness and the performance of the Loan Documents, such additional security shall be of such kind, in such form and have such value as Agent shall in its sole discretion require and shall be otherwise acceptable to Agent. Borrower shall execute and deliver to Agent, on behalf of the Banks, such new or amended mortgage and/or security agreement and/or pledge agreement relating to such additional collateral, as well as such other instruments, papers and other documents, and take such further action in connection therewith, as the Agent shall in its sole discretion require [including but not limited to providing reports and opinions relating to matters concerning title to such additional security and concerning the priority of the lien(s) and security interest(s) granted by such new or amended mortgage and/or security agreement and/or pledge agreement]. 3.4 Operating Accounts. The Borrower agrees to maintain, or cause to be maintained, all of the Borrower's principal operating accounts at the Agent and agrees to deposit, or cause to be deposited, in such accounts substantially all of its funds. SECTION 4. AFFIRMATIVE COVENANTS. - - --------------------------------- For so long as any Indebtedness remains unpaid, unless the Agent otherwise consents in writing, Borrower agrees that: 4.1 First Lien Undertakings. Borrower shall obtain and deliver, or cause to be obtained and delivered, to the Agent such legal opinions, title reports, representations, letters, acknowledgments, attornment agreements, releases, disclaimers, subordinations of prior liens and security interests, non-disturbance agreements, certificates of non-interference with easements, rights-of-way or coal operations and such other documents as may be requested by Agent from time to time, and shall take, or cause to be taken, all steps, to satisfy all requirements of Agent that Borrower and the Subsidiaries and the Partnerships have, and will have, good and marketable rights, titles and interests in and to all of their properties including the Property and the Partnership Wells and that the liens and security interests described in Section 3 hereof are valid and perfected first liens and security interests, free and clear of all liens and encumbrances. 4.2 Protection of Rights, Titles and Interests. Borrower will take, or cause to be taken, all steps necessary and proper (i) to protect and enforce its and the Subsidiaries' rights, titles and interests in and to all their properties including the Property and in connection with their businesses and (ii) to comply with all duties, terms and conditions undertaken or assumed by Borrower and the Subsidiaries in connection with their properties including the Property and their businesses. 4.3 Operation and Maintenance. Borrower will continuously operate, or cause to be operated, its and the Subsidiaries' properties (including the Property) and the Partnership Wells in a good and workmanlike manner and in accordance with sound and approved practices and shall use its best efforts consistent with good business practices to generate, or cause to be generated, the greatest amount of revenue in connection with its and the Subsidiaries' properties (including the Property) and the Partnership Wells. Borrower shall maintain, or cause to be maintained, all of its and the Subsidiaries' properties (including the Property) and the Partnership Wells in good condition and, shall make, or cause to be made, all necessary renewals, repairs, replacements, additions, betterments and improvements thereto. -34- 4.4 Permits. Borrower will obtain and keep in full force and effect, or shall cause to be obtained and kept in full force and effect, all permissions, licenses, easements, rights-of-way, leasehold and fee interests and all local, state and federal governmental approvals, authorizations, consents and permits as well as all other rights, titles and interests necessary to the ownership, development and operation of its and the Subsidiaries' properties (including the Property) and the Partnership Wells and to the conduct of their businesses. 4.5 Compliance with Law. Borrower will comply with, or cause to be complied with, all applicable local, state and federal laws, rules and regulations relating to all of its and the Subsidiaries' activities including, but not limited to, the operation of its and the Subsidiaries' properties (including the Property) and the Partnership Wells and the offer and sale of securities. 4.6 Status as Producers of Gas. Atlas Energy Group, Inc., Atlas Energy Corporation and Atlas Resources, Inc. shall each continue to be a producer of oil and/or natural gas. 4.7 Existence and Ownership. Borrower shall do, or cause to be done, all things necessary to preserve and keep in full force and effect its and the Subsidiaries' existences as corporations, their good standing under the laws of the states of their incorporation and their qualification to do business, and their good standing as foreign corporations, in all jurisdictions wherein their ownership of property or the nature of their businesses requires such qualification. Borrower shall continue to be the legal and beneficial owner of at least the percentages of the issued and outstanding securities of the Subsidiaries which it owns currently plus all additional percentages of such securities which it may acquire hereafter. 4.8 Reports, Certifications and Other Information. Upon request of Agent, Borrower shall deliver, or cause to be delivered, to Agent, within sixty (60) days after the end of each fiscal quarter (and if a default as set forth in Section 8 hereof shall have occurred and be continuing, within thirty (30) days after the end of each calendar month), a report of operating, management and administration fees paid to Borrower during such month together with statements setting forth the quantity of gas and oil produced from the Wells and transported through the Pipeline during such month, the price paid or to be paid for such gas and oil and the transportation and compression thereof, the Borrower's Proceeds (showing in detail the computation whereby the Borrower's Proceeds are determined) and such other information as Agent may request which may include but not be limited to a report prepared by Borrower showing the performance of each Well on a quarterly or monthly, as the case may be, basis and on a cumulative basis as well as such information as is customarily set forth in a meter statement. Within sixty (60) days after the end of each fiscal quarter of each fiscal year of the Borrower and the Subsidiaries, the Borrower shall furnish to Agent such unaudited financial statements of the Borrower and the Subsidiaries ("Quarterly Reports") as Agent shall request (consisting of at least a balance sheet as of the close of such quarter and a profit and loss statement and a statement of cash flow for such quarter and for the period from the beginning of the fiscal year to the close of such quarter), which statements shall be in such detail as Agent shall require, shall show the Borrower's and the Subsidiaries' financial conditions at the close of such fiscal quarter and the results of their operations for the period -35- then ended and shall be prepared by the chief financial officer of Borrower and the Subsidiaries in accordance with generally accepted accounting principles, practices and procedures consistently applied and certified by such officer, subject only to ordinary and usual year end audit adjustments. Within one hundred twenty (120) days after the end of each fiscal year of the Borrower and the Subsidiaries, Borrower shall furnish to Agent a copy of the annual audited financial statements of the Borrower and the Subsidiaries prepared in conformity with generally accepted accounting principles, practices and procedures consistently applied by McLaughlin & Courson, or other certified public accountants satisfactory to Agent and certified without qualification as to scope. The Borrower shall deliver to the Agent, together with each delivery of financial statements required by this Section 4.8, a certificate substantially in the form of Exhibit "H" hereto, appropriately completed, (A) stating that the signer has reviewed the terms of this Agreement and of the other Loan Documents and has made, or caused to be made under his supervision, a review of the transactions and condition of the Borrower during the accounting period covered by such financial statements and that such review has not disclosed the existence during such accounting period, and that the signer does not have knowledge of the existence, as at the date of such certificate, of any condition or event which constitutes a default under Section 8 hereunder with respect to the covenants set forth in Sections 4.16, 4.17, 4.18, and 5.12 hereof, or which, after notice or lapse of time or both, would constitute a default with respect to the covenants set forth in Sections 4.16, 4.17, 4.18, and 5.12 hereof, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Borrower has taken or is taking or proposes to take with respect thereto, (B) demonstrating in reasonable detail compliance as at the end of such accounting period with the restrictions contained in Sections 4.16, 4.17, 4.18, and 5.12 hereof and (C) setting forth in reasonable detail (i) any advances or payments made with respect to intercompany notes or accounts during the accounting period covered by such financial statements together with the closing balance of each such note and account and the interest accrued thereon and (ii) the amount of any management fees or similar advances made during the applicable accounting period. At any time and from time to time, Borrower will submit, or cause to be submitted, to Agent promptly, in such form as Agent shall require, such other information relating to the financial affairs of the Borrower and the Subsidiaries, to the properties of the Borrower and the Subsidiaries including the Property, to the businesses of the Borrower and the Subsidiaries or otherwise as Agent shall reasonably request. 4.9 Records and Access. Borrower shall keep, or cause to be kept, full and complete books and records in which correct and accurate entries will be made of all of its and the Subsidiaries business transactions and their properties including the Property and at any time and from time to time shall give, or cause to be given, to the Agent or the Banks or their representatives full access during normal business hours to examine and copy all of the Borrower's and the Subsidiaries' properties including the Property and their books, contracts and records. 4.10 Payment of Taxes and Mechanics' Claims. Borrower will pay, or cause to be paid, all taxes, assessments, license fees and other governmental charges and all claims of mechanics and materialmen to which it or any of the Subsidiaries or any of their properties -36- including the Property shall be subject, and all other charges on or relating to any of their properties including the Property, before such charges and claims become delinquent, except that no such charge or claim need be paid for so long as its validity or amount shall be contested in good faith by appropriate proceedings duly prosecuted and Borrower and the Subsidiaries shall have set up in their books such reserves with respect thereto as shall be dictated by sound accounting practices; provided, however, that all such charges and claims shall be paid, subject to refund proceedings, if failure to pay would adversely affect the rights or titles of Borrower or any of the Subsidiaries to any of their properties including the Property. 4.11 Insurance. Borrower will keep, or cause to be kept, with financially sound and reputable insurers, such insurance with respect to its and the Subsidiaries' businesses and properties including the Property, in such amounts and insuring against such risks, casualties and contingencies of such types (including but not limited to insurance for loss or damage by fire and other hazards and insurance for liability for damage to persons and property in connection with their properties including the Property and the activities conducted thereon or relating thereto) as is customary for persons, corporations and other entities of established reputations engaged in the same or similar businesses as the Borrower and the Subsidiaries and similarly situated, naming Agent (for the benefit of the Banks) as mortgagee or lender loss payee or additional insured as its interests may appear, and will keep, or cause to be kept, such insurance as required by any applicable workmen's compensation laws, and will furnish, or cause to be furnished, certificates of all such insurance to Agent upon the execution hereof and within one hundred twenty (120) days after the end of each of its fiscal years. All policies shall provide that they may not be altered or cancelled except on thirty (30) days' prior written notice to Agent. 4.12 Duty to Plug. If and when any of the Wells ceases producing gas and oil in paying quantities or is of no further use, or Borrower or any other person, corporation or other entity is required to do so under any agreement or law, Borrower will plug and abandon, or cause to be plugged and abandoned, any and all such Wells in accordance with the local, state and/or federal laws and regulations then in force and regulating the plugging of gas and oil wells. Borrower further consents and agrees that it will save harmless Agent, and the Banks, and the respective successors and assigns, of and from any loss, damage and penalty through failure, if any, to plug, or cause to be plugged, such Well or Wells as herein provided. 4.13 Expenses, Fees and Disbursements. Borrower shall pay, or cause to be paid, all expenses, fees and disbursements incurred in connection with the recordation, filing, continuation, satisfaction and termination of the Mortgage, the Financing Statements and any other Loan Documents and any other instruments or documents relating thereto and the fees, expenses and disbursements of Agent's counsel in connection with this Agreement and the other Loan Documents, and any other instruments or documents relating thereto, their preparation, administration and enforcement as well as the fees, expenses and disbursements of the Agent and its counsel, and others (including but not limited to geologists and engineers) engaged by Agent to provide information and advice in connection with this Agreement and the other Loan Documents and any other instruments or documents relating thereto, their preparation, administration and enforcement. 4.14 Assigned Payments. In connection with any amounts due to Borrower which are assigned to Agent (for the benefit of the Banks) pursuant to the Mortgage, the Security Agreement and/or any other Loan Document, upon notice to the payor thereof by Agent, such payments shall be made directly by the payor thereof to Agent. Agent is, and/or its -37- duly authorized agents are, hereby authorized by Borrower to endorse for and on Borrower's behalf and deposit all drafts and checks payable to Borrower, and such authority shall continue while any Indebtedness is outstanding. In the event that any such assigned amounts paid to Agent consist of amounts belonging in whole or in part to any person, corporation or entity other than Borrower, the Agent shall promptly deliver such amounts or parts thereof to such persons, corporations or entities, or at the option of Agent to the Borrower, upon being furnished with evidence satisfactory to the Agent of such amounts or parts thereof and the identity of such persons, corporations or other entities. 4.15 Notification. Within ten (10) days after Borrower or any Subsidiary receives notice of any litigation or any judicial or administrative proceeding pending or threatened against it which might result in Borrower or such Subsidiary being liable for the payment or performance of obligations in excess of Two Hundred Fifty Thousand ($250,000) Dollars with respect to any single such litigation or proceeding, or in excess of One Million ($1,000,000) Dollars in the aggregate with respect to all such litigations or proceedings, Borrower shall notify the Agent, or cause the Agent to be notified, in writing of such litigation or proceeding. 4.16 Current Ratio. The current assets of the Borrower on a consolidated basis (as determined by Agent in accordance with generally accepted accounting principles) divided by the positive difference between (i) the current liabilities of the Borrower on a consolidated basis (as determined by Agent in accordance with generally accepted accounting principles) and (ii) the product of (x) the advance payments received by Borrower for the drilling and completion of oil and gas wells which are classified as current liabilities times (y) fifteen (15%) percent, shall at all times exceed the ratio of 0.75 to 1.00. For the purposes of this Section 4.16 alone, (i) the principal balance outstanding under the Revolving Credit Notes shall be deemed not to be a current liability and (ii) the unused availability under the Revolving Credit shall be deemed to be a current asset. 4.17 Debt to EBITDA. The Total Indebtedness of the Borrower on a consolidated basis divided by the EBITDA of Borrower on a consolidated basis (calculated for the four most recently completed fiscal quarters) shall at all times be less than the following ratios for the fiscal periods ending on the following dates (inclusive): Fiscal Period Ending Maximum Ratio: -------------------- -------------- 6/30/98 through 12/31/98 3.75 to 1.00 3/31/99 through 9/30/99 3.50 to 1.00 12/31/99 through 3/31/00 3.25 to 1.00 6/30/00 and each fiscal 3.00 to 1.00 period ending thereafter For the purposes of this Section 4.17 and of Section 4.18, (i) the term "Total Indebtedness" shall mean total indebtedness of Borrower, including all indebtedness for money borrowed or credit advanced, purchase price obligations, obligations evidenced by bonds, notes or similar indentures, capitalized lease obligations, guaranties, obligations with respect to letters of credit, obligations under any interest or currency swap, future, option or other similar agreement (except where any such swap, future, option or other similar agreement is matched to an offsetting asset as in the case of hedging with respect to the physical -38- production and sale of oil and gas), and any liability in the nature of any of the foregoing in its capacity as a general partner, and (ii) the term "EBITDA" shall mean the sum of the Borrower's net income plus interest expense plus tax expense plus depreciation plus amortization plus other noncash charges to income minus noncash credits to income (as determined by Agent in accordance with generally accepted accounting principles). 4.18 Fixed Charge Coverage Ratio. The EBITDA of the Borrower on a consolidated basis (calculated for the four most recently completed fiscal quarters) divided by the sum of (i) interest expense of Borrower on a consolidated basis (calculated for the four most recently completed fiscal quarters) plus (ii) Current Maturities of Long Term Debt of Borrower on a consolidated basis, must not be less than 2.0 to 1.0 at any time. For the purposes of this Section 4.18, the term "Current Maturities of Long Term Debt" (as reasonably determined by Agent in accordance with its customary practices) shall mean that portion of the Borrowers' total indebtedness for money borrowed or credit advanced (other than (i) trade credit incurred in the ordinary course of business and (ii) indebtedness to the Banks under the Revolving Credit), however evidenced, which had a scheduled maturity during the preceding four fiscal quarters. 4.19 Additional Documents. From time to time, at the Agent's request, whether before or after any borrowings hereunder, the Borrower at its expense will execute and deliver, or cause to be executed and delivered, to Agent such instruments, papers and other documents and take, or cause to be taken, such further action as Agent reasonably may require in connection with the transactions contemplated hereby including the enforcement of the Loan Documents. 4.20 Environmental Matters. (a) Borrower will ensure that the Property remains in compliance, in all material respects, with all local, state and federal environmental laws, rules and regulations, and that it will not place or permit to be placed on the Property any Hazardous Substances, except as not prohibited by applicable environmental laws, rules or regulations, or in such quantities as to not constitute a hazard to the environment or subject the Borrower to prosecution or liability in connection therewith. (b) Borrower will employ, or cause to be employed, in connection with the use of the Property appropriate technology as the Borrower determines reasonably necessary to maintain compliance with any applicable environmental law, rule or regulation and dispose, or cause to be disposed, of any and all Hazardous Substances generated at the Property only at facilities and with carriers that maintain valid permits under applicable environmental laws, rules and regulations. (c) In the event the Borrower obtains, gives or receives notice of any release or threat of release of a reportable quantity of any Hazardous Substances at the Property or receives any notice of violation, request for information or notification that it is potentially responsible for investigation or cleanup of environmental conditions at the Property, or any demand letter, complaint, order, citation or other written notice with regard to any Hazardous Substances or violation of any environmental law, rule or regulation, affecting the Property from any person or entity, including any state agency responsible in whole or in part for environmental matters in the state in which the Property is located or the United States Environmental Protection Agency (any such person or entity is hereinafter referred to as the "Authority") which might result in the Borrower being liable for the payment or performance of -39- obligations in excess of Ten Thousand ($10,000) Dollars with respect to any such event or in excess of One Hundred Thousand ($100,000) Dollars in the aggregate with respect to all such events, then the Borrower shall, within five (5) days, give written notice of same to the Agent detailing non-privileged and non-confidential facts and circumstances of which the Borrower is aware in connection therewith. Such information is to be provided to allow Agent to protect its security interest in the Property and is not intended to create any obligation upon the Agent or the Banks with respect thereto. (d) Borrower shall promptly forward to the Agent copies of any request for information, notification of potential liability, demand letter for information, notification of potential liability, demand letter relating to potential responsibility with respect to the investigation or cleanup of Hazardous Substances at the Property and shall continue to forward to the Agent copies of correspondence between the Borrower and the Authority regarding such claims until the claims are settled. The Borrower shall promptly forward to the Agent copies of all documents and reports concerning Hazardous Substances at the Property that the Borrower is required to file under any environmental law, rule or regulation. Such information is to be provided to allow the Agent to protect its security interest in the Property and is not intended to create any obligation upon the Agent or the Banks with respect thereto. (e) If the Borrower shall fail to comply, or cause to be complied, with any of the requirements of any environmental law, rule or regulation, the Agent may, at its election, but without the obligation to do so, for the sole purpose of protecting its security interest in the Property, enter onto the Property (or authorize third parties to enter onto the Property) and take such actions as the Agent (or such third parties as directed by the Agent) deems reasonably necessary or advisable, after consultation with the Borrower, to comply with the requirements of such environmental laws, rules and regulations including but not limited to cleaning up, removing, mitigating or otherwise dealing with any release of Hazardous Substances. All reasonable costs and expenses incurred by the Agent (or such third parties) in the exercise of any such rights, including any sums paid in connection with any judicial or administrative investigation or proceedings, fines and penalties, together with interest thereon from the date expended at the highest lawful rate then payable under the Note then outstanding, shall be paid upon demand by the Borrower. (f) Promptly upon the written request of the Agent from time to time, which written request may be made by the Agent only in the event of notice to the Agent of discovery or occurrence of a release of Hazardous Substances at the Property, the Borrower shall provide, or cause to be provided, to Agent, at the Borrower's expense, with an environmental site assessment or environmental audit report prepared by an environmental engineering firm acceptable to the Agent in its reasonable opinion, to assess with a reasonable degree of certainty the existence of a release of Hazardous Substances and the potential costs in connection with the abatement, cleanup and removal of any Hazardous Substances found on, under, or within the Property. Any report or investigation of such release of Hazardous Substances proposed and acceptable to an appropriate Authority that is charged to oversee the cleanup of such release of Hazardous Substances shall be acceptable to the Agent. If such estimates, individually or in the aggregate, exceed FIFTY THOUSAND DOLLARS ($50,000), the Agent shall have the right to require the Borrower to post a bond, letter of credit or other security reasonably satisfactory to the Agent to secure payment of these costs and expenses. (g) Borrower shall defend and indemnify the Agent and the Banks and hold the Agent and the Banks harmless from and against all loss, liability, damage and expense, -40- claims, costs, fines and penalties, including attorney's fees, suffered or incurred by the Agent, whether as a mortgagee in possession, or as successor-in-interest to the Borrower, or otherwise, under or on account of any environmental law, rule or regulation, including the assertion of any lien thereunder, with respect to any release of Hazardous Substances, the presence of any Hazardous Substances affecting the Property, whether or not the same originates or emanates from the Property or any contiguous real estate, including any loss of value of the Property as a result of the foregoing so long as no such loss, liability, damage and expense is attributable to any release of Hazardous Substances resulting from actions on the part of the Agent. The Borrower's obligations under this Section 4.20 shall arise upon the discovery of the presence of any Hazardous Substances at the Property, whether or not any Authority has taken or threatened any action in connection with the presence of any Hazardous Substances. The Borrower's obligation and the indemnification hereunder shall survive the payment in full of the indebtedness secured hereby and the satisfaction in full of the other obligations secured hereby. SECTION 5. NEGATIVE COVENANTS. - - ------------------------------ For so long as any Indebtedness remains unpaid, Borrower agrees that it will not, without the prior written consent of the Agent: 5.1 Alienation. Sell, lease, transfer or otherwise dispose of or alienate any of its property including the Property, or permit the sale, lease, transfer or other disposition or alienation of any of the property of any Subsidiary, except the sale in the ordinary course of business of gas and oil transported through the Pipeline and gas and oil produced from the Wells and except the sale, lease, transfer or other disposition or alienation for fair consideration in the ordinary course of business of its and the Subsidiaries' properties other than the Property and except the sale, lease, transfer or other disposition or alienation for fair consideration other than in the ordinary course of business of its and the Subsidiaries' properties other than the Property having a fair market value not to exceed One Million ($1,000,000) Dollars in the aggregate. 5.2 Encumbrances. Permit, create, assume or incur any mortgage, pledge, charge, security interest, lien or encumbrance of any kind upon any of its or the Subsidiaries' properties (whether now owned or hereafter acquired) including the Property, or commit any act or make any election which will require it or any of the Subsidiaries to reassign any of their properties including the Property, except encumbrances (i) created and granted in this Agreement, the Mortgage, the Security Agreement (Partnerships), the Security Agreement (Note) and the Pledge Agreement or otherwise created or granted in favor of the Banks, (ii) relating to current taxes, assessments, license fees and other governmental charges and claims of mechanics and materialmen not delinquent, or if delinquent being contested in good faith as set forth in Section 4.10 hereof unless required to be paid as set forth in such Section and subject to the reserve requirements set forth in such Section, (iii) imposed in the normal course of the oil and gas business of the Borrower and the Subsidiaries in connection with obtaining surety bonds and (iv) imposed in the normal course of business of the Borrower and the Subsidiaries, other than in favor of the Banks, on properties of the Borrower and the Subsidiaries hereafter acquired by them, provided that such liens and encumbrances are imposed in connection with the financing of the acquisition of such properties and are imposed only on the properties acquired. -41- 5.3 Guaranty. Become or be, or permit any Subsidiary to become or be, a guarantor or endorser of, or surety for, or responsible in any manner whatsoever with respect to, the payment or performance of any indebtedness, obligation or undertaking of any other person, corporation or other entity, except in favor of the Banks in connection with the payment and/or performance of any such indebtedness, obligation or undertaking, except by the endorsement of negotiable instruments for deposit or collection in the ordinary course of business, except guarantees by the Borrower of the performance by the Subsidiaries which are engaged in the oil and gas business of obligations incurred by such Subsidiaries to provide goods and services in such business and except as permitted in accordance with Section 5.6 hereof. 5.4 Debt. Create, assume, incur or permit to exist, any indebtedness or obligation for the payment or repayment of money, whether borrowed by, or advanced to or for the benefit of, Borrower or any Subsidiary, or otherwise, except (i) the borrowings under the Loan Documents and any other indebtedness or obligation of Borrower or any Subsidiary to the Banks thereunder, (ii) indebtedness with respect to the intercompany advances described in Subsection 5.5(vii) hereof, provided, however, that Bank shall at all times have a first perfected lien on any instrument evidencing such indebtedness, and (iii) with respect to the Borrowers other than AIC, Inc., AED Investments, Inc. and ARD Investments, Inc., other indebtedness, other than in favor of the Banks, not exceeding Two Million ($2,000,000) Dollars in the aggregate at any one time outstanding. 5.5 Loans; Investments. Make, or permit any Subsidiary to make, any loan or advance to any person, corporation or other entity, or purchase or otherwise acquire, or permit any such Subsidiary to purchase or otherwise acquire, any capital stock, assets, obligations or other securities of, make any capital contribution to, or otherwise invest in, or acquire any interest in, any person, corporation or other entity, except: (i) direct obligations of the United States of America or any agency thereof with maturities of one year or less from the date of acquisition; (ii) commercial paper of a domestic issuer rated at least "A-1" by Standard & Poor's Corporation or "P-1" by Moody's Investors Service, Inc.; (iii) certificates of deposit with maturities of one year or less from the date of acquisition issued by any Bank or any commercial bank operating within the United States of America having capital and surplus in excess of $50,000,000; (iv) for stock, obligations or securities received in settlement of debts (created in the ordinary course of business) owing to the Borrower or any such Subsidiary; (v) loans from Transatco Corporation to TOPICO, a partnership, not exceeding One Million Twenty Thousand ($1,020,000) Dollars in the aggregate at any one time outstanding; (vi) loans from a Borrower to another Borrower's pursuant to one or more intercompany notes as described in, and subject to, the Security Agreement (Note), (vii) the stock held by a Borrower on the date hereof as described in Section 2.2 hereof, (viii) with respect to the Borrowers other than AIC, Inc., AED Investments, Inc. and ARD Investments, Inc., other loans not exceeding One Million One Hundred Thousand ($1,100,000) Dollars in the aggregate at any one time outstanding; (ix) loans not to exceed $250,000 in the aggregate to Atlas Technologies, LLC; and (x) loans not to exceed $250,000 in the aggregate to Record Imaging, Ltd. 5.6 Business Activities. (a) Subject to the provisions of paragraph (b) below, engage in, or permit any Subsidiary to engage in, any business other than the business which it now conducts. (b) Notwithstanding anything to the contrary contained in this Agreement, The Atlas Group, Inc., AIC, Inc., AED Investments, Inc. and ARD Investments, Inc. shall not be -42- permitted to engage in any business or conduct any activity except (i) make the advances permitted in Subsection 5.5(vi) hereof, (ii) hold the stock held by such Borrower on the date hereof as described in Section 2.2 hereof, (iii) the ownership, maintenance and management of intangible investments (which includes, without limitation, investments in the types of assets listed in Section 5.5 (i), (ii) and (iii) hereof), patents, patent applications, trademarks, trade names and similar types of intangible assets), and the collection and distribution of income from such investments and (iv) with respect to The Atlas Group, Inc. only, perform certain administrative and management services on behalf of the other Borrowers in exchange for a fee. 5.7 Consolidation or Merger, Change of Control. (a) Consolidate with or merge into, or permit any Subsidiary to consolidate with or merge into, any person, corporation or other entity or permit any person, corporation or other entity to consolidate with or merge into Borrower or any Subsidiary, except for (i) the merger of The Atlas Group, Inc. with and into Atlas America, Inc. ("Atlas America") so long as, at the time of such merger, Atlas America is engaged in no business other than owning the stock of The Atlas Group, Inc. and Resource Energy, Inc. ("Resource Energy") and (ii) the merger of Atlas America (as successor by merger to The Atlas Group, Inc.) with Resource Energy (the "Permitted Merger"), so long as (x) prior to the effective date of the Permitted Merger, the Agent and the Banks shall have received from the Borrower (A) such information and documentation regarding Resource Energy as they may reasonably request and (B) pro forma financial statements reflecting the Permitted Merger, and such information, documentation and financial statements are satisfactory to the Banks in all material respects, (y) the consummation of the Permitted Merger shall not cause or result in any event of default under Section 8 hereof, and (z) Resource Energy, the Permitted Merger and all documentation relating thereto shall be otherwise satisfactory in all material respects to the Banks. (b) Permit any Change in Control, except for the acquisition of 100% of the issued and outstanding shares of The Atlas Group, Inc. by Resource America, Inc. or Atlas America (the "Permitted Acquisition"). For the purposes of this Agreement, the term "Change in Control" shall mean any change in the ownership of the shares of stock of any Borrower. 5.8 Acquisitions. Purchase or otherwise acquire, or permit any Subsidiary to purchase or acquire, any obligations or stock of, or any other interest in, or all or substantially all of the assets of, any person, corporation or other entity whatsoever. 5.9 Redemption. Directly or indirectly, purchase or redeem any of the stock issued by Borrower or permit any Subsidiary to purchase or redeem any of the stock issued by such Subsidiary; except the purchase of 131,425 shares of The Atlas Group, Inc. from Charles T. Koval and Joseph R. Sadowski for an aggregate purchase price of up to $12,000,000 in contemplation of the Permitted Acquisition described in Section 5.7 (b) above. 5.10 Distributions. Directly or indirectly, declare or make, or incur any liability to make, any dividend or other distribution on the stock of such Borrower or otherwise to the stockholders of The Atlas Group, Inc. (or its successor), except stock options to be issued to employees of The Atlas Group, Inc. 5.11 Leases. Become, or permit any Subsidiary to become, lessee under any lease of any real or personal property, except gas and oil leases in the ordinary courses of their businesses and except such other leases entered into in the ordinary courses of their -43- businesses so long as the aggregate payments to be made by the Borrower and the Subsidiaries in connection with such other leases in any fiscal year of the Borrower do not exceed One Million ($1,000,000) Dollars and except equipment leases from any Bank or any affiliate thereof) to Borrower or any Subsidiary. 5.12 Capital Expenditures. Make or permit during any fiscal year the aggregate amount of Borrower's exploration expenses to exceed an amount equal to twenty (20%) percent of the Borrower's total capital expenditures (on a consolidated basis) during such fiscal year. For the purposes of this section, exploration expenses shall be included within the calculation of Borrower's total capital expenditures. 5.13 Negative Pledges. Directly or indirectly enter into or assume any agreement (other than this agreement) prohibiting the creation or assumption of any lien or encumbrance upon any of the Borrower's properties (including without limitation the Property), whether now owned or hereafter created or acquired, or otherwise prohibiting or restricting any transaction contemplated hereby. SECTION 6. BORROWING REQUIREMENTS. - - ---------------------------------- 6.1 Conditions to Borrowing. Unless otherwise agreed to by Agent and subject to the performance by Borrower of its other obligations under the Loan Documents, the Banks shall have no obligation to advance any funds to Borrower, to issue or renew any Letter of Credit or to continue any loans outstanding under the Existing Loan Agreement until all legal matters incident to the transactions contemplated by the Loan Documents are resolved in a manner satisfactory to Agent and its counsel and until Borrower shall have provided Agent with the following: A. The Notes, Mortgage, Security Agreement (Partnerships), Security Agreement (Note), Pledge Agreement, Financing Statements and other Loan Documents duly executed and all in form and substance satisfactory to Agent. B. Evidence satisfactory to Agent authorizing the execution and delivery by Borrower of this Agreement, the Notes, the Mortgage, the Security Agreement (Partnerships), Security Agreement (Note), the Pledge Agreement, the Financing Statements and the other Loan Documents. C. Opinions of counsel for Borrower, addressed to Agent and the Banks, satisfactory to Agent's counsel, relating to such matters as the Agent may reasonably require, including opinions that on the dates of delivery of such opinions and at the times the funds to be lent pursuant to this Agreement are advanced (a) the representations set forth in Sections 2.1, 2.2 and 2.6 hereof (which representations shall be repeated at length in such opinions) are accurate, (b) to the best of the knowledge of Borrower's counsel, the representations set forth in Sections 2.5, 2.9, 2.10, 2.11, 2.12 and 2.13 hereof (which representations shall be repeated at length in such opinions) are accurate, and (c) the interest rate options applicable to the Notes, the Commitment Fee or any other Fee provided for herein, the maintenance of the Borrower's principal accounts as required by Section 3.4 hereof and the depositing therein of substantially all of Borrower's funds, and the payment of all other amounts to be paid by Borrower pursuant to this Agreement and the other Loan Documents do not violate any usury -44- or other law of the State of Ohio or the Commonwealth of Pennsylvania relating to interest payments. D. Opinions, addressed to the Agent and the Banks, of Borrower's counsel or such other counsel satisfactory to Agent, in form and substance satisfactory to Agent's counsel, that on the dates of delivery of such opinions and at the times the funds to be lent pursuant to this Agreement are advanced (a) Borrower and the Partnerships have good and marketable rights, titles and interests in and to all the Property and the Partnership Wells, (b) all documents or instruments pursuant to which, or establishing that, Borrower and the Partnerships acquired interests in the Property and the Partnership Wells are valid and subsisting and have not been modified or amended, (c) the extent of Borrowers and the Partnerships' interests in the Property and the Partnership Wells are as described in the documents and instruments pursuant to which, or establishing that, Borrower and the Partnerships acquired their interests in the Property and the Partnership Wells and (d) the Property and the Partnership Wells are free and clear of all liens and encumbrances except such liens and encumbrances as shall be acceptable to Agent in its sole discretion. E. Certificates executed by Borrower stating that no defaults have occurred which are unremedied or unwaived under any agreement, lease, assignment or other document or instrument by or through which Borrower has any rights, titles or interests in connection with the Property. F. Evidence satisfactory to Agent that there has been recorded in the appropriate offices documents and instruments establishing that Borrower and the Partnerships have good and marketable rights, titles and interests in and to the Property and the Partnership Wells and delivery to Agent of copies of all the documents and instruments pursuant to which, or establishing that, Borrower and the Partnerships acquired such rights, titles and interests. G. Evidence satisfactory to Agent of the recordation and filing of the Mortgage, the Financing Statements and any other Loan Document. H. A current certificate of good standing of the each Borrower and a certificate of incumbency for each Borrower. I. A mortgagee title insurance policy issued in favor of Bank with respect to the premises located at 311 Rouser Road, Coraopolis, Pennsylvania, in form and substance acceptable to Agent and its counsel. J. Payment of the Fees provided for in the side letter among Borrower and Agent relating thereto. K. Such other documents and instruments, and evidence of the performance by Borrower of such other obligations, as Agent may reasonably request. SECTION 7. DISBURSEMENT. - - ------------------------ 7.1 Procedure. Except as otherwise provided herein, Borrower may request Revolving Credit Loans by delivering to the Agent, not later than 11:00 A.M. (Pittsburgh, Pennsylvania time) on the proposed borrowing date a written notice requesting, and specifying -45- the date (if other than the date of such request), the amount and the manner of, each borrowing and reborrowing hereunder. Subject to Section 11.2 hereof, the Agent shall promptly notify the Banks of each request for a borrowing or reborrowing on the same day on which the Agent receives such a request, and each Bank shall make its Commitment Percentage of the requested borrowing or reborrowing available to the Borrower, in immediately available funds at the principal office of the Agent, prior to 2:00 P.M. (Pittsburgh, Pennsylvania time) on the date specified by Borrower in its request, and upon availability of such funds Agent shall credit one or more of the accounts of deposit (the "Accounts") maintained by Borrower at the Agent in the amount to be borrowed or reborrowed. Each borrowing or reborrowing by Borrower or issuance or renewal of any Letter of Credit hereunder issuance or renewal shall be conditioned on the following: that at the time of such borrowing, reborrowing issuance or renewal the representations and warranties contained in this Agreement are true and correct and no default set forth in Section 8 hereof shall have occurred and be continuing and no event which, with giving of notice or lapse of time or both would become such a default, shall have occurred or shall have failed to occur and be continuing; and each such borrowing, reborrowing issuance or renewal shall be deemed to be a representation and warranty by the Borrower that the foregoing conditions exist and upon the request of Agent the Borrower shall execute and deliver to the Agent a certificate as to the existence of the foregoing conditions. 7.2 Use of Proceeds. Borrower represents, warrants and agrees that all funds lent or advanced pursuant to this Agreement or any other Loan Document have been, and shall be, used only for the purpose of (i) financing oil or natural gas drilling, producing, gathering and associated activities and facilities by the Borrower, (ii) the prepayment in full of the indebtedness evidenced by those certain Promissory Notes each dated November 14, 1990 and executed in favor of Charles Koval and Joseph Sadowski and the purchasing of the shares of The Atlas Group, Inc. from Charles Koval and Joseph Sadowski in accordance with Section 5.9 above and (iii) for the purpose of funding other general corporate activities of the Borrower. 7.3 Charging Account. Borrower agrees that each Bank and the Agent may charge and is hereby authorized to charge any demand deposit account of the Borrower maintained with the Agent or the Banks (including without limitation the Accounts) for payment of principal of, or interest on, the Notes when due and payable, reimbursement of Draws under the Letters of Credit and all other charges set forth in the Loan Documents when due and payable including but not limited to the Commitment Fee, the Fees provided for in the side letter among Borrower and Agent, any Letter of Credit Fee and the charges set forth in Sections 4.13 and 10.3 hereof. SECTION 8. DEFAULTS. - - -------------------- If one or more of the following events occur: A. Borrower or any Subsidiary or any Partnership makes an assignment for the benefit of its creditors, becomes insolvent or admits in writing its inability to pay its debts as they become due; or Borrower or any Subsidiary or any Partnership files a voluntary petition in bankruptcy or files a petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation; or Borrower or any Subsidiary or any Partnership files an answer admitting or not contesting the material allegations of any petition filed in any action commenced against the Borrower or such Subsidiary or such Partnership in bankruptcy or -46- seeking the relief described above in this Subsection 8.A, or any such action shall not have been dismissed within thirty (30) days after it is commenced; or the Borrower or any Subsidiary, or any of its officers, directors or shareholders, or any Partnership, or any of its partners, takes any action looking to the dissolution or liquidation of Borrower or such Subsidiary or such Partnership; or the Borrower or any Subsidiary or any Partnership applies for, consents to, or acquiesces in the appointment of a trustee, receiver or liquidator for itself or for any of its property or in the absence of such application, consent or acquiescence such a trustee, receiver or liquidator is appointed and is not discharged within thirty (30) days after being appointed; or B. Any garnishment proceeding by attachment, levy or otherwise is instituted against any deposit balance maintained, or any property deposited, with the Bank by the Borrower: then this Agreement and the other Loan Documents shall immediately and automatically be in default, any obligation of the Banks or the Agent under the Loan Documents or otherwise to make any further advances to or for the benefit of Borrower shall immediately and automatically terminate and the principal of, and interest on, the Notes and all other indebtedness of Borrower and the Subsidiaries to Bank including but not limited to all other Indebtedness shall immediately be due and payable without necessity of demand, presentment, protest, notice of dishonor, notice of default or any other notice whatsoever, all of which are hereby expressly waived by Borrower. If one or more of the following events occur: C. Default by Borrower in the payment of principal of, or interest on, the Notes, in the payment of any reimbursement or other obligation with respect to any Letter of Credit, or in the payment of the Commitment Fee, the Fees provided for in the side letter among Borrower and the Agent, the Letter of Credit Fee or in the payment of items of expense or other charges to be paid by the Borrower pursuant to the Loan Documents, including but not limited to the times set forth in Section 4.13 or 10.3 hereof, when due and payable, and continuance thereof for ten (10) days thereafter or for ten (10) days after bills therefor are sent to Borrower, whichever last occurs. D. One or more courts shall render a final judgment or judgments against Borrower or any Subsidiary or any Partnership in an aggregate amount greater than Ten Thousand ($10,000) Dollars in excess of any insurance protecting against the liability on which such judgment or judgments are based and such judgment or judgments shall not be satisfactorily stayed, discharged, vacated or set aside within thirty (30) days after the entry thereof, or, except as set forth in Subsection 8.13 hereof, one or more properties of Borrower or any Subsidiary or any Partnership shall be liened or attached under a claim or claims in an aggregate amount greater than Ten Thousand ($10,000) Dollars in excess of any insurance protecting against the liability on which such lien or attachment is based and such lien or attachment shall not be released or provided for to the satisfaction of Bank within thirty (30) days after the property is liened or attached; E. Borrower or any Subsidiary shall fail to take, or cause to be taken, corrective measures reasonably satisfactory to Agent within thirty (30) days after notice to Borrower or such Subsidiary with respect to any litigation or any judicial or administrative proceedings pending or threatened against Borrower or such Subsidiary or any Partnership or -47- the Property or any Partnership Well, the outcome of which, in the reasonable judgment of Bank, would materially and adversely affect the financial condition of Borrower or such Subsidiary or such Partnership or the Property or the Partnership Wells; F. The PBGC shall make a determination that there has occurred an event or condition which constitutes grounds under ERISA for the termination of, or for the appointment of a trustee to administer, any Plan; G. Default in the performance or observance of any agreement, covenant or obligation of Borrower set forth in this Agreement or any other Loan Document, including but not limited to the Mortgage, the Security Agreement (Partnerships), the Security Agreement (Note), the Pledge Agreement and the Notes, which default does not constitute a specific default set forth in this Section 8, and continuance thereof for thirty (30) days; H. Default in the performance or observance of any agreement, covenant or obligation of Borrower or any Subsidiary or any Partnership in any agreement between Bank and Borrower and/or such Subsidiary and/or such Partnership in addition to any Loan Document, or the existence of any misrepresentation in connection therewith or related thereto, and continuance thereof for more than the permitted period of grace, if any; I. Except as set forth in Subsections 8.C, 8.G and 8.H hereof, default in the payment or performance of any obligation for borrowed money for which the Borrower or any Subsidiary or any Partnership is liable (directly, by assumption, as guarantor, or otherwise) or in the payment or performance of any obligation secured by any mortgage, pledge, charge, security interest or other encumbrance with respect to any property of the Borrower or any Subsidiary or any Partnership, and continuance thereof for more than the permitted period of grace, if any; J. Any representation or warranty made by Borrower herein or in any other Loan Document is untrue in any material respect or any certificate, schedule, statement, report, notice or writing furnished or made to Agent or any Bank in connection with the transactions contemplated by the Loan Documents is untrue in any material respect on the date as of which the facts set forth therein are stated or certified; K. Any Change in Control, except for the Permitted Acquisition contemplated in Section 5.7 above. L. If James R. O'Mara [or any other person(s) acceptable to Agent as set forth in this Subsection 8.L] does not, regardless of the reason therefor, continue to act as the chief executive officer of the Borrower and to devote his entire time and attention to the business and affairs of the Borrower; provided, however, that if such default occurs, Borrower may cure such default by engaging, within sixty (60) days after such occurrence, as the chief executive officer of the Borrower or such other person(s) as shall be reasonably acceptable to Agent: then the Agent, at its option, may immediately declare this Agreement and/or the other Loan Documents in default, may terminate any obligations of the Agent or the Banks under the Loan Documents or otherwise to make any further advances to or for the benefit of Borrower and/or may declare the principal of, and interest on, the Notes and/or all other indebtedness of Borrower and the Subsidiaries to the Banks including but not limited to all other Indebtedness -48- immediately due and payable, whereupon all such indebtedness including but not limited to the Indebtedness shall immediately become due and payable without necessity of demand, presentment, protest, notice of dishonor, notice of default or any other notice whatsoever, all of which are hereby expressly waived by Borrower. Notwithstanding anything to the contrary contained in this Section 8, for purposes of this Section 8, neither this Agreement nor any other Loan Document shall be, or be declared to be, in default upon the occurrence of any of the events set forth above unless (i) any such event relates to a person, corporation or other entity other than, or in addition to, any Partnership, or (ii) any such event relates only to one or more Partnerships and the occurrence of such event, together with all other such events occurring theretofore or thereafter, does, or might, impair the collateral value of the Property in an amount equal to at least Five Hundred Thousand ($500,000) Dollars as determined by Bank in its sole discretion; provided, however, that this paragraph shall in no way affect the calculation of the Collateral Value hereunder or the Borrower's obligation to make mandatory prepayments under Section 1.4 above. SECTION 9. REMEDIES. - - -------------------- The Agent (on behalf of the Banks) shall be entitled at its option to exercise each and every remedy accorded it by law and/or specifically set forth in the Loan Documents, including in that limitation the Mortgage, the Security Agreement (Partnerships), the Security Agreement (Note), the Pledge Agreement and the Notes, which remedies are specifically incorporated herein by reference. Such remedies may be asserted concurrently, cumulatively, successively or independently from time to time so long as any part of the Indebtedness remains unpaid. SECTION 10. MISCELLANEOUS. - - -------------------------- 10.1 Waiver and Modification. No waiver by Agent or the Banks of any default shall operate as a waiver of any other default or of the same default on a future occasion. No failure to exercise, and no delay in exercising, on the part of Agent or the Banks, any power, remedy or right shall operate as a waiver thereof, nor shall any single or partial exercise of any power, remedy or right preclude other or further exercise thereof or the exercise of any other power, remedy or right. This Agreement and the other Loan Documents, including the Notes, the Mortgage, the Security Agreement (Partnerships), the Security Agreement (Note) and the Pledge Agreement, contain the entire agreement of the parties with respect to their subject matter and the terms, conditions and covenants of this Agreement and the other Loan Documents, including the Notes, the Mortgage, the Security Agreement (Partnerships), the Security Agreement (Note) and the Pledge Agreement, may only be modified or waived by a written document executed by Borrower and Bank. 10.2 Notices. All notices or other correspondence required or made necessary by the terms of this Agreement and the other Loan Documents shall be in writing and shall be considered as having been given to each party if served personally or if mailed by registered or certified mail, postage prepaid, to the respective addresses as follows: -49- (a) To Borrower: c/o The Atlas Group, Inc. 311 Rouser Road Coraopolis, Pennsylvania 15108 Attention: James R. O'Mara Chief Executive Officer (b) To Agent: PNC Bank, National Association One PNC Plaza 249 Fifth Avenue Pittsburgh, PA 15222 Attention: Energy, Metals & Mining (c) To Banks: All notices to Banks shall be sent to the notice address of each Bank as set forth on such Bank's signature page to its Assignment and Assumption Agreement. Each party shall have the right to change its address at any time, and from time to time, by giving written notice thereof to the other party. 10.3 Certain Taxes. Borrower agrees to pay, and save Agent and the Banks harmless from, all liability for any federal or state documentary stamp or other tax liability, together with any interest or penalty, which is payable or determined to be payable with respect to the execution or delivery of this Agreement or any other Loan Document including the Notes, the Mortgage, the Security Agreement (Partnerships), the Security Agreement (Note), the Pledge Agreement and the Financing Statements, which obligation of the Borrower shall survive the termination of this Agreement. 10.4 Right to Cure. In the event that Borrower shall fail for any reason to pay any fee, cost, expense or other charge to be paid or reimbursed by Borrower, Agent shall have the right but not the duty to make such payment and if Agent makes such payment the amount thereof shall be added to the balance of the indebtedness secured by the Mortgage, the Security Agreement (Partnerships), the Security Agreement (Note) and the Pledge Agreement, shall be payable on demand and shall bear interest at the highest lawful rate of interest then payable under the Note then outstanding until paid. 10.5 Venue and Jurisdiction: Waiver of Jury Trial. THE PARTIES HERETO AGREE THAT ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT SHALL BE COMMENCED IN THE COURT OF COMMON PLEAS OF ALLEGHENY COUNTY, PENNSYLVANIA AND EACH PARTY AGREES THAT A SUMMONS AND COMPLAINT COMMENCING AN ACTION OR PROCEEDING IN SUCH COURT SHALL BE PROPERLY SERVED AND SHALL CONFER PERSONAL JURISDICTION IF SERVED PERSONALLY OR BY CERTIFIED MAIL TO IT AT ITS ADDRESS DESIGNATED PURSUANT HERETO, OR AS OTHERWISE PROVIDED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. THE PARTIES -50- this is it! HERETO WAIVE ANY CLAIM THAT PITTSBURGH, PENNSYLVANIA IS AN INCONVENIENT FORUM AND ANY CLAIM THAT ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT IN THE AFOREMENTIONED COURT LACKS PROPER VENUE AND/OR JURISDICTION. EACH BORROWER, THE AGENT AND THE BANKS HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE COLLATERAL PROVIDED IN CONNECTION HEREWITH TO THE FULL EXTENT PERMITTED BY LAW. 10.6 Applicable Law. THIS AGREEMENT SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. 10.7 Severability. In the event that any term or provision of this Agreement or any other Loan Document including the Notes, the Mortgage, the Security Agreement (Partnerships), the Security Agreement (Note) and the Pledge Agreement is lawfully held or declared to be invalid, illegal or unenforceable, it shall be deemed deleted to the extent necessary under the applicable law and the validity of the other terms and provisions shall not be affected thereby. 10.8 Successors and Assigns. (a) This Agreement and the other Loan Documents shall be binding upon the Borrower, the Agent and the Banks and their respective successors and assigns, and shall inure to the benefit of Borrower, the Agent and the Banks and the successors and assigns of the Agent and the Banks (except that Borrower shall have no right to assign, voluntarily or by operation of law, any of its rights hereunder or under any other Loan Document without Agent's prior written consent, and provided further that nothing herein is intended by any party hereto to confer any rights upon any third party as a beneficiary hereof). (b) Subject to the remaining provisions of this Section 10.8, any Bank (the "Transferor Bank") may at any time, in the ordinary course of its commercial lending business, in accordance with applicable law, sell to one or more financial institutions (each, a "Purchasing Bank") (which Purchasing Bank may be an affiliate of the Transferor Bank), a portion of its rights and obligations under this Agreement and the Notes then held by it, pursuant to an Assignment and Assumption Agreement substantially in the form of Exhibit "I" and satisfactory to the Agent, executed by the Transferor Bank, such Purchasing Bank, the Agent and the Borrower; provided, however, that the Borrower and the Agent must each give its prior consent to any such assignment (other than an assignment made by a Bank to an affiliate of such Bank), which consent shall not be unreasonably withheld. Upon the execution, delivery, acceptance and recording of any such Assignment and Assumption Agreement, from and after the "Transfer Effective Date," as defined and determined pursuant to such Assignment and Assumption Agreement, and the payment by Purchasing Bank to Agent of an assignment service fee of $3,000, (i) the Purchasing Bank thereunder shall be a party hereto as a Bank and, to the extent provided in such Assignment and Assumption Agreement, shall have the rights and obligations of a Bank hereunder with a Commitment Percentage as set forth therein, and (ii) the Transferor Bank thereunder shall, to the extent provided in such Assignment and Assumption Agreement, be released from its obligations under this Agreement as a Bank. Such Assignment and Assumption Agreement shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Bank as a Bank and the -51 - resulting adjustment of Commitment Percentage and Ratable Share arising from the purchase by such Purchasing Bank of all or a portion of the rights and obligations of such Transferor Bank under this Agreement and the Notes. On or prior to the Transfer Effective Date, the Borrower shall execute and deliver to the Agent, in exchange for the surrendered Notes held by the Transferor Bank, new Notes to the order of such Purchasing Bank in an amount equal to the Commitment Percentage of the Revolving Credit, the Revolving Credit Loans, the Term Loan and the Seven-Year Term Loan assumed by it and purchased by it pursuant to such Assignment and Assumption Agreement, and new Notes to the order of the Transferor Bank in an amount equal to the Commitment Percentage of the Revolving Credit, the Revolving Credit Loans, the Term Loan and the Seven-Year Term Loan retained by it hereunder. (c) The Agent shall maintain at its address referred to in Section 10.2 a copy of each Assignment and Assumption Agreement delivered to it and a register (the "Register") for the recordation of the names and addresses of the Banks and the amount of the Loans owing to each Bank from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Banks may treat each person whose name is recorded in the Register as the owner of the Loans recorded therein for all purposes of this Agreement. The Register shall be available at the office of the Agent for inspection by the Borrower or any Bank at any reasonable time and from time to time upon reasonable prior notice. (d) Notwithstanding any other provision in this Agreement, any Bank may at any time pledge or grant a security interest in all or any portion of its rights under this Agreement, its Notes and the other Loan Documents to any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR Section 203.14 without notice to or consent of the Borrower or the Agent. No such pledge or grant of a security interest shall release the transferor Bank of its obligations hereunder or under any other Loan Document. 10.9 Nature and Survival of Representations. All statements contained in any certificate or other document or instrument of any kind whatsoever delivered by or on behalf of Borrower pursuant hereto or any other Loan Document, or in connection with the transactions contemplated hereby or thereby, shall be deemed representations and warranties made by the Borrower in this Agreement or other Loan Document, or pursuant hereto or thereto, and, together with all representations and warranties contained herein or in any other Loan Document, shall survive the execution and delivery thereof and of this Agreement and any other Loan Document, the making of any loans under the Loan Documents, and the making of any investigation made at any time by or on behalf of Agent and/or the Banks. 10.10 Number and Gender. Whenever required by the context of this Agreement or any other Loan Document the singular shall include the plural, and vice-versa; and the neuter gender shall include the masculine and feminine genders, and vice-versa. 10.11 Joint and Several Liability. Each Borrower is, and shall be, jointly and severally bound by, and responsible for the making and performance of, all of the representations, warranties, covenants, provisions, terms, conditions and agreements made and to be performed by the Borrower under and pursuant to this Agreement and the other Loan Documents including the Notes, the Mortgage, the Security Agreement (Partnerships), the Security Agreement (Note) and the Pledge Agreement. -52- 10.12 Tax Withholding. At least five (5) business days prior to the first date on which interest or fees are payable hereunder for the account of any Bank, each such Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to the Agent and the Borrower two (2) duly completed copies of either (i) United States Internal Revenue Service Form W-9, 1001 or 4224 or such other applicable form prescribed by the Internal Revenue Service of the United States, certifying in each case that such Bank is entitled to receive payments under this Agreement or the Notes without deduction or withholding of United States federal income taxes, or is subject to such tax at a reduced rate under an applicable tax treaty or (ii) Form W-8 or such other applicable form prescribed by the Internal Revenue Service of the United States or a certificate of such Bank indicating that no such exemption or reduced rate of taxation is allowable with respect to such payments. Each Bank which delivers a Form W-8, W-9, 4224 or 1001 further undertakes to deliver to the Agent and the Borrower two (2) additional copies of such form (or any successor form) on or before that form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Agent, either certifying that such Bank is entitled to receive payments under this Agreement or its Note without deduction or withholding of any United States federal income taxes or is subject to such tax at a reduced rate under an applicable tax treaty or stating that no such exemption or reduced rate is allowable. The Agent shall be entitled to withhold United States federal income taxes at the full withholding rate unless each such Bank establishes an exemption or at the applicable reduced rate established pursuant to the above provisions. 10.13 Headings. The headings of the Sections of this Agreement are inserted for convenience only and shall not be deemed to constitute a part hereof. 10.14 Confidentiality. (a) General. The Agent and the Banks each agree to keep confidential all information obtained from Borrower or its Subsidiaries which is nonpublic and confidential or proprietary in nature (including any information the Borrower specifically designates as confidential), except as provided below, and to use such information only in connection with their respective capacities under this Agreement and for the purposes contemplated hereby. The Agent and the Banks shall be permitted to disclose such information (i) to outside legal counsel, accountants and other professional advisors who need to know such information in connection with the administration and enforcement of this Agreement, subject to agreement of such Persons to maintain the confidentiality, (ii) to assignees and participants as contemplated by Section 10.8, (iii) to the extent requested by any bank regulatory authority or, with notice to the Borrower, as otherwise required by applicable Governmental Rule or by any subpoena or similar legal process, or in connection with any investigation or proceeding arising out of the transactions contemplated by this Agreement, (iv) if it becomes publicly available other than as a result of a breach of this Agreement or becomes available from a source not known to be subject to confidentiality restrictions, or (v) if the Borrower shall have consented to such disclosure. (b) Sharing Information With Affiliates of the Banks. Each Borrower acknowledges that from time to time financial advisory, investment banking and other services may be offered or provided to the Borrower or one or more of its affiliates (in connection with this Agreement or otherwise) by any Bank or by one or more Subsidiaries or affiliates of such Bank and each of the Borrowers hereby authorizes each Bank to share any information -53- delivered to such Bank by such Borrower and its Subsidiaries pursuant to this Agreement, or in connection with the decision of such Bank to enter into this Agreement, to any such Subsidiary or affiliate of such Bank, it being understood that any such Subsidiary or affiliate of any Bank receiving such information shall be bound by the provisions of Section 10.15 as if it were a Bank hereunder. Such authorization shall survive the repayment of the Loans and other Indebtedness and the termination of any commitment to lend or to issue Letters of Credit hereunder. SECTION 11. AGREEMENT AMONG BANKS - - ---------------------------------- 11.1 Appointment and Grant of Authority. The Banks hereby appoint PNC, and PNC hereby agrees to act as, Agent under this Agreement, the other Loan Documents, and Agent under the Mortgage, the Guaranty and Financing Statements for the benefit of the Banks. The Agent shall have and may exercise such powers under this Agreement as are specifically delegated to it by the terms hereof or of the other Loan Documents, together with such other powers as are incidental thereto. Without limiting the foregoing, the Agent, on behalf of the Banks, is authorized to execute all of the Loan Documents (other than this Agreement) and to accept all of the Loan Documents and all other agreements, documents or instruments reasonably required to carry out the intent of the parties to this Agreement. Without limiting the foregoing, the Agent, on behalf of the Banks as secured parties, is authorized to execute and/or accept the Mortgage, any Financing Statements, any other Loan Documents and all other agreements, documents or instruments reasonably required to carry out the intent of the parties to this Agreement. 11.2 Reliance by Agent on Banks for Funding. Unless the Agent shall have received notice from a Bank prior to a funding date that such Bank will not make available to the Agent such Bank's portion of net disbursements of Revolving Credit Loans, the Agent may assume that such Bank has made such portion available to the Agent in accordance with Section 7.1 above and the Agent may, in reliance upon such assumption, make Revolving Credit Loans to the Borrower. If and to the extent that such Bank has not made such portion available to the Agent on or prior to any funding date, such Bank and the Borrower severally agree to repay to the Agent immediately upon demand, in immediately available funds, such unpaid amount, together with interest thereon at the Federal Funds Rate for each day from the applicable funding date until such amount is repaid to the Agent. If such Bank shall repay to the Agent such corresponding amount, such amount shall constitute a Revolving Credit Loan made by such Bank for purposes of this Agreement. The failure by any Bank to pay its portion of a Revolving Credit Loan made by the Agent shall not relieve any other Bank of its obligation to pay its portion of net disbursements of Revolving Credit Loans, but no Bank shall be responsible for the failure of any other Bank to make its net share of Revolving Credit Loans to be made by such other Bank on such funding date. 11.3 Non-Reliance on Agent. Each Bank agrees that it has, independently and without reliance on the Agent, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrower and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. Except as otherwise provided herein, the Agent shall have no duty to keep the Banks informed as to the performance or observance by the Borrower of this Agreement or any other document referred -54- to or provided for herein or to inspect the properties or books of the Borrower. The Agent, in the absence of gross negligence or willful misconduct, shall not be liable to any Bank for its failure to relay or furnish to the Bank any information. The preceding provisions of this Section 11. 3 to the contrary notwithstanding, the Agent shall notify each of the Banks as soon as practicable after it receives notice of the occurrence of any default hereunder or under any other Loan Document. 11.4 Responsibility of Agent and Other Matters. (a) Ministerial Nature of Duties. As between the Banks and itself, the Agent shall not have any duties or responsibilities except those expressly set forth in this Agreement or in the other Loan Documents, and those duties and responsibilities shall be subject to the limitations and qualifications set forth in this Section 11. The duties of the Agent shall be ministerial and administrative in nature. (b) Limitation of Liability. As between the Banks and itself, neither the Agent nor any of its respective directors, officers, employees or agents shall be liable, except for gross negligence or willful misconduct, for any action taken or omitted (whether or not such action taken or omitted is within or without the Agent's responsibilities and duties expressly set forth in this Agreement) under or in connection with this Agreement or any other instrument or document in connection herewith. Without limiting the foregoing, neither the Agent nor any of its directors, officers or employees, shall be responsible for, or have any duty to examine (i) the genuineness, execution, validity, effectiveness, enforceability, value or sufficiency of (A) this Agreement or any of the other Loan Documents or (B) any other document or instrument furnished pursuant to or in connection with this Agreement, (ii) the collectibility of any amounts owed by the Borrower to the Banks, (iii) the truthfulness of any recitals or statements or representations or warranties made to the Agent or the Banks in connection with this Agreement, (iv) any failure of any party to this Agreement to receive any communication sent, including any telegram, telex, teletype, telecopy, bank wire, cable, radiogram or telephone message or any writing, application, notice, report, statement, certificate, resolution, request, order, consent, letter or other instrument or paper or communication entrusted to the mails or to a delivery service, or (v) the assets or liabilities or financial condition or results of operations or business or creditworthiness of the Borrower. (c) Reliance. The Agent shall be entitled to act, and shall be fully protected in acting upon, any telegram, telex, teletype, telecopy, bank wire, cable or radiogram or any writing, application, notice, report, statement, certificate, resolution, request, order, consent, letter or other instrument or paper or communication believed by the Agent in good faith to be genuine and correct and to have been signed or sent or made by a proper person. The Agent may consult counsel and shall be entitled to act, and shall be fully protected in any action taken in good faith, in accordance with advice given by counsel. The Agent may employ agents and attorneys-in-fact and shall not be liable for the default or misconduct of any such agents or attorneys-in-fact selected by the Agent with reasonable care. The Agent shall not be bound to ascertain or inquire as to the performance or observance of any of the terms, provisions or conditions of this Agreement or any of the other Loan Documents on the part of the Borrower or any other party thereto. 11.5 Action on Instructions. The Agent shall be entitled to act or refrain from acting, and shall be fully protected in acting or refraining from acting, under this Agreement, the other Loan Documents or any other instrument or document in connection herewith or -55- therewith, in accordance with the instructions of the Required Banks (as such term is defined in Section 11.6 below) or, in the case of the matters set forth in items (i) through (viii) of Section 11.13, from all of the Banks. 11.6 Required Banks. For the purposes of this Agreement, the term "Required Banks" shall mean Banks with aggregate Commitment Percentages equal to at least 66-2/3% of all Commitment Percentages. 11.7 Action Upon Occurrence of an Event of Default. If an event of default set forth in Section 8 hereof has occurred, the Banks shall immediately consult with one another in an attempt to agree upon a mutually acceptable course of conduct. Failing agreement upon a course of conduct and if the Required Banks wish to declare an event of default and/or exercise their rights hereunder, the Agent will exercise the rights of the Banks hereunder as directed by the Required Banks. 11.8 Indemnification. To the extent the Borrower does not reimburse and save harmless the Agent according to the terms hereof for and from all costs, expenses and disbursements in connection herewith, such costs, expenses and disbursements, shall be borne by the Banks ratably in accordance with their respective Commitment Percentages. Each Bank hereby agrees on such basis (i) to reimburse the Agent for such Bank's pro rata share of all such reasonable costs, expenses and disbursements on request and (ii) to the extent of each such Bank's pro rata share, to indemnify and save harmless the Agent against and from any and all losses, obligations, penalties, actions, judgments and suits and other costs, expenses and disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent, other than as a consequence of gross negligence or willful misconduct on the part of the Agent, arising out of or in connection with this Agreement, the other Loan Documents or any other agreement, instrument or document in connection herewith or therewith, or any request of the Required Banks, including without limitation the reasonable costs, expenses and disbursements in connection with defending itself against any claim or liability related to the exercise or performance of any of its powers or duties under this Agreement, the other Loan Documents, or any of the other agreements, instruments or documents delivered in connection herewith or the taking of any action under or in connection with any of the foregoing. 11.9 Agent's Rights as a Bank. With respect to the commitments of the Agent as a Bank hereunder, and any loans of the Agent to Borrower under this Agreement, the other Loan Documents and any other agreements, instruments and documents delivered pursuant hereto, the Agent shall have the same rights and powers, duties and obligations under this Agreement, the other Loan Documents or other agreement, instrument or document as any Bank and may exercise such rights and powers and shall perform such duties and fulfill such obligations as though it were not the Agent. The Agent may accept deposits from, lend money to, and generally engage, and continue to engage, in any kind of business with the Borrower as if it were not the Agent. 11.10 Payment to Banks. Promptly after receipt from the Borrower of any principal repayment of any Loan, any interest due thereunder, and any other interest or fees or other amounts due under any of the Loan Documents, the Agent shall distribute to each Bank in immediately available funds that Bank's Commitment Percentage of the funds so received, provided that in the event payments are received by 11:00 a.m., Pittsburgh time, by the Agent with respect to the Loans and such payments are not distributed to the Banks on the same day -56- received by the Agent, the Agent shall pay the Banks the Federal Funds Rate with respect to the amount of such payments for each day held by the Agent and not distributed to the Banks. 11.11 Pro Rata Sharing. All interest and principal payments on the Notes and all Commitment Fees are to be divided pro rata among the Banks in accordance with their respective Ratable Share. Any sums obtained from the Borrower by any Bank by reason of the exercise of its rights of setoff or banker's lien shall be shared pro rata among the Banks. Nothing in this Section 11.11 shall be deemed to require the sharing among the Banks of collections specifically relating to any other indebtedness of the Borrower to any Bank. 11.12 Successor Agent. The Agent may resign as Agent upon ninety (90) days' notice to the Banks and the Borrower. If such notice shall be given, the Banks shall appoint a successor agent for the Banks, during such ninety (90) day period, which successor agent shall be reasonably satisfactory to the Borrower, to serve as agent hereunder and under the several documents. If at the end of such ninety (90) day period the Banks have not appointed such a successor, the Agent shall procure a successor reasonably satisfactory to the Banks and the Borrower, to serve as agent for the Banks hereunder and under the several documents. Any such successor agent shall succeed to the rights, powers and duties of the Agent. Upon the appointment of such successor agent or upon the expiration of such ninety (90) day period (or any longer period to which the Agent has agreed), the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article XI shall inure to the benefit of such retiring Agent as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. 11.13 Amendments and Waivers. The Required Banks, or the Agent with the consent in writing of the Required Banks, and the Borrower may, subject to the provisions of this Section 11.13, from time to time enter into written supplemental agreements to this Agreement and the other Loan Documents for the purpose of adding or deleting any provisions or otherwise changing, varying or waiving in any manner the rights of the Banks, the Agent or the obligor thereunder or the conditions, provisions or terms thereof or waiving any event of default thereunder or consenting to an action of the Borrower, but only to the extent specified in such written agreements; provided, however, that no such supplemental agreement shall, without the consent of all the Banks: (i) waive any event of default by the Borrower in any payment of principal and/or interest due hereunder and under any of the Notes or any Reimbursement Obligation or other amount due with respect to the Letters of Credit; (ii) decrease any interest rate provided for herein; (iii) change the Termination Date or otherwise extend the maturity of any obligation hereunder; (iv) release any guarantor of the Indebtedness, any of the Property from the Mortgage, any Security Agreement and/or any Financing Statement or any other collateral described in any Loan Document except in the case of incidental sales of the Property in the ordinary course of the business of the Borrower; -57- (v) reduce the Commitment Fee; (vi) increase the maximum principal amount of the Revolving Credit; (vii) permit the Borrower to assign its rights or duties hereunder or under any of the other Loan Documents; or (viii) amend or waive the provisions of this Section 11.13; Any such supplemental agreement shall apply equally to each of the Banks and shall be binding upon the Borrower, the Banks, the Agent and all future holders of the Notes. In the case of any waiver, the Borrower, the Banks and the Agent shall be restored to their former positions and rights, and any event of default hereunder or under the other Loan Documents waived shall be deemed to be cured and not continuing, but no such waiver shall extend to any subsequent or other event of default hereunder or under the other Loan Documents, or impair any right consequent thereon. 11.14 Agent's Fees. The Borrower shall pay to the Agent certain fees (the "Fees") under the terms of a letter among the Borrower and Agent, as amended from time to time. 11.15 Funding by Branch, Subsidiary or Affiliate. (a) Notional Funding. Each Bank shall have the right from time to time, without notice to the Borrower, to deem any branch, subsidiary or affiliate (which for the purposes of this Section 11.15 shall mean any corporation or association which is directly or indirectly controlled by or is under direct or indirect common control with any corporation or association which directly or indirectly controls such Bank) of such Bank to have made, maintained or funded any Loan to which the Euro-Rate Option applies at any time, provided that immediately following (on the assumption that a payment were then due from the Borrower to such other office), and as a result of such change, the Borrower would not be under any greater financial obligation pursuant to Section 1.6(i) than it would have been in the absence of such change. Notional funding offices may be selected by each Bank without regard to such Bank's actual methods of making, maintaining or funding the Loans or any sources of funding actually used by or available to such Bank. (b) Actual Funding. Each Bank shall have the right from time to time to make or maintain any Loan by arranging for a branch, subsidiary or affiliate of such Bank to make or maintain such Loan subject to the last sentence of this Section 11.15(b). If any Bank causes a branch, subsidiary or affiliate to make or maintain any part of the Loans hereunder, all terms and conditions of this Agreement shall, except where the context clearly requires otherwise, be applicable to such part of the Loans to the same extent as if such Loans were made or maintained by such Bank, but in no event shall any Bank's use of such a branch, subsidiary or affiliate to make or maintain any part of the Loans hereunder cause such Bank or such branch, subsidiary or affiliate to incur any cost or expenses payable by the Borrower hereunder or require the Borrower to pay any other compensation to any Bank (including any expenses incurred or payable pursuant to Section 1.6(i)) which would otherwise not be incurred. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -58- WITNESS the due execution hereof the day and year first above written. WITNESS: ATLAS ENERGY GROUP, INC., an Ohio corporation /s/ Bruce M. Wolf By /s/ J.R. O'Mara - - ------------------------------- -------------------------------- Name: J.R. O'Mara Title: President and C.E.O. WITNESS: ATLAS RESOURCES, INC., a Pennsylvania corporation /s/ Bruce M. Wolf By /s/ J.R. O'Mara - - ------------------------------- -------------------------------- Name: J.R. O'Mara Title: President and C.E.O. WITNESS: TRANSATCO CORPORATION, an Ohio corporation /s/ Bruce M. Wolf By /s/ J.R. O'Mara - - ------------------------------- -------------------------------- Name: J.R. O'Mara Title: President and C.E.O. WITNESS: ATLAS ENERGY CORPORATION, an Ohio corporation /s/ Bruce M. Wolf By /s/ J.R. O'Mara - - ------------------------------- -------------------------------- Name: J.R. O'Mara Title: President and C.E.O. [SIGNATURES CONTINUED ON NEXT PAGE] -59- [CONTINUATION OF SIGNATURES TO NINTH AMENDED AND RESTATED LOAN AGREEMENT] WITNESS: MERCER GAS GATHERING, INC., a Pennsylvania corporation /s/ Bruce M. Wolf By /s/ J.R. O'Mara - - ------------------------------- -------------------------------- Name: J.R. O'Mara Title: President and C.E.O. WITNESS: ATLAS GAS MARKETING, INC., a Pennsylvania corporation /s/ XXXXXXXXXX By /s/ Bruce M. Wolf - - ------------------------------- -------------------------------- Name: Bruce M. Wolf Title: President WITNESS: PENNSYLVANIA INDUSTRIAL ENERGY, INC., a Pennsylvania corporation /s/ Bruce M. Wolf By /s/ J.R. O'Mara - - ------------------------------- -------------------------------- Name: J.R. O'Mara Title: President and C.E.O. WITNESS: THE ATLAS GROUP, INC. (f/k/a "AEG HOLDINGS, INC."), a Pennsylvania corporation /s/ Bruce M. Wolf By /s/ J.R. O'Mara - - ------------------------------- -------------------------------- Name: J.R. O'Mara Title: President and C.E.O. [SIGNATURES CONTINUED ON NEXT PAGE] -60- [CONTINUATION OF SIGNATURES TO NINTH AMENDED AND RESTATED LOAN AGREEMENT] WITNESS: AED INVESTMENTS, INC., a Delaware corporation /s/ XXXXXXXXXX By /s/ Bruce M. Wolf - - ------------------------------- -------------------------------- Name: Bruce M. Wolf Title: President WITNESS: ARD INVESTMENTS, INC., a Delaware corporation /s/ XXXXXXXXXX By /s/ Bruce M. Wolf - - ------------------------------- -------------------------------- Name: Bruce M. Wolf Title: President WITNESS: AIC, INC., a Delaware corporation /s/ XXXXXXXXXX By /s/ Bruce M. Wolf - - ------------------------------- -------------------------------- Name: Bruce M. Wolf Title: President WITNESS: BANK: PNC BANK, NATIONAL ASSOCIATION, as Agent and as Initial Bank /s/ XXXXXXXXXX By /s/ Thomas Majeski - - ------------------------------- -------------------------------- Name: Thomas Majeski Title: Vice President Initial Commitment Percentage: 100% -61- EX-10.13 3 LOAN AND SECURITY AGREEMENT AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT Fidelity Leasing, Inc. with First Union National Bank, as Agent and Each of the Financial Institutions Now or Hereafter Shown on the Signature Pages hereof as Lenders TABLE OF CONTENTS
PAGE SECTION 1. DEFINITIONS AND INTERPRETATION........................................................................2 1.1 Terms Defined...............................................................................2 1.2 Accounting Principles......................................................................12 SECTION 2. THE LOANS............................................................................................12 2.1 Credit Facility - Description..............................................................12 2.2 Advances, Conversions and Payments.........................................................15 2.3 Preconditions to Advances and Assignment of Leases and Leased Property.....................17 2.4 Credit Facility Interest...................................................................19 2.5 Additional Interest Provisions.............................................................23 2.6 Fees.......................................................................................24 2.7 Prepayments................................................................................25 2.8 Use of Proceeds............................................................................27 2.9 Capital Adequacy...........................................................................27 SECTION 3. COLLATERAL...........................................................................................27 3.1 Description................................................................................27 3.2 Lien Documents.............................................................................27 3.3 Other Actions..............................................................................28 3.4 Searches...................................................................................28 3.5 Filing Security Agreement..................................................................29 3.6 Power of Attorney..........................................................................29 SECTION 4. CLOSING AND CONDITIONS PRECEDENT TO ADVANCES.........................................................29 4.1 Resolutions, Opinions, and Other Documents.................................................30 4.2 Absence of Certain Events..................................................................31 4.3 Warranties and Representations at Closing..................................................31 4.4 Compliance with this Agreement.............................................................31 4.5 Officers' Certificate......................................................................32 4.6 Closing....................................................................................32 4.7 Non-Waiver of Rights.......................................................................32 SECTION 5. REPRESENTATIONS AND WARRANTIES.......................................................................32 5.1 Corporate Organization and Validity........................................................32 5.2 Places of Business.........................................................................33 5.3 Pending Litigation.........................................................................33 5.4 Title to Collateral........................................................................34 5.5 Governmental Consent.......................................................................34 5.6 Taxes......................................................................................34 5.7 Financial Statements.......................................................................34 5.8 Full Disclosure............................................................................35 5.9 Subsidiaries...............................................................................35 5.10 Guarantees.................................................................................35 5.11 Government Regulations, etc................................................................35 5.12 Names......................................................................................36 5.13 Other Associations.........................................................................37 5.14 Environmental Matters......................................................................37 5.15 Capital Stock..............................................................................37 5.16 Solvency...................................................................................38 5.17 Leases and Leased Property.................................................................38 SECTION 6. BORROWER'S AFFIRMATIVE COVENANTS.....................................................................42 6.1 Payment of Taxes and Claims................................................................42 6.2 Maintenance of Properties and Corporate Existence..........................................42 6.3 Business Conducted.........................................................................44 6.4 Litigation.................................................................................44 6.5 Taxes......................................................................................44 6.6 Bank Accounts..............................................................................44 6.7 Warranties for Future Advances.............................................................44 6.8 Financial Covenants........................................................................45 6.9 Change of Ownership Interests..............................................................45 6.10 Financial and Business Information.........................................................46 6.11 Officers' Certificates.....................................................................47 6.12 Inspection.................................................................................48 6.13 Tax Returns and Reports....................................................................48 6.14 Material Adverse Developments..............................................................48 6.15 Places of Business.........................................................................48 6.16 Sale of Collateral.........................................................................48
PAGE SECTION 7. BORROWER'S NEGATIVE COVENANTS:.......................................................................49 7.1 Merger, Consolidation, Dissolution or Liquidation..........................................49 7.2 Liens and Encumbrances.....................................................................49 7.3 Negative Pledge............................................................................49 7.4 Transactions With Affiliates or Subsidiaries...............................................50 7.5 Guarantees.................................................................................50 7.6 Indebtedness...............................................................................50 7.7 Use of Lenders' Name.......................................................................50 SECTION 8. DEFAULT..............................................................................................51 8.1 Events of Default..........................................................................51 8.2 Cure.......................................................................................53 8.3 Rights and Remedies on Default.............................................................54 8.4 Nature of Remedies.........................................................................55 8.5 Set-Off....................................................................................55 9.1 Appointment and Authorization..............................................................56 9.2 General Immunity...........................................................................56 9.3 Consultation with Counsel..................................................................56 9.4 Documents..................................................................................56 9.5 Rights as a Bank...........................................................................57 9.6 Responsibility of Agent....................................................................57 9.7 Collections and Disbursements..............................................................58 9.8 Indemnification............................................................................59 9.9 Expenses...................................................................................59 9.10 No Reliance................................................................................60 9.11 Reporting..................................................................................60 9.12 Removal of Agent...........................................................................60 9.13 Action on Instructions of Lenders..........................................................61 9.14 Several Obligations........................................................................61 9.15 Consent of Banks...........................................................................61 9.16 Participations and Assignments.............................................................63 SECTION 10. MISCELLANEOUS.......................................................................................64 10.1 GOVERNING LAW..............................................................................64 10.2 Integrated Agreement.......................................................................64 10.3 Waiver.....................................................................................64 10.4 Time.......................................................................................65 10.5 Expenses of Agent..........................................................................65 10.6 Brokerage..................................................................................65 10.7 Notices....................................................................................65 10.8 Headings...................................................................................66 10.9 Survival...................................................................................66 10.10 Successors and Assigns.....................................................................67 10.11 Counterparts...............................................................................67 10.12 Modification...............................................................................67 10.13 Signatories................................................................................67 10.14 Third Parties..............................................................................67 10.15 Discharge of Taxes, Borrower's Obligations, Etc............................................67 10.16 Most Favored Lenders.......................................................................68 10.17 Consent to Jurisdiction....................................................................68 10.18 Waiver of Jury Trial.......................................................................68 10.19 Information to Participant.................................................................68
EXHIBIT LIST Exhibit 2.1(b) -- Form of Revolving Credit Note Exhibit 2.1(c) -- Form of Term Note Exhibit 2.1(e) -- Form of Borrowing Base Certificate Exhibit 2.3(b)(ii) -- Form of Assignment Agreement Exhibit 5.1 -- Borrower's States of Qualifications Exhibit 5.2 -- Places of Business Exhibit 5.3 -- Judgments, Proceedings, Litigation and Orders Exhibit 5.9 -- Subsidiaries and Affiliates Exhibit 5.10 -- Existing Guaranties, Investments and Borrowings, Leases and Employment Agreements Exhibit 5.12(a) -- Schedule of Names Exhibit 5.12(b) -- Trademarks, Patents and Copyrights Exhibit 5.13 -- Other Associations Exhibit 5.14 -- Environmental Matters Exhibit 5.15 -- Capital Stock Exhibit 5.17 -- Form of Lease Exhibit 6.11 -- Officers' Certificates SCHEDULES Schedule A -- Schedule and Addresses of Lenders AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT This Amended and Restated Loan and Security Agreement ("Agreement") is dated this ____ day of September, 1998, by and among Fidelity Leasing, Inc., a Pennsylvania corporation ("Borrower"), First Union National Bank, a national banking association in its capacity as agent ("Agent") and as lender, and the financial institutions listed on Schedule A attached hereto and made a part of this Agreement (as such Schedule may be amended, modified or replaced from time to time), in their capacity as lenders (singly, each is a "Lender" and collectively, all are "Lenders"). BACKGROUND A. On December 24, 1996, Borrower entered into a certain Loan and Security Agreement among Borrower, CoreStates Bank, N.A. ("CoreStates"), as agent and as a lender and First Union National Bank ("First Union") as co-agent and as a lender, as amended from time to time ("Existing Loan Agreement") and certain other instruments, documents and agreements related thereto, all as amended from time to time (collectively with the Existing Loan Agreement, "Existing Loan Documents") pursuant to which certain credit facilities were extended by CoreStates and First Union to Borrower as set forth therein. B. CoreStates has merged with First Union with First Union being the surviving entity and the owner of all of the right, title and interest of the lenders under the Existing Loan Documents. C. First Union has agreed to assign to European American Bank a portion of its interest in the Loans outstanding under the Existing Loan Documents as well as a portion of its Pro Rata Percentage of the Credit Facility established thereunder. D. Borrower wishes, and Agent and Lenders agree, to hereby amend and restate the Existing Loan Agreement. Lenders are willing to make loans and grant extensions of credit to Borrower under the terms and provisions hereinafter set forth. - 7 - E. The parties desire to define the terms and conditions of their relationship to writing. NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: SECTION 1. DEFINITIONS AND INTERPRETATION 1.1 Terms Defined: As used in this Agreement, the following terms have the following respective meanings: Account - Any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance. Adjusted Debt to Tangible Net Worth Ratio - At any time means the ratio of (i) total Liabilities less Nonrecourse Debt to (ii) Borrower's Tangible Net Worth less an amount equal to fifty percent (50%) of all restricted cash, restricted receivables and other collateral pledged or sold in connection with Securitization Transaction(s) (it being understood that for the purposes hereof, the asset identified on Borrower's balance sheet as of June 30, 1998 as $14,000,000 in notes secured by equipment leases shall not be considered restricted receivables provided no additional assets shall be included therein). Adjusted LIBOR Rate - As applied to a LIBOR Based Rate Loan, for any LIBOR Interest Period, the rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) determined pursuant to the following formula: Adjusted LIBOR Rate = LIBOR Rate (1 - Reserve Percentage) For purposes hereof, "LIBOR Rate" shall mean the arithmetic average of the rates of interest per annum (rounded upwards, if necessary to the next 1/16 of 1%) at which the Agent is offered deposits of United States dollars in the London Interbank market on or about eleven o'clock (11:00) a.m. London time two (2) Business Days prior to the commencement of such LIBOR Interest Period on amounts substantially equal to such LIBOR Based Rate Loan as to which the Borrower may elect the LIBOR Based Rate to be applicable with a maturity of comparable duration to the LIBOR Interest Period selected by the Borrower for such LIBOR Based Rate Loan. Administration Fee - Section 2.6(b). Advance(s) - Any monies advanced or credit extended to Borrower by any Lender under the Credit Facility. Affiliate - As to any Person, each other Person that directly, or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, the Person in question. Agreement - This Amended and Restated Loan and Security Agreement, as it may hereafter be amended, supplemented or replaced from time to time. Assignment Agreement - Section 2.3(b)(ii). Authorized Officer - Any officer or partner of Borrower authorized by specific resolution of Borrower to request Advances as set forth in the incumbency certificate referred to in Section 4.1(d) of this Agreement. Base Rate - On any date of determination, a per annum rate of interest which is 225 basis points (in the case of Term Loans) or 175 basis points (in the case of Revolving Credit Loans) in excess of the CD Rate, on such date. Base Rate Loans - Any portion of Loans on which interest accrues at the Base Rate. Books and Records - All of Borrower's original ledger cards, payment schedules, credit applications, Contract Rights, liens, security instruments, guarantees and other General Intangibles relating in any way to the Leases or Leased Property. Borrowing Base - As of any date of determination, an amount equal to the lesser of: (i) the Maximum Credit Limit, and (ii) 80% of the sum of the gross Lease Receivable balance corresponding to each Eligible Lease (net of any deposits or other advance cash receipts). Business Day - Any day that is not a Saturday or Sunday or day on which Agent or any Lender is required or permitted to close. CD Rate - On any date of determination, that rate quoted in the Money Rate Section of The Wall Street Journal on such date, as the average of top rates given by major New York banks on primary new issues of certificates of deposit with a maturity of six (6) months. If for any reason The Wall Street Journal is unavailable, a CD Rate shall be as quoted in another publication of comparable standing. Closing - Section 4.6. Closing Date - Section 4.6. Collateral - All now or hereafter existing Leases and Leased Property, Books and Records and all cash and noncash proceeds, thereof, including insurance proceeds. Contract Rights - All rights under contracts not yet earned by performance. Credit Facility - Section 2.1(a). Current Term - The Initial Term during the period of the Initial Term, and any renewal or extended term during the term thereof, if Lenders elect, in their sole discretion, to renew or extend the Credit Facility. Defaulted Lease - Any Lease where the Lease or Leased Property associated therewith fails, at any time, to comply with all of the representations and warranties set forth in Section 5.17 below. Defaulting Lender - Section 2.2(b)(iii)(C). Default Rate - Section 2.5(b). Distribution - (1) Dividends or other distributions on capital stock of Borrower; and (2) The redemption, repurchase or acquisition of such stock or of warrants, rights or other options to purchase such stock. Eligible Lease(s) - Each Lease which meets all of the following specifications: (1) is not subject to any Lien, security interest or prior assignment other than Agent's security interest for the benefit of Lenders and the rights of the Lessees thereunder; (2) is a valid and enforceable Lease, representing the undisputed obligation of the Lessee, with rentals due thereunder not more than 61 days contractually past due; (3) is not subject to any defense, set off, counterclaim, deduction, or allowance or adjustment; (4) unless otherwise agreed to in writing by Agent, provides for the lease of Leased Property with an aggregate invoice price of less than $1,000,000 except in the case of Leases to Investment Grade Lessees which may provide for the lease of Leased Property with an aggregate invoice price of up to $1,500,000; (5) provides for the lease of Leased Property which has not been returned, rejected, lost or damaged; (6) arose in the ordinary course of Borrower's business; (7) Borrower has not received notice of bankruptcy, receivership, reorganization, insolvency or material adverse change in the financial condition of the Lessee; (8) the Lessee is not a Subsidiary or Affiliate of Borrower; (9) is not a Defaulted Lease and complies with all general warranties set forth in Section 5.17 hereof; (10) does not have an initial stated term in excess of sixty (60) months, provided, however, that lease(s) with an initial stated term of up to 72 months may be considered Eligible Leases so long as the aggregate Lease Receivable(s) of all such Lease(s) shall, at no time, exceed an amount which is ten (10%) percent of the outstanding principal balance of the Loans; (11) has not, in the case of Revolving Credit Loans, been pledged to Agent and/or Lenders for a period of more than twelve (12) months; (12) contains a provision whereby the Lessee agrees not to assert any claim or reduction, counterclaim, setoff, recoupment, or any other claim, allowance or adjustment against any assignee of Borrower; and(13) is a Lease with a Lease Receivable, which together with all other Lease Receivables owed by the same Lessee, does not exceed $1,000,000 in the aggregate. Equipment - The meaning ascribed thereto in the Pennsylvania Uniform Commercial Code. ERISA - The Employee Retirement Income Security Act of 1974, as the same may be amended, from time to time. Event of Default - Section 8.1. Expenses - Section 10.5. Federal Funds Rate - means on any day, the effective rate of interest charged by the Federal Reserve Bank of Philadelphia for overnight Federal Funds in Philadelphia as reported by the Federal Reserve Bank in Philadelphia for such day. Financial Statements - The financial statements of Borrower prepared in accordance with GAAP. Fixed Charge Coverage Ratio - The ratio of Borrower's operating cash flow (income before taxes, depreciation, amortization and extraordinary items, plus interest expense) to the sum of (i) interest expense; (ii) mandatory principal payments and (iii) an amount equal to twenty-five (25%) percent of the average daily outstanding principal balance of the Revolving Credit Loans. GAAP - Generally accepted accounting principles as in effect on the Closing Date, as may be amended from time to time. General Intangibles - The meaning ascribed thereto in the Pennsylvania Uniform Commercial Code and shall include, but not be limited to, all contract rights (including without limitation, all rights under remarketing agreements), chattel paper, documents, instruments, books, records, ledgers, journals, check books, print outs, blue prints, designs, computer programs, computer tapes, punch cards, formulae, drawings, customer lists, choses in action, claims, goodwill, designs and plans, licenses, license agreements, tax and all other types of refunds, returned and unearned insurance premiums, rights and claims under insurance policies, patents, patent application, trademarks, trade names, trade styles, trademark applications and copyrights. Good Business Day - Any Business Day when banks in Philadelphia, Pennsylvania and London, England are open for business. Guarantors - Resource America, Inc., Resource Leasing, Inc., FL Partnership Management, Inc. and FL Financial Services, Inc. Guaranty - Section 4.1(l). Hazardous Substance - Section 5.14. Initial Term - Section 2.1(d). Inventory - The meaning ascribed thereto in the Pennsylvania Uniform Commercial Code and shall include all additions, improvements, accessions, attachments, upgrades, replacements and substitutions thereto or therefor. Investment Grade Lessee - A Lessee with a public debt rating from Moody's Investor Service, Inc. of at least Baa or from Standard & Poor's Rating Services of at least BBB or an equivalent rating as approved by Agent. Lease(s) - All of Borrower's Accounts, Documents, General Intangibles, Instruments and Chattel Paper arising in connection with each and every equipment lease (whether a "true lease" or a lease intended as security) and/or schedule to a master lease agreement, assigned to Lenders and/or Agent for the benefit of Lenders, or now or hereafter designated on any schedule as being assigned to Lenders and/or Agent for the benefit of Lenders. The term "Lease" includes (i) all payments to be made thereunder, (ii) all rights of Borrower therein, and (iii) any and all amendments, renewals, extensions or guarantees thereof. Lease Receivable(s) - With respect to each Lease, the gross value of the contractual firm term lease payments plus the absolute and unconditional obligation, if any, of the corresponding Lessee to make a payment(s) at the end of the stated Lease term. Leased Property - Any personal property leased or to be leased or financed by Borrower pursuant to a Lease; the term "Leased Property" includes all of Borrower's Inventory or Equipment so leased and any and all additions, improvements, accessions, attachments, upgrades, replacements and substitutions thereto and therefor. Lessee - The lessee(s) or obligor(s) responsible for payment and/or performance under a Lease. Liabilities - All liabilities of every kind of Borrower and its Subsidiaries as would be shown on a consolidated financial statement of Borrower prepared in accordance with GAAP, and all contingent and unmatured obligations of Borrower and its Subsidiaries pursuant to any and all guarantee, surety or similar type agreements relating to the debts of Persons outside of the consolidated group. LIBOR Based Rate - A rate of interest determined by reference to the Adjusted LIBOR Rate. LIBOR Based Rate Loan - Any portion of the Revolving Credit Loans or any Term Loan on which interest accrues at the LIBOR Based Rate. LIBOR Based Revolving Loan Rate - The Adjusted LIBOR Rate plus 150 basis points. LIBOR Market Index Rate - For any day, is the rate (rounded to the next higher 1/100 of 1%) for one (1) month U.S. dollar deposits as reported on Telerate page 3750 as of 11:00 a.m. London time, for such day, provided if such day is not a Good Business Day, the immediately preceding Good Business Day (or if not so reported, then as determined by Agent from another recognized source or interbank quotation plus 150 basis points). LIBOR Market Index Rate Loan - Any portion of the Revolving Credit Loans or any Term Loan on which interest accrues at the LIBOR Market Index Rate. LIBOR Based Term Loan Rate - The Adjusted LIBOR Rate plus 225 basis points. LIBOR Interest Period - Section 2.4(c)(i). Lien - Any interest of any kind or nature in property securing an obligation owed to, or a claim of any kind or nature in property by, a Person other than the owner of the Property, whether such interest is based on the common law, statute, regulation or contract, and including, but not limited to, a security interest or lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt, a lease, consignment or bailment for security purposes, a trust, or an assignment. Loans - All Revolving Credit Loans and Term Loans. Loan Documents - This Agreement, the Revolving Credit Notes, the Term Notes, the Guaranty and all agreements, instruments and documents executed and/or delivered from time to time in connection therewith, as amended or replaced from time to time. Majority Lenders - At any time, Lenders holding Pro Rata Percentages aggregating at least fifty-one (51%) percent of the aggregate amount outstanding under the Credit Facility at such time; provided, however, that if there is no outstanding amount under the Credit Facility, the Majority Lenders shall be determined by those Lenders holding fifty-one(51%) percent of the Maximum Credit Limit. Maturity Date - The later of (i) March 31, 2000 or (ii) the last day of the then Current Term. Maximum Credit Limit - The sum of the Pro Rata Shares which at the time of Closing equals Twenty Million Dollars ($20,000,000). Net Income - The consolidated net income after taxes of Borrower as such would appear on Borrower's consolidated statement of income, prepared in accordance with GAAP. Net Worth - At any time means the amount of stockholders equity on a consolidated basis plus Borrower's Subordinated Indebtedness. Nonrecourse Debt - All Liabilities of Borrower which are non-recourse in nature and treated as non-recourse obligations on Borrower's Financial Statements. Non-recourse Debt shall not include any Liabilities which are partially recourse and may be off balance sheet. Obligations - All existing and future liabilities and obligations of every kind or nature at any time owing by Borrower to Lenders (or any of them)and/or to Agent, whether joint or several, related or unrelated, primary or secondary, matured or contingent, due or to become due, and whether principal, interest, fees or Expenses, including, without limitation, obligations in respect of the Revolving Credit Loans and Term Loans and any extensions, modifications, substitutions, increases and renewals thereof, and the payment of all reasonable amounts advanced by Agent (or any Lender after the occurrence of an Event of Default) to preserve, protect and enforce rights hereunder and in the Collateral and all Expenses incurred by Agent (or any Lender after the occurrence of an Event of Default) in connection therewith. Pennsylvania Uniform Commercial Code or UCC - The Uniform Commercial Code as enacted in Pennsylvania, as the same shall be amended from time to time. Person - An individual, partnership, corporation, limited liability corporation, trust, unincorporated association or organization, joint venture or any other entity. Present Value - The value, from time to time, as of the date of determination, of the remaining Lease Receivables due under a Lease, discounted using the applicable interest rate as set forth herein. Pro Rata Percentage - Section 2.1(a)(iii). Pro Rata Share - Section 2.1(a)(iii). Property - Any interest of Borrower in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. Regulation D - Regulation D of the Board of Governors of the Federal Reserve System, comprising Part 204 of Title 12, Code of Federal Regulations, as amended, and any successor thereto. Reserve Percentage - For a Lender, on any day, that percentage (expressed as a decimal) which is in effect on such day, prescribed by the Board of Governors of the Federal Reserve System (or any successor or any other banking authority to which a Lender is subject, including any board or governmental or administrative agency of the United States or any other jurisdiction to which a Lender is subject), for determining the maximum reserve requirement (including without limitation any basic, supplemental, marginal or emergency reserves) for (a) deposits of United States dollars or (b) Eurocurrency liabilities as defined in Regulation D, in each case used to fund a LIBOR Based Rate Loan subject to a LIBOR Based Rate. The Adjusted LIBOR Rate shall be adjusted automatically on and as of the effective day of any change in the Reserve Percentage. Revolving Credit Loans - Section 2.1(a). Revolving Credit Notes - Section 2.1(b). Securitization Transaction - Any transaction for which Agent has received 30 days prior written notice, using, in part, leases or leased property to secure notes issued by Borrower or a special purpose subsidiary of Borrower and in connection with which, Borrower will be subject to no recourse or limited recourse arising out of a servicing agreement. Stock Pledge Agreements - Section 4.1(m). Subordinated Indebtedness - All indebtedness which is subordinate in all respects to the Obligations pursuant to a subordination agreement acceptable to Agent in its sole discretion. Subordination Agreement - Section 4.1(n). Subsidiary - Any corporation more than fifty percent (50%) of whose voting stock is legally and beneficially owned by Borrower or owned by a corporation more than fifty percent (50%) of whose voting stock is legally and beneficially owned by Borrower. SuperMajority Lenders - At any time, Lenders holding Pro Rata Percentages aggregating at least sixty-six and two-thirds (66-2/3%) percent of the aggregate amount outstanding under the Credit Facility at such time; provided, however, that if there is no outstanding amount under the Credit Facility, the SuperMajority Lenders shall be determined by those Lenders holding sixty-six and two-thirds (66-2/3%) percent of the Maximum Credit Limit. Tangible Net Worth - Borrower's Net Worth less assets which would be classified as intangible on a balance sheet prepared in accordance with GAAP including, without limitation, trademarks, goodwill, deferred closing costs, loans to shareholders and Affiliates and "start-up" costs except Borrower may include up to $300,000 worth of intangible assets representing certain organizational costs and deferred taxes paid for by Borrower prior to September 30, 1996. Term Loan - Section 2.1(a). Term Notes - Section 2.1(c). Unmatured Event of Default - An event or condition which, with the passage of time, the giving of notice, or both, would become an Event of Default. Unused Line Fee - Section 2.6(a). 1.2 Accounting Principles: Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, this shall be done in accordance with GAAP, to the extent applicable, except as otherwise expressly provided in this Agreement. SECTION 2. THE LOANS 2.1 Credit Facility - Description: (a) (i) Subject to the terms and conditions of this Agreement, each Lender, severally, hereby establishes for the benefit of Borrower, a credit facility (collectively referred to as "Credit Facility") which shall include Advances extended by Lenders to or for the benefit of Borrower from time to time hereunder in the form of revolving credit loans ("Revolving Credit Loans") or term loans ("Term Loans"). The aggregate outstanding principal amount of all Loans, at any time, shall not exceed the Borrowing Base. Subject to such limitation, the outstanding balance of all Revolving Credit Loans may fluctuate from time to time, to be reduced by repayments made by Borrower and to be increased by future Revolving Credit Loans which may be made by Lenders. If the aggregate outstanding amount of all Loans at any time exceeds the Maximum Credit Limit, Borrower shall immediately repay such excess in full in accordance with Section 2.7. If the aggregate outstanding amount of all Loans exceeds the Borrowing Base, Borrower shall within ten (10) days of such occurrence, either (x) repay such excess in full or (y) pledge additional Eligible Leases in accordance with the terms hereof. The obligations of Borrower under the Credit Facility and this Agreement shall at all times be absolute and unconditional. Advances hereunder shall not exceed the lesser of (x) 95% of the original invoice amount (net of "soft costs") for the Leased Property being financed with the proceeds of the applicable Advance or (y) $500,000 or, in the case of Advances to finance Leases to Investment Grade Lessees, $1,000,000. (ii) Subject to the terms and conditions of this Agreement, and provided that no Event of Default or Unmatured Event of Default has occurred hereunder, Borrower shall have the option to have any Advance under the Credit Facility initially be a Revolving Credit Loan or a Term Loan and Borrower may at any time, in accordance with the terms hereof, convert a Revolving Credit Loan to a Term Loan. In no event shall the initial principal amount of any Term Loan be less than $2,000,000 or any Revolving Credit Loan be less than $500,000. At no time shall Borrower have more than five (5) Term Loans outstanding. (iii) Subject to the terms and conditions of this Agreement, each Lender severally agrees to lend to Borrower an amount equal to such Lender's respective percentage (as to each Lender, the percentage of the Credit Facility set forth opposite its name on Schedule "A" attached hereto and made a part hereof and referred to as its "Pro Rata Percentage") of the Advance requested by Borrower. The aggregate outstanding Loans by each Lender shall not exceed the respective amounts ("Pro Rata Shares") set forth opposite such Lender's name on Schedule "A". (b) At Closing, Borrower shall execute and deliver its promissory note to each Lender for the total principal amount of such Lender's Pro Rata Share (collectively as may be amended, modified or replaced from time to time, the "Revolving Credit Notes"). The Revolving Credit Notes shall evidence Borrower's absolute and unconditional obligation to repay such Lender(s) for all Revolving Credit Loans made by such Lender(s) under the Credit Facility, with interest as herein and therein provided. Each and every Revolving Credit Loan under the Credit Facility shall be deemed evidenced by the Revolving Credit Notes, which are deemed incorporated herein by reference and made a part hereof. All Revolving Credit Notes shall be substantially in the form set forth in Exhibit "2.1(b)" attached hereto and made a part hereof. (c) In the event Borrower requests any Advance to initially be a Term Loan, or at any time a Revolving Credit Loan is converted to a Term Loan, Borrower shall execute and deliver its promissory note to each Lender for the total principal amount of such Lender's Pro Rata Percentage of such Term Loan (collectively as may be amended, modified or replaced from time to time, the "Term Notes"). The Term Notes shall evidence Borrower's absolute and unconditional obligation to repay such Lender for the Term Loan made by such Lender under the Credit Facility, with interest as herein and therein provided. Each and every Term Loan under the Credit Facility shall be evidenced by separate Term Notes, which shall be deemed incorporated herein by reference and made a part hereof. All Term Notes shall be substantially in the form set forth in Exhibit "2.1(c)" attached hereto and made a part hereof. (d) The term ("Initial Term") of the Credit Facility shall expire on March 31, 2000. The Credit Facility may, nonetheless, be renewed at the end of the then Current Term in Lenders' sole discretion, for additional eighteen(18) month periods. Borrower's request for such renewal must be made at least six (6) months prior to the expiration of the then Current Term. After the Maturity Date, no further Advances shall be available from Lenders. (e) Borrower shall deliver, at least monthly on the first Business Day of each month, and with each borrowing request, unless Agent requests more frequent delivery, a Borrowing Base Certificate in the form of Exhibit 2.1(e) attached hereto and made a part hereof, executed by an Authorized Officer, evidencing the availability under the Borrowing Base and compliance with the respective sublimits. (f) Borrower hereby confirms and acknowledges that, as of September 28, 1998, the outstanding principal balance of all Loans, advances and extensions of credit made by the Bank under the Existing Loan Documents is $0 ($0 for Revolving Credit Loans and $0 for Term Loans) and such amount is owing without defense, setoff, counterclaim, discount, recoupment or charge of any kind by Borrower and shall be considered as Loans for all purposes hereunder as though such Loans, advances and extensions of credit had been originally made under this Agreement. 2.2 Advances, Conversions and Payments: (a) Except to the extent otherwise set forth in this Agreement, all payments of principal and of interest on the Credit Facility, the Unused Line Fee, the Administration Fee, the Expenses, and all other charges and any other Obligations of Borrower hereunder, shall be made to Agent at its main Philadelphia banking office First Union National Bank, 1339 Chestnut Street, Philadelphia, Pennsylvania, in United States dollars, in immediately available funds. Agent, on behalf of all Lenders, shall have the unconditional right and discretion to make an Advance under the Credit Facility in the form of a Revolving Credit Loan (subject to availability existing under the Borrowing Base) to pay, and/or to charge Borrower's operating account with Agent for all of Borrower's Obligations as they become due from time to time under this Agreement including, without limitation, interest, principal, fees and reimbursement of Expenses. (b) (i) Advances which may be made by Lenders from time to time under the Credit Facility shall be made available by crediting such proceeds to Borrower's operating account with Agent. (ii) All Advances requested by Borrower and all requests by Borrower to convert Revolving Credit Loans to Term Loans must be requested by 11:00 A.M. Eastern time, three (3) Business Days prior to the date of such requested Advance or conversion. All requests or confirmation of requests for an Advance or conversion are to be in writing and may be sent by telecopy or facsimile transmission provided that Agent shall have the right to require that receipt of such request not be effective unless confirmed via telephone with Agent. (iii) A. Upon receiving a request for an Advance or conversion in accordance with subparagraph (ii) above, as soon as reasonably practical thereafter, Agent shall notify all Lenders of the request. Each Lender shall advance its applicable Pro Rata Percentage of the requested Advance to Agent by remitting federal funds, immediately available, to Agent pursuant to Agent's instructions prior to 11:00 A.M. Eastern Time on the scheduled date of the Advance. Subject to satisfaction of the terms and conditions hereof, Agent shall make the requested Advance available to Borrower by crediting such amount to Borrower's operating account with Agent as soon as is reasonably practical thereafter on the day the requested Advance is to be made. In lieu of the foregoing, Agent may, in its discretion, fund the Pro Rata Percentage of such Advance on behalf of any one or more Lenders (unconditionally and absolutely obligating such affected Lender(s) to reimburse Agent in full without deduction or setoffs for its portion of such Advance) with a settlement of the pro rata percentages of such Advances of each Lender on the following Business Day under such procedures as Agent may establish. B. Neither Agent nor any other Lender shall be obligated, for any reason whatsoever, to advance the share of any other Lender. If such corresponding amount is not made available to Agent by such Lender on the date the Advance is made and Agent elects (at its discretion, without any obligation to do so) to make such Lender's Pro Rata Percentage of the Advance, Agent shall be entitled to recover such amount on demand from such Lender together with interest at the per annum rate equal to the Federal Funds Rate in respect of the first two days and at the Base Rate in respect of each day thereafter during the period commencing 2:00 P.M. Eastern Time on the date of such Advance and ending on (but excluding) the date Agent recovers such amount. Agent shall also be entitled to recover any and all losses and damages (including, without limitation, attorneys' fees and costs) from any Lender failing to so advance upon demand of Agent. Agent may set off the obligations of a Lender under this paragraph against any distributions or payments of the Obligations which Agent would otherwise make available to such Lender. C. To the extent and during the time period in which any Lender fails to provide or delays providing its respective payment to Agent pursuant to subsections A or B above (any such Lender being referred to, during such period, as a "Defaulting Lender"), such Lender's percentage of all payments of the Obligations (but not its Pro Rata Percentage of future Advances required to be funded by such Lender) shall decrease to reflect the actual percentage which its actual outstanding Loans bear to the total outstanding Loans of all Lenders. In addition, notwithstanding any definition or other provision of this Agreement to the contrary, during any period in which a Lender is a Defaulting Lender, all calculations for voting purposes among the Lenders shall be made as if the Defaulting Lender were not a Lender and not a party to this Agreement. 2.3 Preconditions to Advances and Assignment of Leases and Leased Property (a) Before Lenders will make any Advance: (i) Borrower will deliver to Agent the following (dated and signed) in form and substance satisfactory to Agent and its counsel: A. A borrowing request setting forth the requested date of the Advance (but no sooner than three (3) Business Days after Agent receives the request), the requested advance amount, the applicable interest rate and whether the request is for a Term Loan or a Revolving Credit Loan, a Borrowing Base Certificate in the form attached hereto as Exhibit "2.1(e)" setting forth the availability under the Borrowing Base, any information required by this Agreement and such other information as Agent shall reasonably request. A borrowing request may be made orally, provided that Borrower confirms the request in writing within two (2) days thereafter, provided further however, that Lenders need not make any Advances until Agent receives actual written confirmation and a Borrowing Base Certificate, B. Such financial information concerning any of the Leases, Borrower or any Lessee as Lenders may reasonably request, and C. Such other instruments, agreements and documents as Agent reasonably requests to carry out the intent of the parties to this Agreement. (ii) No Event of Default or Unmatured Event of Default shall have occurred hereunder. (b) In order to increase the Borrowing Base, Borrower shall deliver to Agent for the benefit of Lenders the following items: (i) A description of the collateral package, which shall include, identification of the Lessee, a description of the Leased Property, the net cost of the Leased Property, the net remaining principal balance under the Lease(s), and the terms of and rentals owed under each Lease, and such other information which Agent or Lenders shall reasonably request, (ii) An Assignment Agreement signed by Borrower assigning Borrower's right, title and interest in and to the Leased Property and Leases to Agent for the benefit of Lenders, in the form attached hereto as Exhibit "2.3(b)(ii)" ("Assignment Agreement"), (iii) Invoices showing the true cost of the Leased Property net of any servicing or maintenance charges, brokers' fees or similar types of "soft costs", (iv) If requested by Agent, additional Uniform Commercial Code ("UCC") financing statements covering, inter alia, the Leased Property and the Leases listing Agent for the benefit of Lenders, as secured party and Borrower as debtor, to be filed in locations reasonably required by Agent, (v) Copies of all UCC-1 financing statements filed by Borrower against Lessee(s) and any acknowledgment copies or recording information Borrower has received back from the recording offices, provided, however, that Borrower shall not be required to furnish evidence of the filing of UCC-1 financing statements covering Leased Property leased pursuant to Lease(s) having an outstanding Lease Receivable value of under $16,000. (vi) The sole original of each Lease along with all schedules duly assigned to Agent for the benefit of Lenders, (vii) For each item of Leased Property with a Lease Receivable in excess of $20,000, evidence that such item of Leased Property is insured against such risks, in such amounts, with such insurance, and on such terms and conditions as shall be satisfactory to Lenders ("Insurance Coverage"), (viii) A certificate of acceptance or other document evidencing, or other evidence of oral confirmation, that the Lessee has received and accepted the Leased Property, (ix) Where the initial cost of the Leased Property is in excess of $100,000 and such Leased Property is to be affixed to real estate in such a manner as, under applicable law, to become a fixture, a landlord or mortgagee waiver from all persons having an interest in the real estate on which the Leased Property will be located, and (x) An undated notice signed by the Borrower directing each Lessee to pay all sums due or to become due under each Lease directly to Agent for the benefit of Lenders ("Lessee Notice") to be used only following the occurrence of an Event of Default. Agent will hold the Lessee Notices in escrow and will not release them, unless and until an Event of Default shall have occurred. 2.4 Credit Facility Interest: (a) Revolving Credit Loans: The unpaid principal balance of all or a portion of the Revolving Credit Loans shall bear interest at either the LIBOR Based Revolving Loan Rate or the LIBOR Market Index Rate. Interest on all Revolving Credit Loans shall be due and payable monthly in arrears on the first day of each month and on the last day of the applicable LIBOR Interest Period with respect to LIBOR Based Rate Loans. (b) Term Loans: The unpaid principal balance of all or a portion of the Term Loans shall bear interest at the LIBOR Based Term Loan Rate. In addition Borrower may request that a Term Loan be converted to a fixed rate loan for the remaining term of such Term Loan at a rate quoted at the time of request by Agent and Co-Agent and acceptable to all Lenders. Interest on all Term Loans shall be due and payable monthly in arrears on the first day of each month. (c) (i) LIBOR Based Rate Loans: LIBOR Based Rate Loans shall be selected for a period of either one (1), two (2), or three (3) months' duration, as Borrower may elect, during which a LIBOR Based Rate is applicable ("LIBOR Interest Period"); provided, however, that (a) if the LIBOR Interest Period would otherwise end on a day which shall not be a Good Business Day, such LIBOR Interest Period shall be extended to the next succeeding Good Business Day, unless such Good Business Day falls in another calendar month, in which case such LIBOR Interest Period shall end on the next preceding Good Business Day subject to clause (c) below; (b) interest shall accrue from and including the first day of each LIBOR Interest Period to, but excluding, the day on which any LIBOR Interest Period expires; and (c) with respect to any LIBOR Interest Period which begins on the last Good Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such LIBOR Interest Period), the LIBOR Interest Period shall end on the last Good Business Day of a calendar month. All accrued and unpaid interest on a LIBOR Based Rate Loan must be paid in full on the day the applicable LIBOR Interest Period expires. No LIBOR Interest Period may end after the Maturity Date. Subject to all of the terms and conditions applicable to a request that a new Advance be a LIBOR Based Rate Loan, Borrower may extend LIBOR Based Rate Loans as of the last day of the applicable LIBOR Interest Period to a new LIBOR Based Rate Loan. If Borrower does not notify Agent of its desire to extend a LIBOR Based Rate Loan or repay such Advance prior to the expiration of the applicable LIBOR Interest Period, such Advance shall automatically be converted to a LIBOR Market Index Rate Loan. (ii) The Adjusted LIBOR Rate may be automatically adjusted by Agent on a prospective basis to take into account the additional or increased cost of maintaining any necessary reserves for Eurodollar deposits or increased costs due to changes in applicable law or regulation or the interpretation thereof occurring subsequent to the commencement of the then applicable LIBOR Interest Period, including but not limited to changes in tax laws and changes in the reserve requirements imposed by the Board of Governors of the Federal Reserve System (or any successor), excluding any such changes that have resulted in a payment pursuant to Section 2.9 hereof, that increase the cost to Lenders of funding the LIBOR Based Rate Loan. Agent shall promptly give the Borrower and each Lender notice of such a determination and adjustment, which determination shall be conclusive, absent manifest error, as to the correctness of the fact and the amount of such adjustment. Agent shall furnish to Borrower a statement setting forth the basis for adjusting such LIBOR Based Rate and the method for determining the amount of such adjustment. (iii) In the event that Agent shall have reasonably determined that Eurodollar deposits equal to the amount of the principal of the requested LIBOR Based Rate Loan and for the LIBOR Interest Period specified are unavailable, impractical or unlawful, or a LIBOR Based Rate or a LIBOR Market Index Rate will not adequately and fairly reflect the cost of making or maintaining the principal amount of the requested LIBOR Based Rate Loan or LIBOR Market Index Rate Loan specified by Borrower, or that by reason of circumstances affecting Eurodollar markets, adequate and reasonable means do not exist for ascertaining the rate based on the Adjusted LIBOR Rate or the LIBOR Market Index Rate, Agent shall promptly give notice of such determination to the Borrower that rates based on the Adjusted LIBOR Rate or the LIBOR Market Index Rate are not available. A determination by Agent hereunder shall be prima facie evidence of the correctness of the fact and amount of such additional costs or unavailability. Upon such a determination, (i) the right of Borrower to select, convert to, or maintain a LIBOR Based Rate Loan at the rate based on the Adjusted LIBOR Rate or a LIBOR Market Index Rate Loan at the rate based on the LIBOR Market Index Rate shall be suspended until Agent shall have notified the Borrower that such conditions shall have ceased to exist, and (ii) the LIBOR Based Rate Loans and LIBOR Market Index Rate Loans shall accrue interest at the Base Rate. (iv) In the event that, as a result of any changes in applicable law or regulation or the interpretation thereof, it becomes unlawful for a Lender to maintain Eurodollar liabilities sufficient to fund any LIBOR Based Rate Loan subject to the LIBOR Based Rate, then such Lender shall immediately notify Agent who shall immediately notify the other Lenders and Borrower thereof, and such Lender's obligation to make, convert to, or maintain a LIBOR Based Rate Loan at a LIBOR Based Rate shall be suspended until such time as such Lender may again cause the LIBOR Based Rate to be applicable to its share of any LIBOR Based Rate Loans and such Lender's share of the Loans subject to the LIBOR Based Rate shall accrue interest at the Base Rate. If it becomes unlawful for a Lender to maintain a LIBOR Based Rate Loan, such Lender may require that Borrower immediately prepay such Lender's LIBOR Based Rate Loans or convert such Loans to Base Rate Loans or LIBOR Market Index Rate Loans. Promptly after becoming aware that it is no longer unlawful for such Lender to maintain such Eurodollar liabilities, such Lender shall notify Agent who will notify Borrower thereof and such suspension shall cease to exist. In the event it becomes unlawful for a Lender to maintain Eurodollar liabilities, Borrower may seek to have such Lender replaced with a lender for whom maintenance of Eurodollar liabilities is not unlawful so long as such replacement lender is satisfactory to Agent and the SuperMajority Lenders (without giving effect to the potentially replaced Lender), in their sole and absolute discretion. (v) In the event Borrower prepays (voluntarily or involuntarily) or converts a LIBOR Based Rate Loan prior to the last day of the applicable Interest Period, Borrower shall also pay to Agent for the account of Lenders, on demand, the additional amount, as specified by Agent in a certificate setting forth the basis of such computation, equal to the amount of any reasonable fees, costs, expenses or other charges, plus the present value of an amount which is the difference (if a positive number) between (y) the aggregate interest which would have been payable to the last day of such Interest Period on such prepaid amount, and (z) the aggregate interest the Lenders could expect to earn on such prepaid amount if such amount were invested for the period from the date of such prepayment to the last day of such Interest Period in United States Treasury obligations maturing on or closest to the last day of such Interest Period. Such certificate shall be conclusive except for manifest error. (d) LIBOR Market Index Rate Loan: Up to $5,000,000 in aggregate principal amount of Revolving Credit Loans and Term Loans may bear interest from time to time at the LIBOR Market Index Rate provided that no Revolving Credit Loan or portion of any Term Loan shall bear interest at the LIBOR Market Index Rate for a period of more than 21 days. Upon or prior to the expiration of such 21-day period, and subject to all the terms and conditions applicable to the making of LIBOR Based Rate Loans hereunder, Borrower shall cause any such Loan(s) to be converted to LIBOR Based Rate Loan(s). If Borrower does not notify Agent of its desire to extend the applicable LIBOR Market Index Rate Loan as a LIBOR Based Rate Loan, Borrower will repay such Loan prior to the expiration of such 21-day period, or such Loan shall automatically be converted to a LIBOR Based Rate Loan with a one month LIBOR Interest Period (unless such LIBOR Interest Period would extend beyond the Maturity Date, in which case, the LIBOR Market Index Rate Loan shall be continued as a LIBOR Market Index Rate Loan until the Maturity Date). Interest on all LIBOR Market Index Rate Loans shall be payable monthly, in arrears, on the first day of each calendar month. The calculation and determination of the LIBOR Market Index Rate shall be made daily by the Agent and such determination shall, absent manifest error, be final, conclusive and binding upon all parties hereto. Changes in the LIBOR Market Index Rate shall become effective on the same day as the Agent determines a change in such LIBOR Market Index Rate has occurred. 2.5 Additional Interest Provisions. (a) Calculation of Interest: Interest on the Loans, regardless of the applicable interest rate, shall be based on a three hundred sixty (360) day year and charged for the actual number of days elapsed. (b) Default Rate: After the occurrence and during the continuance of an Event of Default hereunder and following notice from Agent to Borrower of the Lenders' intention to apply the Default Rate to the Loans, the per annum effective rate of interest on all Loans outstanding under the Credit Facility shall be increased to a per annum rate equal to two (2%) percentage points in excess of the applicable interest rate ("Default Rate"). (c) Continuation of Interest Charges: All contractual rates of interest chargeable on outstanding Loans, regardless of the then applicable interest rate, shall continue to accrue and be paid even after default, maturity, acceleration, judgment, bankruptcy, insolvency proceedings of any kind or the happening of any event or occurrence similar or dissimilar. (d) Applicable Interest Limitations: In no contingency or event whatsoever shall the aggregate of all amounts deemed interest hereunder and charged or collected pursuant to the terms of this Agreement exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such court determines Lenders have charged or received interest hereunder in excess of the highest applicable rate, Agent, on behalf of Lenders, shall in its sole discretion, apply and set off such excess interest received by Lenders against other Obligations due or to become due and such rate shall automatically be reduced to the maximum rate permitted by such law. (e) Limitation on LIBOR Based Rate Loans and LIBOR Market Index Rate Loans: Upon the occurrence of an Event of Default, and following written notice from Agent to Borrower, Agent may in its sole discretion, or upon the instructions of Supermajority Lenders Agent shall, eliminate the availability of LIBOR Based Rate Loans and LIBOR Market Index Rate Loans. 2.6 Fees: (a) Unused Line Fee: So long as the Credit Facility is outstanding and has not been terminated, Borrower shall unconditionally pay to Agent, for the benefit of Lenders in accordance with their respective Pro Rata Percentages, a non-refundable fee ("Unused Line Fee") equal to one-quarter of one percent (1/4%) per annum of the average daily unused portion of the Credit Facility (which shall be calculated as the Maximum Credit Limit minus the average daily outstanding balance of all Loans during the quarter for which such calculation is made). The Unused Line Fee shall be computed and paid on a quarterly basis, in arrears, on the first day of each January, April, July and October for the previous quarter for which such computation is made by Agent, beginning on the first day of October, 1998. (b) Administration Fee: So long as the Credit Facility is outstanding and has not been terminated, Borrower shall unconditionally pay to Agent, for Agent's account, a non-refundable fee ("Administration Fee") equal to three eighths of one percent (3/8%) per annum of the average daily outstanding principal balance of all Loans during the quarter for which such calculation is made). The Administration Fee shall be computed and paid on a quarterly basis, in arrears, on the first day of each January, April, July and October for the previous quarter for which such computation is made by Agent, beginning on the first day of October, 1998. 2.7 Prepayments: (a) (i) Base Rate Loans and LIBOR Market Index Rate Loans: Base Rate Loans and LIBOR Market Index Rate Loans may be prepaid at any time and from time to time, in whole or in part, without premium or penalty upon no less than two (2) Business Day's notice to Agent. All partial prepayments shall be applied first to accrued and unpaid interest, fees and Expenses related to such prepaid Loan and then to the outstanding principal balance of the Loan so prepaid. (ii) LIBOR Based Rate Loans: LIBOR Based Rate Loans may not be prepaid on any date other than the last day of the selected Interest Period unless Borrower gives Agent written notice of such intention prior to 1:00 p.m. on a Business Day which is no less than two (2) Business Days prior to the date it intends to make such prepayment (unless such prepayment must be immediate because of the illegality of LIBOR Based Rate Loans as set forth in Section 2.4(c)(iv) hereof, in which case Borrower shall not be required to provide such notice) and pays a prepayment fee in accordance with Section 2.4(c)(v) above. All such prepayments must be of the full amount of the applicable LIBOR Based Rate Loan plus all accrued but unpaid interest, fees and Expenses related to such prepaid Loan. Borrower agrees that this fee is an estimate of Lender's damages and not a penalty. (iii) Fixed Rate Term Loans: Term Loans bearing interest at a fixed rate pursuant to Section 2.4(b) hereof may not be prepaid unless Borrower pays a prepayment fee equal to (the amount of any applicable fees, costs, Expenses or other charges, plus the present value of an amount which is the difference (if a positive number) between (y) the aggregate interest which would have been payable to the last day of such Term Loan on such prepaid amount, and (z) the aggregate interest Lenders could expect to earn on such prepaid amount if such amount were invested for the period from the date of such prepayment to the maturity date of the Term Loan in United States Treasury obligations maturing on or closest to such maturity date. Borrower agrees that this fee is our estimate of Lenders' damages and not a penalty. All such prepayments shall be applied to the prepaid Term Loan, first against all accrued and unpaid interest, fees and Expenses related to such prepaid Term Loan and then to installments of the outstanding principal balance of the Term Loan so prepaid in the inverse order of maturity. (b) Proceeds of Collateral: Prior to the occurrence of an Event of Default, proceeds from Collateral comprising a portion of the Borrowing Base, to the extent that the aggregate outstanding amount of all Loans exceeds the Borrowing Base, shall promptly be paid to Agent for the benefit of Lenders and be first applied to accrued but unpaid interest, fees, costs and Expenses related to the Credit Facility, and then to the outstanding balance of the Revolving Credit Loans, the Term Loan and then to Borrower's other Obligations in such order as Agent may elect in its sole discretion. Following the occurrence of an Event of Default, all proceeds from the Collateral shall be immediately delivered to Agent and Agent may apply such proceeds to any of Borrower's Obligations in such order as Lenders may decide in their sole discretion. (c) Mandatory Prepayment: In the event the aggregate outstanding amount of all Loans at any time exceeds the Maximum Credit Limit, Borrower shall immediately repay such excess in full and if the aggregate outstanding amount of all Revolving Credit Loans exceeds the Borrowing Base, Borrower shall within ten (10) days either (i) repay such excess in full or (ii) pledge additional Eligible Leases in accordance with the terms hereof. Any such payments shall first be applied to accrued but unpaid interest, fees, costs and Expenses related to the Credit Facility, and then to the outstanding balance of the Revolving Credit Loans, the Term Loans and then to Borrower's other Obligations in such order as Agent may elect in its sole discretion. Prepayments of the Term Loans shall be applied against the remaining principal installments in the inverse order of maturity. 2.8 Use of Proceeds: The extensions of credit under and proceeds of the Credit Facility shall be used to enable Borrower to purchase Leased Property and finance Leases associated with such Leased Property. 2.9 Capital Adequacy: If any present or future law, governmental rule, regulation, policy, guideline, directive or similar requirement (whether or not having the force of law) imposes, modifies, or deems applicable any capital adequacy, capital maintenance or similar requirement which affects the manner in which Commercial banks generally allocate capital resources to their commitments (including any commitments hereunder), and as a result thereof, in the opinion of a Lender, the rate of return on such Lender's capital with regard to the Loans is reduced to a level below that which such Lender could have achieved but for such circumstances, then in such case and upon notice from Agent and/or such Lender to Borrower, from time to time, Borrower shall pay such Lender such additional amount or amounts as shall compensate such Lender for such reduction in its rate of return. Such notice shall contain the statement of such Lender with regard to any such amount or amounts which shall, in the absence of manifest error, be binding upon Borrower. In determining such amount, such Lender may use any reasonable method of averaging and attribution that it deems applicable. SECTION 3. COLLATERAL 3.1 Description: As security for the payment of the Obligations, and satisfaction by Borrower of all covenants and undertakings contained in this Agreement and the other Loan Documents, Borrower hereby grants to Agent, for the benefit of Lenders, a continuing first lien on and security interest in, upon and to the Collateral. 3.2 Lien Documents: At Closing and thereafter as Agent deems necessary, Borrower shall execute and deliver to Agent, or have executed and delivered (all in form and substance reasonably satisfactory to Agent): (a) Financing Statements - Financing statements pursuant to the UCC, which Agent, on behalf of Lenders, may file in any jurisdiction where any Collateral is or may be located and where Borrower maintains its chief executive office; and (b) Other Agreements - Any other agreements, documents, instruments and writings, including, without limitation, security agreements and Assignment Agreements, reasonably required by Agent to evidence, perfect or protect Agent's and/or Lenders' liens and security interest in the Collateral or as Agent may reasonably request from time to time. 3.3 Other Actions: In addition to the foregoing, Borrower shall do anything further that may be lawfully and reasonably required by Agent to secure Lenders and effectuate the intentions and objects of this Agreement, including, but not limited to, the execution and delivery of lockbox agreements, continuation statements, amendments to financing statements, security agreements, contracts and any other documents required hereunder. Borrower shall also immediately deliver (with execution by Borrower of all necessary documents or forms to reflect Agent's Lien for the benefit of Lenders thereon) to Agent as bailee for Lenders, all items for which Agent and/or Lenders must or may receive possession to obtain a perfected security interest, including without limitation, all Leases, notes, certificates and documents of title, chattel paper, warehouse receipts, instruments, and any other similar instruments constituting Collateral. 3.4 Searches: Agent shall, prior to or at Closing, and thereafter as Agent may determine from time to time, at Borrower's sole expense, obtain the following searches (the results of which are to be consistent with the warranties made by Borrower in this Agreement): (a) UCC Searches: UCC searches with the Secretary of State and local filing office of each state where Borrower maintains its executive office, a place of business, or assets; (b) Judgments, Etc.: Judgment, federal tax lien and corporate tax lien searches, in all applicable filing offices of each state searched under subparagraph (a) above. Borrower shall, prior to or at Closing and at its expense, obtain and deliver to Agent good standing certificates showing Borrower to be in good standing in its state of incorporation and in each other state or foreign country in which it is doing and presently intends to do business for which Borrower's failure to be so qualified might have material adverse effect on Borrower's business, financial condition, Property or Agent's and/or Lenders' rights hereunder. 3.5 Filing Security Agreement: A carbon, photographic or other reproduction or other copy of this Agreement or of a financing statement is sufficient as and may be filed in lieu of a financing statement. 3.6 Power of Attorney: Each of the officers of Agent is hereby irrevocably made, constituted and appointed (such appointment being coupled with an interest) the true and lawful attorney for Borrower (without requiring any of them to act as such) with full power of substitution to do the following: (1) endorse the name of Borrower upon any and all checks, drafts, money orders and other instruments for the payment of monies that are payable to Borrower and constitute collections on the Collateral; (2) execute in the name of Borrower any financing statements, schedules, assignments, instruments, documents and statements that Borrower is obligated to give Agent hereunder or is necessary to perfect Agent's and/or Lenders' security interest or Lien in the Collateral, including without limitation, execute in its own name or in the name of Borrower, all documentation necessary to have Agent's Lien for the benefit of Lenders noted on all vehicle titles, to prepare and sign any and all applications for vehicle titles relating to Leased Property and any registration documentation with respect to such Leased Property; (3) to verify validity, amount or any other matter relating to the Collateral by mail, telephone, telecopy or otherwise; and (4) upon the occurrence of an Event of Default, do such other and further acts and deeds in the name of Borrower that Agent may reasonably deem necessary or desirable to enforce any Account or perfect its liens on, or to protect its interest in, any other Collateral. SECTION 4. CLOSING AND CONDITIONS PRECEDENT TO ADVANCES Closing under this Agreement is subject to the following conditions precedent (all documents to be in form and substance satisfactory to Agent and its counsel): 4.1 Resolutions, Opinions, and Other Documents: Borrower shall have delivered to Agent the following: (a) this Agreement and the Revolving Credit Notes all properly executed; (b) each document and agreement required to be executed under any provision of this Agreement or any related agreement; (c) certified copies of (i) resolutions of Borrower's board of directors authorizing the execution of this Agreement, the Revolving Credit Notes and the Term Notes to be issued hereunder and each document, instrument and agreement required to be delivered by any Section hereof and resolutions of each Guarantor's board of directors authorizing the execution and delivery of the Guaranty and (ii) Borrower's and each Guarantor's Articles of Incorporation and By-laws; (d) an incumbency certificate identifying all Authorized Officers of Borrower and each signatory of the Guaranty on behalf of each Guarantor authorizing the execution and delivery of the Guaranty, with specimen signatures; (e) a written opinion of Borrower's and each Guarantor's independent counsel addressed to Agent for the benefit of all Lenders; (f) certification by Borrower's chief financial officer that there has not occurred any material adverse change in the operations and condition (financial or otherwise) of Borrower since June 30, 1998; (g) payment by Borrower of all Expenses associated with the Credit Facility incurred to the Closing Date; (h) Uniform Commercial Code, judgment, federal and state tax lien searches against Borrower, at Borrower's expense, showing that the Collateral is not subject to any Liens, together with Good Standing and Corporate Tax Lien Search Certificates showing no tax Liens on Borrower's Property and showing Borrower to be in good standing in each jurisdiction where the failure to so qualify might have a material adverse affect on Borrower's business, financial condition, Property or Agent's and/or Lenders' rights hereunder; (j) An initial borrowing base certificate dated the Closing Date evidencing Borrower's minimum borrowing availability under the Borrowing Base as of the Closing Date; (k) UCC-1 Financing Statements naming Borrower as debtor and Agent as secured party, to be filed in all locations satisfactory to Agent; (l) A Guaranty Agreement executed by each of the Guarantors ("Guaranty"); (m) Stock Pledge Agreements for the shares of Borrower and Resource Leasing, Inc. executed by Resource Leasing, Inc. and Resource America, Inc. respectively (collectively "Stock Pledge Agreements); and (n) A subordination agreement ("Subordination Agreement") among Resource Leasing, Inc., Agent and Borrower whereby Resource Leasing, Inc. agrees to subordinate all indebtedness owing from Borrower to Resource Leasing, Inc., on terms and conditions satisfactory to Agent. 4.2 Absence of Certain Events: At the Closing Date, no Event of Default or Unmatured Event of Default hereunder shall have occurred and be continuing. 4.3 Warranties and Representations at Closing: The warranties and representations contained in Section 5 as well as any other Section of this Agreement and any other Loan Document shall be true and correct in all material respects on the Closing Date with the same effect as though made on and as of that date. Borrower shall not have taken any action or permitted any condition to exist which would have been prohibited by any Section hereof. 4.4 Compliance with this Agreement: Borrower shall have performed and complied with all agreements, covenants and conditions contained herein including, without limitation, the provisions of Sections 6 and 7 hereof, and any other Loan Document, which are required to be performed or complied with by Borrower before or at the Closing Date. 4.5 Officers' Certificate: Agent shall have received a certificate dated the Closing Date and signed by an Authorized Officer of Borrower certifying that all of the conditions specified in this Section have been fulfilled. 4.6 Closing: Subject to the conditions of this Section 4, the Credit Facility shall be made available on the date ("Closing Date") this Agreement is executed and all of the conditions contained in Section 4.1 hereof are completed (the "Closing"). 4.7 Non-Waiver of Rights: By completing the Closing hereunder, or by making advances hereunder, Agent and Lenders do not thereby waive a breach of any warranty, representation or covenant made by Borrower hereunder or any agreement, document, or instrument delivered to Agent or otherwise referred to herein, including without limitation, the Existing Loan Documents, and any claims and rights of Agent and/or Lenders resulting from any breach or misrepresentation by Borrower are specifically reserved by Agent for the benefit of Lenders. SECTION 5. REPRESENTATIONS AND WARRANTIES To induce Lenders to complete the Closing and make the initial Advances under the Credit Facility to Borrower, Borrower warrants and represents to Agent and Lenders that: 5.1 Corporate Organization and Validity: (a) Borrower is a corporation duly organized and validly existing under the laws of its state of incorporation, is duly qualified, is validly existing and in good standing and has lawful power and authority to engage in the business it conducts in each state and other jurisdiction where the nature and extent of its business requires qualification, except where the failure to so qualify would not have a material adverse effect on Borrower's business, financial condition, Property or prospects. A list of all states and other jurisdictions where Borrower is qualified to do business is attached hereto as Exhibit "5.1" and made a part hereof. (b) The making and performance of this Agreement and related agreements, and each document required by any Section hereof will not violate any law, government rule or regulation, or the charter, minutes or bylaw provisions of Borrower or violate or result in a default (immediately or with the passage of time) under any contract, agreement or instrument to which Borrower is a party, or by which it is bound. Borrower is not in violation of, nor has knowingly caused any Person to violate, any term of any agreement or instrument to which it or such Person is a party or by which it may be bound or of its charter, minutes or bylaws which violation could have a material adverse effect on Borrower's business, financial condition, Property or prospects. (c) Borrower has all requisite corporate power and authority to enter into and perform this Agreement and to incur the obligations herein provided for, and has taken all proper and necessary corporate action to authorize the execution, delivery and performance of this Agreement, and the documents and related agreements required hereby. (d) This Agreement, the Revolving Credit Notes and the Term Notes to be issued hereunder, and all related agreements and documents required to be executed and delivered by Borrower hereunder, when delivered, will be valid and binding upon Borrower and enforceable in accordance with their respective terms. 5.2 Places of Business: The only places of business of Borrower, and the places where it keeps and intends to keep copies of the Leases and its Books and Records concerning the Collateral, are at the addresses listed in Exhibit "5.2" attached hereto and made a part hereof. The name of the record owner of each property is also set forth on Exhibit "5.2". 5.3 Pending Litigation: There are no judgments or judicial or administrative orders, proceedings or investigations (civil or criminal) pending, or to the knowledge of Borrower, threatened, against Borrower in any court or before any governmental authority or arbitration board or tribunal except as shown in Exhibit "5.3" attached hereto and made a part hereof, none of which may materially and adversely affect the business, financial condition, Property or prospects of Borrower, or the ability of Borrower to perform under this Agreement. Borrower is not in default with respect to any order of any court, governmental authority, regulatory agency or arbitration board or tribunal, the effect of which would materially and adversely affect the business, financial condition, Property or prospects of Borrower. No shareholder or executive officer of Borrower has been indicted or convicted in connection with or is engaging in any criminal conduct, or is currently subject to any lawsuit or proceeding or under investigation in connection with any anti-racketeering or other conduct or activity. 5.4 Title to Collateral: Borrower has good and marketable title in fee simple (or its equivalent under applicable law) to all the Collateral it respectively purports to own, free from Liens, except those of Agent for the benefit of Lenders and free from the claims of any other Person other than the leasehold interests of the Lessees. 5.5 Governmental Consent: Neither the nature of Borrower or of its business or Property, nor any relationship between Borrower and any other Person, nor any circumstance affecting Borrower in connection with the issuance or delivery of the Revolving Credit Notes or the Term Notes, is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any governmental authority on the part of Borrower in connection with the execution and delivery of this Agreement or the issuance or delivery of the Revolving Credit Notes or the Term Notes or other documents contemplated hereby. 5.6 Taxes: All tax returns required to be filed by Borrower in any jurisdiction have in fact been filed, and all taxes, assessments, fees and other governmental charges upon Borrower, or upon any of its Property, income or franchises, which are shown to be due and payable on such returns have been paid, except for those taxes being contested in good faith with due diligence by appropriate proceedings for which appropriate reserves have been maintained under GAAP. 5.7 Financial Statements: Borrower's annual consolidated audited balance sheet as of September 30, 1997 and its quarterly consolidated balance sheet as of March 31, 1998 and the related income statements and statements of cash flows as of such dates, all accompanied by reports thereon from Borrower's independent certified public accountants with respect to the annual statements (complete copies of which have been delivered to Agent), have been prepared in accordance with GAAP and present fairly, accurately and completely the financial position of the Borrower as of such dates and the results of its operations for such periods. The fiscal year for Borrower currently ends on September 30. Borrower's federal tax identification number is 23-2842671. 5.8 Full Disclosure: Neither the financial statements referred to in Section 5.7, nor this Agreement or related agreements and documents or any written statement furnished by Borrower to Agent in connection with the negotiation of the Credit Facility and contained in any financial statements or documents relating to Borrower contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading. 5.9 Subsidiaries: Borrower has no Subsidiaries or Affiliates, except as listed on Exhibit "5.9" attached hereto and made a part hereof. 5.10 Guarantees: Borrower does not own nor hold equity or long term debt investments in, has any outstanding advances to, or serves as guarantor, surety or accommodation maker for the obligations of, or has any outstanding borrowings from, any Person except as described in Exhibit "5.10", attached hereto and a made part hereof. 5.11 Government Regulations, etc.: (a) The use of the proceeds of and Borrower's issuance of the Revolving Credit Notes and the Term Notes will not directly or indirectly violate or result in a violation of Section 7 of the Securities Exchange Act of 1934, as amended or Regulations U, T or X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. Borrower does not own or intend to carry or purchase any "margin stock" within the meaning of said Regulation U. (b) Borrower has obtained all licenses, permits, franchises or other governmental authorizations necessary for the ownership of its Property and for the conduct of its business, where the failure to obtain would have a material adverse effect on the business, financial condition, Property or prospects of Borrower or Agent's and/or Lenders' rights with respect to the Collateral. (c) Borrower is not in violation of, has not received written notice that it is in violation of, or has knowingly caused any Person to violate, any applicable statute, regulation or ordinance of the United States of America, or of any state, city, town, municipality, county or of any other jurisdiction, or of any agency, or department thereof, (including without limitation, environmental laws and regulations), which may materially and adversely affect its business, financial condition, Property or prospects or Agent's and/or Lenders' rights with respect to the Collateral. (d) Borrower is current with all reports and documents required to be filed with any state or federal securities commission or similar agency and is in full compliance in all material respects with all applicable rules and regulations of such commissions. 5.12 Names: (a) Within five (5) years prior to the Closing Date, Borrower has not conducted business under or used any other name (whether corporate or assumed) except for the names shown on Exhibit "5.12(a)", attached hereto and made a part hereof. Borrower is the sole owner of all names listed on such Exhibit "5.12(a)" and any and all business done and all invoices issued in such trade names are Borrower's sales, leases, business and invoices. Each trade name of Borrower represents a division or trading style of Borrower and not a separate corporate subsidiary or affiliate or independent entity. (b) All trademarks, patents or copyrights which Borrower uses, plans to use or has a right to use are listed on Exhibit "5.12(b) attached hereto and made a part hereof. Borrower is the sole owner of such Property except to the extent any other Person has claims or rights in such Property, as such claims and rights are described on such Exhibit "5.12(b)." To the best of Borrower's knowledge, Borrower is not in violation of any rights of any other Person with respect to such Property. 5.13 Other Associations: Borrower is not engaged and has no interest in any joint venture or partnership with any other Person except as described on Exhibit "5.13" hereto and made a part hereof. 5.14 Environmental Matters: Except as disclosed on Exhibit "5.14" attached hereto and made a part hereof, Borrower has no knowledge: (a) of the presence of any Hazardous Substances on any of the real property where Borrower conducts operations or has its personal property, or (b) of any on-site spills, releases, discharges, disposal or storage of Hazardous Substances that have occurred or are presently occurring on any of such real property or where any Collateral is located, or (c) of any spills, releases, discharges or disposal of Hazardous Substances that have occurred, are presently occurring on any other real property as a result of the conduct, action or activities of Borrower. As used herein, the term "Hazardous Substances" means any substances defined or designated as hazardous or toxic waste, hazardous or toxic material, hazardous or toxic substance or similar term, by any environmental statute, rule or regulation of any governmental entity presently in effect and applicable to such real property. 5.15 Capital Stock: The authorized and outstanding shares of capital stock of Borrower is as set forth on Exhibit "5.15" attached hereto and made a part hereof. All of the capital stock of Borrower has been duly and validly authorized and issued and is fully paid and non-assessable and has been sold and delivered to the holders thereof in compliance with, or under valid exemption from, all Federal and state laws and the rules and regulations of all regulatory bodies thereof governing the sale and delivery of securities. Except for the rights and obligations set forth in Exhibit "5.15", there are no subscriptions, warrants, options, calls, commitments, rights or agreements by which Borrower or any of the shareholders of Borrower is bound relating to the issuance, transfer, voting or redemption of shares of its capital stock or any pre-emptive rights held by any Person with respect to the shares of capital stock of Borrower. Except as set forth in Exhibit "5.15", Borrower has not issued any securities convertible into or exchangeable for shares of its capital stock or any options, warrants or other rights to acquire such shares or securities convertible into or exchangeable for such shares. 5.16 Solvency: Borrower is solvent, able to pay its debts as they become due, and has capital sufficient to carry on its business and all business in which it is about to engage, and now owns Property having a value both at fair valuation and at present fair salable value greater than the amount required to pay its debts. Borrower will not be rendered insolvent by the execution and delivery of this Agreement or any of the other documents executed in connection with this Agreement or by the transactions contemplated hereunder or thereunder. 5.17 Leases and Leased Property: Each Lease reported to Agent and Lenders as an Eligible Lease and the Leased Property associated therewith shall, at all times when such Leases are included in the Borrowing Base calculation, be in compliance with all of the following representations: (a) Each Lease is in substantially the same form as that attached as Exhibit 5.17 hereto or has been otherwise approved by Agent in its reasonable discretion and is genuine, based on contracts that are enforceable in accordance with its terms against the Lessee and the Leased Property named and referenced therein, constitutes the entire agreement for the leasing of the Leased Property thereby covered, has not been altered or amended, except as set forth in the related schedules, and Borrower's Books and Records relating thereto are accurate, complete and genuine; (b) The sole original of each Lease has been delivered to Agent, and all other counterparts of each Lease shall contain a legend stating that the Lease has been assigned to First Union National Bank, As Agent, pursuant to that certain Amended and Restated Loan and Security Agreement dated September 30, 1998, or contain similar language specifying that such counterpart is not an original for "chattel paper" purposes under the UCC; (c) Where the Lease consists of a Master Lease Agreement and specific schedules which describe the terms of any specific items to be leased pursuant to such schedule, the sole original schedule shall constitute the sole original Lease, provided that the terms of the Master Lease Agreement and the schedule make it clear that the sole original schedule is a separate lease for "Chattel Paper" purposes under the UCC and that possession of such schedule constitutes possession of "Chattel Paper" under the UCC; (d) Except as otherwise consented to by Agent in writing, the aggregate amount of Leases with the same Lessee (or its Affiliates) is not in excess of $250,000; (e) The original amount and unpaid balance of each Lease shown on Borrower's Books and Records and on any statement or schedule delivered to Agent in connection therewith is the true and correct amount actually owed to Borrower, no portion of which, except as specifically provided for in the Lease, has been prepaid; (f) The amount due under each Lease is not subject to, and the terms of the Lease provide that the Lessee may not assert, any claim or reduction, counterclaim, setoff, recoupment, or any other claim, allowance or adjustment and no Lease has been re-negotiated, restructured or compromised except as renewed in the ordinary course of business; (g) All security agreements, title retention instruments and other documents and instruments which are security for any Lease, and/or each Lease, contain a correct and sufficient description of the Leased Property covered thereby and all security interests granted therein to Borrower (either directly or as assignee), if applicable, have been properly perfected and assigned to Agent for the benefit of Lenders; (h) Borrower has not and will not enter into any agreement with a Lessee of any Leased Property which provides, directly or indirectly, for the crediting of any obligation or liability of Borrower to such Lessee against future rentals accruing under the Lease; (i) Each item of Leased Property has been delivered to and, in all instances, accepted by the Lessee and is in good condition, ordinary wear and tear excepted, has not been returned, rejected, lost, stolen, destroyed or damaged and has not been removed from service; (j) Each Lease has been duly executed by Borrower and each Lessee, is a valid, legal and binding obligation of Borrower, and such Lessee, and is enforceable against Borrower and such Lessee in accordance with its terms. Borrower is the sole owner of each of the Leases and has the authority to assign all of its right, title and interest therein upon the terms herein set forth; (k) Each of the Leases and all Leased Property which is the subject matter thereof at the time of its assignment to Agent for the benefit of Lenders and at all times thereafter, will be free and clear of any and all assignments, options, rights, or other Liens whatsoever except Lenders' and/or Agent's and residual sharing arrangements; (l) Borrower has made its usual credit investigation of each Lessee and has determined that the credit is satisfactory; (m) All costs, fees, and expenses incurred in making and closing each of the Leases has been paid and each Lease is and will be current at the time of the assignment thereof to Lenders. No default exists or event exists which with the giving of notice or the passage of time or both, will result in the occurrence of a default of any obligation, as expressed in any Lease; (n) All rentals, fees, costs, expenses and charges paid or payable by the Lessee under any Lease, including without limitation, any brokerage and other fees paid to Borrower do not violate any laws relating to the maximum fees, costs, expenses or charges that can be charged in any state in which any Leased Property is located or in which the corresponding Lessee is located, or in which a transaction was consummated, or in any other state which may have jurisdiction with respect to any such Leased Property, Lease or Lessee; (o) Agent, for the benefit of Lenders, has a first perfected lien and security interest in the Collateral (including without limitation each Lease and the Leased Property) subject to no other Lien. Borrower has taken and in the future, shall take all steps necessary to maintain Agent's first perfected lien and security interest in the Collateral, including, if required, perfecting Borrower's security interest (in the event the Lease is not a "true lease") through filing financing statements, amendments thereto, or assignments and/or continuations thereof and recording of the documentation necessary to perfect Borrower's lien; (p) For each Lease, with a Lease Receivable in excess of $16,000, Borrower has either (i) listed Agent for the benefit of Lenders, as assignee on the UCC-1 Financing Statement so filed, or (ii) after Borrower has received acknowledgment copies of UCC-1s, deliver to Agent executed UCC-3 Financing Statements naming Agent for the benefit of Lenders as assignee of Borrower's security interest. Agent agrees not to file the UCC-3 Financing Statements until such time as an Event of Default or Unmatured Event of Default occurs under this Agreement, and Agent will return such UCC-3 Financing Statements to Borrower if such Leases are ultimately sold or refinanced on a permanent basis with another lender; (q) Each Lease is valid and enforceable and presents the undisputed obligation of the Lessee named therein and is not more than sixty-one (61) days contractually past due; (r) Each item of Leased Property leased pursuant to a Lease with a Lease Receivable in excess of 20,000 has been insured in the ordinary course of Borrower's or the corresponding Lessee's business; (s) Borrower has not received notice of a bankruptcy, receivership, reorganization or insolvency of any Lessee; (t) No Lessee is a Subsidiary or Affiliate of Borrower, or is an officer or employee of Borrower; (u) Each Lease contains a provision whereby the Lessee agrees not to assert any claim or reduction, counterclaim, setoff, recoupment or any other claim, allowance or adjustment against any assignee of Borrower; and (v) The Lessee is not otherwise in default under the corresponding Lease. SECTION 6. BORROWER'S AFFIRMATIVE COVENANTS Borrower covenants that until all of Borrower's Obligations under or in connection with this Agreement to Lenders and Agent are paid and satisfied in full and the Revolving Credit has been terminated: 6.1 Payment of Taxes and Claims: Borrower shall pay, before they become delinquent, all taxes, assessments and governmental charges or levies imposed upon it or upon Borrower's Property, except for those taxes being contested in good faith with due diligence by appropriate proceedings for which appropriate reserves have been maintained pursuant to GAAP. 6.2 Maintenance of Properties and Corporate Existence: (a) Property Insurance - Borrower shall maintain or caused to be maintained insurance on the Collateral against fire, flood, casualty and such other hazards in such amounts, with such deductibles and with such insurers as are customarily used by companies operating in the same industry as Borrower or the corresponding Lessee. At or prior to Closing, Borrower shall furnish Agent with copies of original insurance binders certified as true and correct and being in full force and effect as of the Closing Date or such other evidence of insurance as Agent may require. In the event Borrower fails to procure or cause to be procured any such insurance or to timely pay or cause to be paid the premium(s) on any such insurance, Agent (on behalf of Lenders) may do so for Borrower, but Borrower shall continue to be liable for the same. The policies of all such casualty insurance shall contain standard Lender's Loss Payable Clauses issued in favor of Agent (on behalf of Lenders) under which all losses thereunder shall be paid to Agent (on behalf of Lenders) as Agent's interest may appear. Such policies shall expressly provide that the requisite insurance cannot be altered or canceled without thirty (30) days prior written notice to Agent and shall insure Lenders notwithstanding the act or neglect of Borrower. Borrower hereby appoints Agent as Borrower's attorney-in-fact, exercisable at Agent's option to endorse any check which may be payable to Borrower in order to collect the proceeds of such insurance and any amount or amounts collected by Agent pursuant to the provisions of this paragraph may be applied by Agent to Borrower's Obligations. Borrower further covenants that all insurance premiums owing under its current casualty policy have been paid. Borrower also agrees to notify Agent, promptly, upon Borrower's receipt of a notice of termination, cancellation, or non-renewal from its insurance company of any such policy. (b) Public and Products Liability Insurance - Borrower shall maintain, and shall deliver to Agent upon Agent's request evidence of, public liability, products liability and business interruption insurance in such amounts as is customary for companies in the same or similar businesses located in the same or similar area. (c) Financial Records - Borrower shall keep current and accurate books of records and accounts in which full and correct entries will be made of all of its business transactions, and will reflect in its financial statements adequate accruals and appropriations to reserves, all in accordance with GAAP. Borrower shall not change its respective fiscal year end date without the prior written consent of Agent. (d) Corporate Existence and Rights - Borrower shall do (or cause to be done) all things necessary to preserve and keep in full force and effect its existence, good standing, rights and franchises. (e) Compliance with Laws - Borrower shall be in compliance with any and all laws, ordinances, governmental rules and regulations, and court or administrative orders or decrees to which it is subject, whether federal, state or local, (including without limitation environmental or environmental-related laws, statutes, ordinances, rules, regulations and notices and all applicable consumer sale and/or leasing laws and regulations), and shall obtain and maintain any and all licenses, permits, franchises or other governmental authorizations necessary to the ownership of its Property or to the conduct of its businesses, which violation or failure to obtain may materially adversely affect the business, Property, financial conditions or prospects of Borrower. 6.3 Business Conducted: Borrower shall continue in the business presently operated by it using its best efforts to maintain its customers and goodwill. Borrower shall not engage, directly or indirectly, in any material respect in any line of business substantially different from the businesses conducted by it immediately prior to the Closing Date, unless such line of business is reasonably related to such business so conducted prior to the Closing Date. 6.4 Litigation: Borrower shall give prompt notice to Agent of any litigation claiming in excess of $100,000 from Borrower, or which may otherwise have a material adverse effect on the business, financial condition, Property or prospects of Borrower. 6.5 Taxes: (a) Borrower shall pay all taxes (other than taxes based upon or measured by any Lender's income or revenues), if any, in connection with the Loans and/or the recording of any Lien Documents. The obligations of Borrower under this section shall survive the payment of Borrower's Obligations under this Agreement and the termination of this Agreement. Borrower shall cause to be paid all taxes incurred in connection with any of the Leases or the acquisition, sale or lease of any of the Leased Property. 6.6 Bank Accounts: Borrower shall maintain its major depository and disbursement account(s) with Agent. 6.7 Warranties for Future Advances: Each request by Borrower for an Advance under the Credit Facility in any form following the Closing Date shall constitute an automatic representation and warranty by Borrower to the effect that: (a) There has been no material adverse change in Borrower's operations or condition (financial or otherwise) since the date of delivery of Borrower's most recent Financial Statements. (b) No Event of Default which has not been cured or waived, or Unmatured Event of Default, then exists; (c) Each Advance is within and complies with the terms and conditions of this Agreement including without limitation the notice provisions contained in Section 2.3 hereof; (d) No Lien, including, without limitation, any federal tax Lien, has been imposed on Borrower which may, in any way, take priority over Agent's and/or Lenders' security interests in or Liens on any Collateral; and (e) Each representation and warranty set forth in Section 5 of this Agreement is then true and correct in all material respects. 6.8 Financial Covenants: Borrower shall maintain and comply with the following financial covenants as reflected on and computed from their Financial Statements: (a) Adjusted Debt to Tangible Net Worth Ratio: Borrower shall have and maintain at all times an Adjusted Debt to Tangible Net Worth Ratio on a consolidated basis, measured quarterly as of the last day of each fiscal quarter during each fiscal year, of not more than 5.5 to 1. (b) Tangible Net Worth: Borrower shall have and maintain a Tangible Net Worth of not less than $8,000,000 as of June 30, 1998. As of the last day of each fiscal quarter thereafter, Borrower shall have a Tangible Net Worth of not less than the amount required hereby for the immediately preceding fiscal quarter plus an amount equal to 75% of the Borrower's Net Income for the immediately preceding fiscal quarter (for the purposes of such step-up, Net Income shall never be less than zero). The amount of Tangible Net Worth required to be maintained by Borrower pursuant to this Section 6.8(b) shall be adjusted upon receipt by Borrower of the net proceeds of any capital contribution by an amount to be agreed upon by Borrower and Agent. (c) Fixed Charge Coverage Ratio: Borrower shall have and maintain as of the end of each fiscal quarter, based on financial information for the twelve-month period ending as of the end of such fiscal quarter, on a consolidated basis, a Fixed Charge Coverage Ratio of not less than 1.50 to 1. 6.9 Change of Ownership Interests/Management: Resource America, Inc. and/or Abraham Bernstein shall at all times own 51% of the aggregate voting interests of all classes of capital stock of Borrower entitled to vote generally and Abraham Bernstein shall at all times remain as Chief Executive Officer of Borrower and have a substantial equity interest (including options) in Borrower. 6.10 Financial and Business Information: Borrower shall deliver to Agent and each Lender the following: (a) Financial Statements and Collateral Reports: such data, reports, statements and information, financial or otherwise, as Agent may reasonably request, including, without limitation: (i) within one hundred twenty (120) days after the end of each fiscal year of Borrower, Financial Statements of Borrower for such year including the balance sheet of Borrower as at the end of such fiscal year and a statement of cash flows and income statement for such fiscal year, all on a consolidated and consolidating basis, setting forth in the consolidated statements in comparative form, the corresponding figures as at the end of and for the previous fiscal year, all in reasonable detail, including all supporting schedules, and audited and certified by independent public accountants of recognized standing, selected by Borrower and satisfactory to the Agent (Grant Thornton being deemed satisfactory to Agent), to have been prepared in accordance with GAAP, and such independent public accountants shall also provide an unqualified opinion that the Financial Statements present fairly the Borrower's financial condition. Such independent accountants shall also provide a statement certifying that nothing has come to their attention to cause them to believe that calculations contained in the compliance certificate are inaccurate. (ii) within fifteen (15) days of the end of each calendar month, Borrower's Lease receivables aging report, covenant compliance certificate and such other reports as Agent reasonably deems necessary, certified by Borrower's chief financial officer or other officer acceptable to Agent as true and correct, all in form and substance satisfactory to Agent; (iii) within fifteen (15) days after the end of each month, Borrower's internally prepared monthly consolidated and consolidating Financial Statements, including balance sheet, income statement and statements of cash flows. (b) Notice of Event of Default - promptly upon becoming aware of the existence of any condition or event which constitutes a default or an Event of Default or Unmatured Event of Default under this Agreement, a written notice specifying the nature and period of existence thereof and what action Borrower is taking (and proposes to take) with respect thereto; (c) Notice of Claimed Default - promptly upon receipt by Borrower, notice of default, oral or written, given to Borrower by any creditor for borrowed money in excess of $50,000; (d) Securities and Other Reports - if Borrower or any Affiliate shall be required to file reports with the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, promptly upon its becoming available, one copy of each financial statement, report, notice or proxy statement sent by Borrower or such Affiliate to stockholders generally, and, a copy of each regular or periodic report, and any registration statement, or prospectus in respect thereof, filed by Borrower with any securities exchange or with federal or state securities and exchange commissions or any successor agency. 6.11 Officers' Certificates: Along with the set of Financial Statements delivered to Agent and each Lender at the end of each fiscal quarter and fiscal year pursuant to Section 6.9(a) hereof, deliver to Agent and each Lender a certificate (in the form of Exhibit "6.11" attached hereto and made a part hereof) from the chief financial officer or other officer of Borrower acceptable to Agent (and as to certificates accompanying the annual statements of Borrower, also certified by Borrower's independent certified public accountant) setting forth: (a) Covenant Compliance - the information (including detailed calculations) required in order to establish whether Borrower is in compliance with the requirements of Sections 6.8 as of the end of the period covered by the financial statements then being furnished (and any exhibits appended thereto) under Section 6.10; and (b) Event of Default - that the signer, in his capacity as an officer of Borrower, has reviewed the relevant terms of this Agreement, and has made (or caused to be made under his supervision) a review of the transactions and conditions of Borrower from the beginning of the accounting period covered by the Financial Statements being delivered therewith to the date of the certificate, and that such review has not disclosed the existence during such period of any condition or event which constitutes an Event of Default or Unmatured Event of Default or if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action Borrower has taken or proposes to take with respect thereto. 6.12 Inspection: Borrower will permit any of Agent's officers or other representatives to visit and inspect any of Borrower's locations or where any Collateral is kept during regular business hours, to examine and audit all of Borrower's books of account, records, reports and other papers, to make copies and extracts therefrom and to discuss its affairs, finances and accounts with its officers, employees and independent certified public accountants. Agent will notify Lenders within a reasonable time of each scheduled field examination and to the extent reasonably practicable, representatives of each Lender may accompany Agent during each such field examination. Prior to the occurrence of an Event of Default, up to two (2) such (and after the occurrence of an Event of Default, all such) examinations shall be at Borrower's expense at the standard rates charged by the Agent or an outside firm engaged to perform such services, for such activities (plus the Agent's or such outside firm's out-of-pocket expenses). 6.13 Tax Returns and Reports: At Agent's or any Lender's request from time to time, Borrower shall promptly furnish Agent and each Lender with copies of the annual federal and state income tax returns of Borrower. 6.14 Material Adverse Developments: Borrower agrees that immediately upon becoming aware of any development or other information which would reasonably be expected to materially and adversely affect its businesses, financial condition, Property, prospects or its ability to perform under this Agreement, it shall give to Agent telephonic or telegraphic notice specifying the nature of such development or information and such anticipated effect. In addition, such verbal communication shall be confirmed by written notice thereof to Agent on the next business day after such verbal notice is given. 6.15 Places of Business: Borrower shall give thirty (30) days prior written notice to Agent of any changes in the location of any of its respective places of business, of the places where Books and Records are kept, or the establishment of any new, or the discontinuance of any existing place of business. 6.16 Sale of Collateral: Borrower shall mark its Books and Records to indicate Agent's security interest in the Collateral for the benefit of Lenders, including the Leases and Leased Property and, unless Agent consents otherwise in writing, Borrower shall retain title at all times to the Leased Property; provided however, that so long as no Event of Default or Unmatured Event of Default has occurred, Borrower may, subject to the prepayment provisions set forth herein, sell (i) Leases and Leased Property pursuant to Securitization Transactions or other Nonrecourse Financing of Borrower. So long as no Event of Default or Unmatured Event of Default has occurred, upon receipt of the proceeds (if required) from the sale of such Leases and/or Leased Property, Agent shall execute such documentation as is reasonably necessary to release its security interest in such Leases and/or Leased Property. SECTION 7. BORROWER'S NEGATIVE COVENANTS: Borrower covenants that until all of Borrower's Obligations under or in connection with this Agreement to Lenders are paid and satisfied in full and the Credit Facility has been terminated, that: 7.1 Merger, Consolidation, Dissolution or Liquidation: (a) Borrower shall not sell, lease, license, transfer or otherwise dispose of more than 10% of Borrower's aggregate assets during any 12 consecutive month period except in the ordinary course or ordinary operation of Borrower's business and in Securitization Transactions or other non-recourse financing. (b) Borrower shall not enter into any merger, consolidation, reorganization or recapitalization or acquire all or substantially all of the assets of any other Person or entity except for a merger, consolidation or acquisition in which properties and assets of Borrower are transferred to or combined with, as a single entity, any one Person, so long as (A) no Event of Default or Unmatured Event of Default has occurred hereunder and that after giving effect to such merger, consolidation or acquisition, no Event of Default or Unmatured Event of Default shall have occurred, and (B) Borrower shall be the surviving corporation. 7.2 Liens and Encumbrances: Borrower shall not: (i) execute a negative pledge agreement with any Person covering any of the Collateral, or (ii) cause or permit or agree or consent to cause or permit in the future (upon the happening of a contingency or otherwise) the Collateral, whether now owned or hereafter acquired, to be subject to a Lien; 7.3 Negative Pledge: Borrower shall not pledge, grant or permit any Lien to exist on the common stock of its Subsidiaries nor on any Leases or Leased Property (except those liens and assignments granted to Agent for the benefit of Lenders). 7.4 Transactions With Affiliates or Subsidiaries: (a) Borrower shall not enter into any transaction with any Subsidiary or other Affiliate including, without limitation, the purchase, sale, lease or exchange of Property, or the loaning or giving of funds to any Affiliate or any Subsidiary (other than a sale to a special purpose Subsidiary in connection with a Securitization Transaction or other non-recourse sale), unless (i) such Subsidiary or Affiliate is engaged in a business substantially related to the business conducted by Borrower and the transaction is in the ordinary course of and pursuant to the reasonable requirements of Borrower's business and upon terms substantially the same and no less favorable to Borrower as it would obtain in a comparable arm's-length transactions with any Person not an Affiliate or a Subsidiary, and (ii) so long as such transaction is not otherwise prohibited hereunder. (b) Subject in any event to the limitations of Section 7.4(a) above, Borrower shall not create or acquire any Subsidiary unless such Subsidiary engages in a business substantially related to the business of Borrower as conducted immediately prior to the Closing Date. 7.5 Guarantees: Excepting the endorsement in the ordinary course of business of negotiable instruments for deposit or collection, Borrower shall not become or be liable, directly or indirectly, primary or secondary, matured or contingent, in any manner, whether as guarantor, surety, accommodation maker, or otherwise, for the existing or future indebtedness of any kind of any Person. 7.6 Indebtedness: Borrower shall not incur or assume any indebtedness for money borrowed or become a surety, guarantor of, or otherwise responsible or liable in any manner with respect to, directly or indirectly, the indebtedness of any Person except for: (i) Subordinated Indebtedness; (ii) trade debt incurred in the ordinary course of Borrower's business; (iii) Non-Recourse Debt; and (iv) unsecured intercompany Indebtedness to Affiliates to the extent the outstanding principal balance thereof is at all times less than three (3) times the then outstanding principal amount of Borrower's Subordinated Indebtedness. 7.7 Use of Lenders' Name: Borrower shall not use any Lender's name (or the name of any of any Lender's Affiliates) or Agent's name in connection with any of its business operations except to identify the existence of the Credit Facility and the names of the Lenders and Agent in the ordinary course of Borrower's business. Nothing herein contained is intended to permit or authorize Borrower to make any contract on behalf of any Lender or Agent. SECTION 8. DEFAULT 8.1 Events of Default: Each of the following events shall constitute an event of default ("Event of Default") and Agent shall thereupon have the option, and the SuperMajority Lenders shall have the right to cause Agent, to declare the Obligations immediately due and payable, all without demand, notice, presentment or protest or further action of any kind (it also being understood that the occurrence of any of the events or conditions set forth in subparagraphs (j), (k) or (l) shall automatically cause an acceleration of the Obligations): (a) Payments - if Borrower fails to make any payment of principal or interest under the Credit Facility within two days after Agent has given notice that such payment was due; or (b) Other Charges - if Borrower fails to pay any other charges, fees, Expenses or other monetary obligations owing to any Lender or Agent arising out of or incurred in connection with this Agreement within two days after Agent has given notice that such payment is due and payable; or (c) Particular Covenant Defaults - if Borrower fails to perform, comply with or observe any covenant or undertaking contained in this Agreement, provided, however, that in the case of Borrower's failure to perform, comply with or observe the covenants contained in Sections 6.1, 6.2, 6.5, 6.10 or 6.11 ("Curable Covenant"), Borrower shall have five (5) days from the date on which Borrower became aware or should have become aware of its failure to perform, comply with or observe any such Curable Covenant to cure such nonperformance or compliance to the satisfaction of Agent; or (d) Financial Information - if any statement, report, financial statement, or certificate made or delivered by Borrower or any of its officers, employees or agents, to Agent or any Lender, is not true and correct, in all material respects, when made; or (e) Uninsured Loss - if there shall occur any uninsured damage to or loss, theft, or destruction in excess of $100,000 with respect to any portion of any Collateral; or (f) Warranties or Representations - if any warranty, representation or other statement by or on behalf of Borrower or any Guarantor or pledgor contained in or pursuant to this Agreement, or in any document, agreement or instrument furnished in compliance with, relating to, or in reference to this Agreement, is false, erroneous, or misleading in any material respect when made; or (g) Agreements with Others - if Borrower shall default beyond any grace period under any agreement with any creditor for borrowed money or in connection with any Securitization Transaction, each in an amount equal to or greater than $250,000 and (i) such default consists of the failure to pay any principal, premium or interest with respect to such indebtedness or (ii) such default consists of the failure to perform any covenant or agreement with respect to such indebtedness, if the effect of such default is to cause Borrower's obligations which are the subject thereof to become due prior to its maturity date or prior to its regularly scheduled date of payment or would entitle such creditor to accelerate such obligations; or (h) Other Agreements with Lenders - if Borrower breaches or violates the terms of, or if a default or an Event of Default, occurs under, any other existing or future agreement (related or unrelated) between or among Borrower and Agent or any Lender or all Lenders, except with respect to Non-Recourse Debt; or (i) Judgments - if any final judgment for the payment of money in excess of $250,000 which is not fully and unconditionally covered by insurance shall be rendered; or (j) Assignment for Benefit of Creditors, etc. - if Borrower makes or proposes an assignment for the benefit of creditors generally, offers a composition or extension to creditors, or makes or sends notice of an intended bulk sale of any business or assets now or hereafter owned or conducted by Borrower which might materially and adversely affect Borrower; or (k) Bankruptcy, Dissolution, etc. - upon the commencement of any action for the dissolution or liquidation of Borrower, or the commencement of any proceeding to avoid any transaction entered into by Borrower, or the commencement of any case or proceeding for reorganization or liquidation of Borrower's debts under the Bankruptcy Code or any other state or federal law, now or hereafter enacted for the relief of debtors, whether instituted by or against Borrower; provided, however, that Borrower shall have sixty (60) days to obtain the dismissal or discharge of involuntary proceedings filed against it, it being understood that during such sixty (60) day period, no Lender shall be obligated to make Advances hereunder and Agent may seek adequate protection in any bankruptcy proceeding; or (l) Receiver - upon the appointment of a receiver, liquidator, custodian, trustee or similar official or fiduciary for Borrower or for any of Borrower's Property; or (m) Execution Process, Seizure, etc. - the issuance of any execution or distraint process against Borrower, or any Property of Borrower is seized by any governmental entity, federal, state or local; or (n) Termination of Business - if Borrower ceases any material portion of its business operations as presently conducted; or (o) Pension Benefits, etc. - if Borrower fails to comply with ERISA, so that grounds exist to permit the appointment of a Trustee under ERISA to administer Borrower's employee plans or to allow the pension benefit guarantee corporation to institute a proceeding to appoint a trustee to administer such plan(s), or to permit the entry of a Lien to secure any deficiency or claim; or (p) Investigations - any indication or evidence received by Agent or any Lender that reasonably leads it to believe Borrower may have directly or indirectly been engaged in any type of activity which, would be reasonably likely to result in the forfeiture of any Property of Borrower to any governmental entity, federal, state or local; or (q) Guarantor Default - Any Guarantor shall default under, terminate, or disclaim liability under its Guaranty Agreement; or (r) Stock Pledgor Default - Resource Leasing, Inc. or Resource America, Inc. shall, default under their respective Stock Pledge Agreement; or (s) Default under Subordination Agreement - Resource Leasing, Inc. or Borrower shall default under the terms of the Subordination Agreement. 8.2 Cure - Nothing contained in this Agreement or the Loan Documents shall be deemed to compel Agent and/or Lenders to accept a cure of any Event of Default hereunder. 8.3 Rights and Remedies on Default: (a) In addition to all other rights, options and remedies granted or available to Agent or Lenders under this Agreement or the Loan Documents, or otherwise available at law or in equity, upon or at any time after the occurrence and during the continuance of an Event of Default or Unmatured Event of Default, Agent may, in its discretion, and the SuperMajority Lenders shall have the right to cause Agent to, withhold or cease making Advances under the Credit Facility. (b) In addition to all other rights, options and remedies granted or available to Agent under this Agreement or the Loan Documents (each of which is also then exercisable by Agent), Agent may, in its discretion, and the SuperMajority Lenders shall have the right to cause Agent to, upon or at any time after the occurrence and during the continuance of an Event of Default, terminate the Credit Facility. (c) In addition to all other rights, options and remedies granted or available to Agent under this Agreement or the Loan Documents (each of which is also then exercisable by Agent), Agent may, upon or at any time after the occurrence of an Event of Default, exercise all rights under the UCC and any other applicable law or in equity, and under all Loan Documents permitted to be exercised after the occurrence of an Event of Default, including the following rights and remedies (which list is given by way of example and is not intended to be an exhaustive list of all such rights and remedies): (i) The right to take possession of, and notify all Lessees of the Agent's and Lenders' security interest in the Collateral and require payment under the Leases to be made directly to Agent for the benefit of Lenders and Agent may, in its own name or in the name of Borrower, exercise all rights of lessor under the Leases and collect, sue for and receive payment on all Leases, and settle, compromise and adjust the same on any terms as may be satisfactory to Agent, in its sole and absolute discretion for any reason or without reason and Agent may do all of the foregoing with or without judicial process (including without limitation notifying the United States postal authorities to redirect mail addressed to Borrower to an address designated by Agent); or (ii) By its own means or with judicial assistance, subject to the rights of the Lessees, enter Borrower's premises or location of Collateral and take possession of the Collateral, or render it unusable, or dispose of the Collateral on such premises in compliance with subsection (e) below, without any liability for rent, storage, utilities or other sums, and Borrower shall not resist or interfere with such action; or (iii) Require Borrower, at Borrower's sole expense, subject to the rights of the Lessees, to assemble all or any part of the Collateral and make it available to Agent at any place designated by Agent; or (iv) The right to reduce or modify the Maximum Credit Limit, Borrowing Base or any portion thereof or the advance rates or to modify the terms and conditions upon which Agent, on behalf of Lenders, may be willing to consider making Advances under the Credit Facility or to take additional reserves in the Borrowing Base for any reason. (e) Borrower hereby agrees that a notice received by it at least five (5) days before the time of any intended public sale or of the time after which any private sale or other disposition of the Collateral is to be made, shall be deemed to be reasonable notice of such sale or other disposition. If permitted by applicable law, any Collateral which threatens to speedily decline in value or which is sold on a recognized market may be sold immediately by Agent without prior notice to Borrower. Borrower covenants and agrees not to interfere with or impose any obstacle to Agent's exercise of its rights and remedies with respect to the Collateral, after the occurrence of an Event of Default hereunder. 8.4 Nature of Remedies: All rights and remedies granted Agent or Lenders hereunder and under the Loan Documents, or otherwise available at law or in equity, shall be deemed concurrent and cumulative, and not alternative remedies, and Agent may proceed with any number of remedies at the same time until all Obligations under or in connection with this Agreement are satisfied in full. The exercise of any one right or remedy shall not be deemed a waiver or release of any other right or remedy, and Agent, upon or at any time after the occurrence of an Event of Default, may proceed against Borrower, at any time, under any agreement, with any available remedy and in any order. 8.5 Set-Off: If any bank account of Borrower with Agent or any Lender or any participant is attached or otherwise liened or levied upon by any third party, Agent or such Lender, as applicable, (and such participant) as agent for Lenders shall have and be deemed to have, without notice to Borrower, the immediate right of set-off and may apply the funds or amount thus set-off against any of Borrower's Obligations hereunder. SECTION 9. AGENT As between the Agent, on one hand, and the Lenders, on the other hand, the Agent and each of the Lenders, who are now or shall become parties to this Agreement, agree as follows (with the consent and approval of Borrower): 9.1 Appointment and Authorization. Each Lender, and each subsequent holder of any of the Revolving Credit Notes or Term Notes by its acceptance thereof, hereby irrevocably appoints and authorizes the Agent to take such action on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto. Except as may be otherwise expressly provided herein, Borrower is hereby authorized by the Lenders to deal solely with the Agent in all transactions which affect the Lenders under this Agreement and the Loan Documents. Provided, however, nothing herein shall prohibit any Lender from communicating directly with Borrower concerning any matters related to the Loans or Loan Documents. The rights, privileges and remedies accorded to the Agent hereunder shall be exercised by the Agent on behalf of all of the Lenders. 9.2 General Immunity. Subject to the provisions of this Agreement, the Agent will handle all transactions relating to the Loans and all other Obligations, including, without limitation, all transactions with respect to this Agreement, the Loan Documents and all related documents in accordance with their usual banking practices. In performing its duties as Agent hereunder, the Agent will take the same care as it takes in connection with loans in which it alone is interested. However, neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them hereunder or in connection herewith except for its or their own gross negligence or willful misconduct. 9.3 Consultation with Counsel. The Agent may consult with legal counsel and any other professional advisors or consultants deemed necessary or appropriate and selected by Agent and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. 9.4 Documents. The Agent shall not be under a duty to examine into or pass upon the effectiveness, genuineness or validity of this Agreement or any of the Revolving Credit Notes, Term Notes, or any other instrument or document furnished pursuant hereto or in connection herewith, and the Agent shall be entitled to assume that the same are valid, effective and genuine and what they purport to be. In addition, the Agent shall not be liable for failing to make any inquiry concerning the accuracy, performance or observance of any of the terms, provisions or conditions of such instrument or document. 9.5 Rights as a Bank. With respect to its applicable Pro Rata Percentage of the Credit Facility, the Agent shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not the Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Agent in its individual capacity. Subject to the provisions of this Agreement, the Agent may accept deposits from, lend money to, and generally engage in any kind of banking or trust business with Borrower and its Affiliates as if it were not the Agent. 9.6 Responsibility of Agent. It is expressly understood and agreed that the obligations of the Agent hereunder are only those expressly set forth in this Agreement and that the Agent shall be entitled to assume that no Event of Default and no Unmatured Event of Default has occurred and is continuing, unless the Agent has actual knowledge of such fact. Except to the extent Agent is required by the Lenders pursuant to the express terms hereof to take a specific action, the Agent shall be entitled to use its discretion with respect to exercising or refraining from exercising any rights which may be vested in it by, or with respect to taking or refraining from taking any action or actions that it may be able to take under or in respect of, this Agreement and the Loan Documents. The Agent shall not incur any liability under or in respect of this Agreement and the Loan Documents by acting upon any notice, consent, certificate, warranty or other paper or instrument believed by it to be genuine or authentic or to be signed by the proper party or parties, or with respect to anything that either of them may do or refrain from doing in the reasonable exercise of its judgment, or that may seem to them to be necessary or desirable under the circumstances. It is agreed among the Agent and the Lenders that the Agent shall not have any responsibility to carry out field examinations or otherwise examine the books and records or properties of Borrower, except as the Agent, in its sole discretion, deems appropriate. The relationship between the Agent and each Lender is and shall be that of agent and principal only and nothing herein shall be construed to constitute the Agent a joint venturer with any Lender, a trustee or fiduciary for any of the Lenders or for the holder of a participation therein nor impose on the Agent duties and obligations other than those set forth herein. 9.7 Collections and Disbursements. (a) The Agent will have the right to collect and receive all payments of the Obligations, together with all fees, charges and other amounts due under this Agreement and the Loan Documents, and the Agent will remit to each Lender according to applicable Pro Rata Percentages all such payments actually received by Agent (subject to any required clearance procedures) on the same Business Day of receipt thereof (but if such payments shall not have been received by the Agent prior to 12:00 noon Eastern Time on such Business Day then, on the next Business Day). (b) On the Business Day for which notice is given Lenders by Agent with respect to requested Advances (which notice shall state the date and amount of such payment), each Lender shall remit to the Agent its Pro Rata Percentage of the payment in respect to such Advance. The obligations of Lenders hereunder are unconditional, not subject to set-off, and irrevocable and may not be terminated at any time. (c) If any such payment received by the Agent is rescinded, determined to be unenforceable or invalid or is otherwise required to be returned for any reason at any time, whether before or after termination of this Agreement and the Loan Documents, each Lender will, upon written notice from the Agent, promptly pay over to the Agent its Pro Rata Percentage of the amount so rescinded, held unenforceable or invalid or required to be returned, together with interest and other fees thereon if also required to be rescinded or returned. (d) All payments by the Agent and the Lenders to each other hereunder shall be in immediately available funds. The Agent will at all times maintain proper books of account and records reflecting the interest of each Lender in the Credit Facility, in a manner customary to the Agent's keeping of such records, which books and records shall be available for inspection by each Lender at reasonable times during normal business hours, at such Lender's sole expense. In the event that any Lender shall receive any payments in reduction of the Obligations in an amount greater than its applicable Pro Rata Percentage in respect of indebtedness to the Lenders evidenced hereby (including, without limitation amounts obtained by reason of setoffs), such Lender shall hold such excess in trust for Agent (on behalf of all other Lenders) and shall promptly remit to the Agent such excess amount so that the amounts received by each Lender hereunder shall at all times be in accordance with its applicable Pro Rata Percentage. To the extent necessary for each Lender's actual percentage of all outstanding Loans to equal its applicable Pro Rata Percentage, the Lender having a greater share of any payment(s) than its applicable Pro Rata Percentage shall acquire a participation in the applicable outstanding balances of the Pro Rata Shares of the other Lenders as determined by Agent. 9.8 Indemnification. The Lenders hereby each indemnify the Agent ratably according to their respective Pro Rata Percentages, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or any other Loan Document or any action taken or omitted by the Agent under or related to this Agreement or the other Loan Documents or the Loans, provided that no Lender shall be liable to Agent for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Agent's gross negligence or willful misconduct. Agent shall have the right to deduct, from any amounts to be paid by Agent to any Lender hereunder, any amounts owing to Agent by such Lender by virtue of this paragraph. Provided all of the Obligations have been satisfied in full, if Agent shall have received any sums from any of the Lenders pursuant to the terms of this Section and the indemnified Agent receives additional payments from the Collateral or elsewhere which could be used by such party pursuant to the terms of this Agreement, the other Loan Documents, at law or in equity to satisfy the liability, for which such party was indemnified, such additional payments shall be applied against the liabilities for which such party was reimbursed and an equal amount shall be reimbursed to the Lenders on a pro-rata basis based on the respective amounts of their payments to the Agent made under this Section. 9.9 Expenses. (a) All out-of-pocket costs and out-of-pocket expenses incurred by Agent and not reimbursed on demand by Borrower, in connection with the creation, amendment, administration, termination and enforcement of the Loans (including, without limitation, field examination expenses, reasonable counsel fees and expenditures to protect, preserve and defend Agent's and any Lender's rights and interest under the Loan Documents) shall be shared and paid on demand by Lenders pro rata, based on their applicable Pro Rata Percentage. (b) Agent may deduct from payments or distributions to be made to Lenders such funds as may be necessary to pay or reimburse Agent for such costs or expenses. 9.10 No Reliance. By execution of or joining in this Agreement, each Lender acknowledges that it has entered into this Agreement and the Loan Documents solely upon its own independent investigation and is not relying upon any information supplied by or any representations made by Agent. Each Lender shall continue to make its own analysis and evaluation of Borrower. Agent makes no representation or warranty nor assumes any responsibility with respect to the financial condition or Property of Borrower, any Lessee or any Collateral; the accuracy, sufficiency or currency of any information concerning the financial condition, prospects or results of operations of Borrower; or for sufficiency, authenticity, legal effect, validity or enforceability of the Loan Documents. Agent assumes no responsibility or liability with respect to the collectibility of the Obligations or the performance by Borrower of any obligation under the Loan Documents. 9.11 Reporting. During the term of this Agreement, Agent will promptly furnish each Lender such financial statements and reports as any Lender may reasonably request. Agent will notify Lenders within a reasonable period of time (not to exceed ten (10) Business Days) after it receives actual knowledge of any Event of Default under the Loan Documents. 9.12 Removal of Agent. The Agent may resign at any time upon giving thirty (30) days prior written notice thereof to Lenders and Borrower. The Agent may be removed as Agent hereunder upon the written direction of all Lenders exclusive of the Agent upon the following: (i) willful misconduct in the performance of Agent's duties or responsibilities under this Agreement; or (ii) if a receiver, trustee or conservator is appointed for Agent or any state or federal regulatory authority assumes management or control of Agent or if, under applicable law, the administrative or discretionary duties and responsibilities of Agent hereunder become controlled by or subject to the approval of any state or federal regulatory authority. Upon any resignation or permitted removal of Agent, the Lenders shall have the right to appoint a successor Agent by majority vote of the other Lenders (based upon the percentages of the total Pro Rata Shares of the Lenders other than the Lender which is the Agent). Upon the acceptance of the appointment as a successor Agent hereunder by such successor Agent, such successor Agent shall thereupon succeed to and become vested with all rights, powers, obligations and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations hereunder. 9.13 Action on Instructions of Lenders. With respect to any provision of this Agreement, or any issue arising thereunder, concerning which the Agent is authorized to act or withhold action by direction of one or more Lenders, the Agent shall in all cases be fully protected in so acting, or in so refraining from acting, hereunder in accordance with written instructions signed by the requisite Lenders. Such instructions and any action taken or failure to act pursuant thereto shall be binding on all Lenders and on all holders of the Revolving Credit Notes and Term Notes. 9.14 Several Obligations. The obligation of each Lender is several, and neither the Agent nor any other Lender shall be responsible for any obligation or commitment hereunder of any other Lender. 9.15 Consent of Banks. (a) Subject to this Section 9.15, Agent shall have the sole and exclusive right to service, administer and monitor the Loans and the Loan Documents, including without limitation, the right to exercise all rights, remedies, privileges and options under the Loan Documents. (b) Notwithstanding anything to the contrary contained in subparagraph (a) above, Agent shall not, without the prior written consent of all Lenders: (i) extend or renew the Current Term or, any payment date under the Credit Facility, (ii) decrease any interest rate on the Credit Facility, (iii) compromise or settle all or a portion of the Obligations, (iv) release any obligor from the Obligations except in connection with termination of the Credit Facility and full payment and satisfaction of all Obligations, (v) increase the Borrowing Base advance rate, (vi) modify Section 9.15(b) or (c), or (vii) increase the Maximum Credit Limit; provided however that Agent may increase the Maximum Credit Limit by first offering the amount of any such increase to each of the Lenders in accordance with their respective Pro Rata Percentage. To the extent any Lender(s) may choose not to increase its/their respective Pro Rata Shares by the amount attributable to its/their Pro Rata Percentage of such increase, such amount will be offered to the other Lenders on such sharing basis as Agent may reasonably establish. After each Lender choosing to increase its Pro Rata Share has agreed to do so, and in conjunction with the modification of this Agreement to reflect such increase executed by those Lenders sharing in the increase of the Credit Facility, the Lenders' Pro Rata Percentages will be adjusted accordingly and all Lenders (whether or not sharing in such increase) shall be bound by such modification. (c) Notwithstanding anything to the contrary contained in subparagraph (a) above and subject to the terms of subparagraph (b) above, Agent shall not, without the prior written consent of all Lenders: (i) enter into any written amendment to any of the Loan Documents; (ii) waive Borrower's compliance with the terms and conditions of the Loan Documents or any Event of Default hereunder or thereunder; (iii) consent to Borrower taking any action which, if taken, would constitute an Event of Default under this Agreement or under any of the Loan Documents; or (iv) release any Collateral other than Collateral which Borrower seeks to have released from the Agent's lien (for the benefit of Lenders) in the ordinary course of Borrower's business. (d) After an acceleration of the Obligations, Agent shall have the sole and exclusive right, with communication (to the extent reasonably practicable under the circumstances) with all Lenders, to exercise or refrain from exercising any and all rights, remedies, privileges and options under the Loan Documents and available at law or in equity to protect and enforce the rights of the Lenders and collect the Obligations, including, without limitation, instituting and pursuing all legal actions against Borrower or to collect the Obligations, or defending any and all actions brought by Borrower or other Person; or incurring Expenses or otherwise making expenditures to protect the Loans, the Collateral or Lenders' rights or remedies. (e) To the extent Agent is required to obtain or otherwise elects to seek the consent of the other or Lenders to an action Agent desires to take, if Agent or any Lender fails to notify such Person, in writing, of its consent or dissent to any request of Agent hereunder within seven (7) Business Days of such Person's actual receipt of such request, the Person whose consent is sought, shall be deemed to have given its consent thereto. (f) No provision in Section 9 of this Agreement may be amended without Agent's prior written consent. 9.16 Participations and Assignments: Borrower hereby acknowledges and agrees that a Lender may at any time: (a) grant participations in up to forty-nine percent (49%) (up to 100% to an Affiliate of such Lender) of its Pro Rata Percentage and Pro Rata Share or of its right, title and interest therein or in or to this Agreement (collectively, "Participations") or to any other bank, lending institution or other entity which the granting Lender reasonably determines has the requisite sophistication to evaluate the merits and risks of investments in participations ("Participants"); provided, however, that: (i) all amounts payable by the Borrower to each Lender hereunder shall be determined as if such Lender had not granted such Participation; and (ii) any agreement pursuant to which any Lender may grant a Participation: (A) shall provide that such Lender shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provisions of this Agreement; (B) such participation agreement may provide that such Lender will not agree to any modification, amendment or waiver of this Agreement without the consent of the Participant if such amendment, modification or waiver would reduce the principal of or rate of interest on the Loans, increase the amount of the Maximum Credit Limit, postpone the date fixed for any scheduled payment of principal of or interest on the Loans or release Collateral for the Loans, subject to Section 9.15 hereof; and (C) shall not relieve such Lender from its obligations, which shall remain absolute, to make Advances hereunder; and (b) assign all or any portion of its Pro Rata Share (together with its rights and obligations with respect thereto), and its right, title and interest therein or in and to this Agreement and the other Loan Documents to a Lender or any affiliate of a Lender; or to any other bank or financial institution, in each case with thirty (30) days prior written notice to Agent and subject to the prior written consent of the Agent which consent shall not be unreasonably withheld; provided however that (i) such assignment shall not result in either the assigning or acquiring Lender having a Pro Rata Share of less than $5,000,000 and (ii) the parties to such assignment shall execute such assignment or other documents reasonably requested by Agent and Borrower shall execute such replacement Revolving Credit Notes as may be requested by Agent, and (iii) the parties to the assignment shall pay Agent a processing fee of $2,500 in conjunction with such assignment. All Participations and assignments hereunder shall be of the Pro Rata Percentage or Pro Rata Share of the Lender making the assignment or granting the Participation. Notwithstanding the foregoing or anything else contained in this Agreement or any of the other Loan Documents, any Lender may assign or pledge all or any portion of its Pro Rata Share (including, without limitation, its rights with respect thereto), and its right, title and interest therein or in and to this Agreement and the other Loan Documents to a Federal Reserve Bank in support of borrowings made by such Lender from such Federal Reserve Bank. SECTION 10. MISCELLANEOUS 10.1 GOVERNING LAW: THIS AGREEMENT, AND ALL RELATED AGREEMENTS AND DOCUMENTS, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. THE PROVISIONS OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND ALL OTHER AGREEMENTS AND DOCUMENTS REFERRED TO HEREIN ARE TO BE DEEMED SEVERABLE, AND THE INVALIDITY OR UNENFORCEABILITY OF ANY PROVISION SHALL NOT AFFECT OR IMPAIR THE REMAINING PROVISIONS WHICH SHALL CONTINUE IN FULL FORCE AND EFFECT. 10.2 Integrated Agreement: The Revolving Credit Notes, the Term Notes, the other Loan Documents, all related agreements, and this Agreement shall be construed as integrated and complementary of each other, and as augmenting and not restricting Lenders' and Agent's rights and remedies. If, after applying the foregoing, an inconsistency still exists, the provisions of this Agreement shall constitute an amendment thereto and shall control. 10.3 Waiver: (a) No omission or delay by Agent or Lenders in exercising any right or power under this Agreement or any related agreements and documents will impair such right or power or be construed to be a waiver of any default, or Event of Default or an acquiescence therein, and any single or partial exercise of any such right or power will not preclude other or further exercise thereof or the exercise of any other right, and as to Borrower no waiver will be valid unless in writing and signed by Agent and then only to the extent specified. (b) Borrower releases and shall indemnify, defend and hold harmless Agent and Lenders, and their respective officers, employees and agents, of and from any claims, demands, liabilities, obligations, judgments, injuries, losses, damages and costs and expenses (including, without limitation, reasonable legal fees) resulting from (i) acts or conduct of Borrower or under, pursuant or related to this Agreement and the other Loan Documents, (ii) Borrower's breach or violation of any representation, warranty, covenant or undertaking contained in this Agreement or the other Loan Documents, and (iii) Borrower's failure to comply with any or all laws, statutes, ordinances, governmental rules, regulations or standards, whether federal, state or local, or court or administrative orders or decrees, (including without limitation environmental laws, etc.) and all costs, expenses, fines, penalties or other damages resulting therefrom, unless resulting solely from acts or conduct of Lenders constituting wilful misconduct or gross negligence. 10.4 Time: Whenever Borrower shall be required to make any payment, or perform any act, on a day which is not a Business Day, such payment may be made, or such act may be performed, on the next succeeding Business Day. Time is of the essence in Borrower's performance under all provisions of this Agreement and all related agreements and documents. 10.5 Expenses of Agent and Lenders: At Closing and from time to time thereafter, Borrower will pay all reasonable expenses of Agent (and after the occurrence of an Event of Default, all expenses of Lenders and Agent, or any of them) on demand (including, without limitation, search costs, audit fees, appraisal fees, environmental fees and the fees and expenses of legal counsel for Agent and Lender(s), if applicable) relating to this Agreement, and all related agreements and documents, including, without limitation, expenses incurred in the analysis, negotiation, preparation, closing, administration and enforcement of this Agreement and the other Loan Documents, the enforcement, protection and defense of the rights of Agent and Lenders in and to the Loans and Collateral or otherwise hereunder, and any expenses relating to extensions, amendments, waivers or consents pursuant to the provisions hereof, or any related agreements and documents or relating to agreements with other creditors, or termination of this Agreement (collectively, the "Expenses"). 10.6 Brokerage: This transaction was brought about and entered into by Agent, Lenders and Borrower acting as principals and without any brokers, agents or finders being the effective procuring cause hereof. Borrower represents that it has not committed Agent or any Lender to the payment of any brokerage fee, commission or charge in connection with this transaction. 10.7 Notices: (a) Any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed given if delivered in person or if sent by telecopy or by nationally recognized overnight courier, or via first class, Certified or Registered mail, postage prepaid, as follows, unless such address is changed by written notice hereunder: If to Agent to: First Union National Bank 1339 Chestnut Street Philadelphia, PA 19107 Attn: Grainne Pergolini Vice President Telecopy No.: 215/786-7704 With copies to: Blank Rome Comisky & McCauley LLP One Logan Square Philadelphia, PA 19103 Attn: Lawrence F. Flick, II, Esquire Telecopy No.: 215/569-5522 If to Borrower to: Fidelity Leasing, Inc. 7 E. Skippack Pike Ambler, PA 19002 Attn: Abraham Bernstein Telecopy No.: 215/619-2830 With copies to: Richard Abt, Esquire Ledgwood Law Firm, P.C. 1521 Locust Street, 4th Floor Philadelphia, PA 19102 Telecopy No.: 215/735-2513 If to Lenders: to the addresses set forth on Schedule A (b) Any notice sent by Agent, any Lender or Borrower by any of the above methods shall be deemed to be given when so received. (c) Agent shall be fully entitled to rely upon any facsimile transmission or other writing purported to be sent by any Authorized Officer (whether requesting an Advance or otherwise) as being genuine and authorized. 10.8 Headings: The headings of any paragraph or Section of this Agreement are for convenience only and shall not be used to interpret any provision of this Agreement. 10.9 Survival: All warranties, representations, and covenants made by Borrower herein, or in any agreement referred to herein or on any certificate, document or other instrument delivered by it or on its behalf under this Agreement, shall be considered to have been relied upon by Agent and Lenders, and shall survive the delivery to Lenders of the Notes, regardless of any investigation made by Lenders or on their behalf. All statements in any such certificate or other instrument prepared and/or delivered for the benefit of Agent and any and all Lenders shall constitute warranties and representations by Borrower hereunder. Except as otherwise expressly provided herein, all covenants made by Borrower hereunder or under any other Loan Document shall be deemed continuing until all Obligations under or in connection with this Agreement are satisfied in full. 10.10 Successors and Assigns: This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. Borrower may not transfer, assign or delegate any of its duties or obligations hereunder. 10.11 Counterparts: Two or more duplicate originals of this Agreement may be signed by the parties, each of which shall constitute an original but all of which together shall constitute one and the same instrument. This Agreement may be executed in counterparts, all of which counterparts taken together shall constitute one completed fully executed document. 10.12 Modification: No modification hereof or any agreement referred to herein shall be binding or enforceable unless in writing and signed by Borrower, Agent and the Lenders and except as provided in Section 9 hereof. Any modification in accordance with the terms hereof shall be binding on all parties hereto, whether or not each is a signatory thereto. 10.13 Signatories: Each individual signatory hereto represents and warrants that he is duly authorized to execute this Agreement on behalf of his principal and that he executes the Agreement in such capacity and not as a party. 10.14 Third Parties: No rights are intended to be created hereunder, or under any related agreements or documents for the benefit of any third party donee, creditor or incidental beneficiary of Borrower. Nothing contained in this Agreement shall be construed as a delegation to Agent or any Lender of Borrower's duty of performance, including, without limitation, Borrower's duties under any Lease, account or contract with any other Person. 10.15 Discharge of Taxes, Borrower's Obligations, Etc.: Agent, in its sole discretion, shall have the right at any time, and from time to time, with prior notice to Borrower, if Borrower fails to do so five (5) Business Days after requested in writing to do so by Agent, to: (a) pay for the performance of any of Borrower's obligations hereunder, and (b) discharge taxes or Liens, at any time levied or placed on any of Borrower's Property in violation of this Agreement unless Borrower is in good faith with due diligence by appropriate proceedings contesting such taxes or Liens and maintaining proper reserves therefor in accordance with GAAP. Expenses and advances shall be added to the Revolving Credit, bear interest at the same rate applied to the Revolving Credit, until reimbursed to Agent. Such payments and advances made by Agent shall not be construed as a waiver by Agent or Lenders of an Event of Default under this Agreement. 10.16 Most Favored Lenders: Borrower agrees to promptly notify Agent in writing if any agreement for borrowed money to which Borrower is a party, contains or is amended to contain, financial or performance covenants more restrictive than those contained herein and upon Agent's request, Borrower agrees to amend this Agreement accordingly so that covenants contained herein are substantially the same as those contained in such other agreements for borrowed money so long as such covenants remain applicable to Borrower pursuant to such other agreements. 10.17 Consent to Jurisdiction: Borrower and each Lender hereby irrevocably consents to the jurisdiction of the Courts of Common Pleas of Philadelphia, Commonwealth of Pennsylvania or the United States District Court for the Eastern District of Pennsylvania in any and all actions and proceedings whether arising hereunder or under any other agreement or undertaking and irrevocably agree to service of process by certified mail, return receipt requested to the address of the appropriate party set forth herein. 10.18 Waiver of Jury Trial: EACH OF BORROWER, LENDERS AND AGENT HEREBY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A JURY TRIAL IN CONNECTION WITH ANY LITIGATION COMMENCED BY OR AGAINST AGENT OR ANY LENDER OR LENDERS WITH RESPECT TO RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO OR UNDER THE LOAN DOCUMENTS. 10.19 Information to Participant: Agent and each Lender may divulge to any participant, co-lender or assignee or prospective participant, co-lender or assignee it may obtain in the Credit Facility, or any portion thereof, all information, and furnish to such Person copies of any reports, financial statements, certificates, and documents obtained under any provision of this Agreement, or related agreements and documents; provided, however that any potential participant, co-lender or assignee agrees to hold in confidence all confidential or proprietary information provided to them by Borrower, Agent or such Lender except (a) to the extent that the production of such information is required pursuant to any statute, ordinance, regulation, rule or order or any subpoena or any governmental inquiry or by reason of any bank regulation in connection with any bank examination, and (b) such potential participant, co-lender or assignee shall not be prohibited from disclosing any such information to any of their agents, officers, employees, attorneys, accountants or consultants who shall be informed of this provision. IN WITNESS WHEREOF, the undersigned parties have executed this Agreement the day and year first above written. FIDELITY LEASING, INC. By:________________________________ Title: Attest:____________________________ (Corporate Seal) FIRST UNION NATIONAL BANK, as Agent and Lender By:________________________________ Title: EUROPEAN AMERICAN BANK, as Lender By:________________________________ Title: SCHEDULE A Pro Rata Lenders Pro Rata Share Percentage European American Bank $7,500,000 37.5% 400 Oak Street Garden City, NY 11530 Attn: Christopher Czaja, Vice President Telecopy No.: (516) 364-3307 First Union National Bank $12,500,000 62.5% 1339 Chestnut Street Philadelphia, PA 19101 Attn: Ms. Grainne Pergolini Vice President Telecopy No.: 215/786-7704 Exhibit 2.3(b)(ii) ASSIGNMENT AGREEMENT Fidelity Leasing, Inc. (hereinafter "Assignor"), does hereby assign to FIRST UNION NATIONAL BANK, as Agent, for the benefit of the Lenders (as defined below) (hereinafter "Assignee"), its successors and assigns, all of the right, title and interest of Assignor in and to (i) the Leases, as identified on the Schedule "A" attached hereto and made a part hereof, the Leased Property which is the subject matter of such Leases, and all proceeds thereof; and (ii) all of the interest of Assignor as loss payee or beneficiary under any insurance policies issued in connection with any Lease or any Leased Property which is the subject matter of any Lease. This Assignment is entered into and delivered in accordance with and is subject to that certain Loan and Security Agreement dated July __, 1998 among Assignor, Assignee and the lenders now or hereafter shown on the signature pages thereof (collectively "Lenders") (hereinafter "Agreement"). Assignee shall have the right to sue for, collect, and receive all payments due or to become due under the Leases, in accordance with the Agreement, with power to enforce in its own name or in Assignor's name any and all rights given to Assignor thereunder. All capitalized terms not otherwise defined herein shall have the meaning set forth in the Agreement. This Assignment and the subject matter hereof, is hereby given as security for all of Assignor's Obligations. Delivered herewith are the sole originals of all Leases referred to on Schedule "A" attached hereto and made a part hereof. Assignor agrees that Assignee shall not assume any of Assignor's obligations or liabilities to the lessee/renter under any Leases. All of the representations and warranties contained in the Agreement with respect to Assignor, the Leases and the Leased Property are true, correct and complete as of the date of this Assignment and no Event of Default has occurred under the Agreement. IN WITNESS WHEREOF, the undersigned has caused these presents to be executed by its duly authorized officer this _____ day of _____________________, 19___. FIDELITY LEASING, INC. Attest:_____________________ By:___________________________ Title:________________________ Exhibit 2.1(e) First Union National Bank, as Agent Computation of Borrowing Base Availability for the ________________, 19___ for Fidelity Leasing, Inc. - - -------------------------------------------------------------------------------- 1. Total Eligible Lease Receivables Currently Pledged to Agent $___________________ 2. Additional Eligible Lease Receivables Pledged to Agent $________ Date:__________ $________ Date:__________ $___________________ 3. Aggregate Sales Of Eligible Lease Receivables To Date During This Month $________ Date:__________ $________ Date:__________ $___________________ 4. Total Eligible Lease Receivables Pledged To Agent (Line 1, plus line 2, minus 3) $___________________ 5. 80% of the sum of the gross Lease Receivables balance corresponding to Eligible Leases pledged to Agent. $___________________ 6. Aggregate Revolving Credit $___________________ Note Balances 7. Excess Of Total Eligible Lease Receivables Over Revolving Credit Note Balances (Line 5, minus line 6) $___________________ 8. Maximum Availability $ 10,000,000 9. Availability Under Facility (lesser of (i) line 8, minus line 6 or (ii) line 7) $___________________ 10. Amount Of Borrowing Request $___________________ 11. Net Availability (Line 9, minus line 10) $___________________ Borrower submits this computation pursuant to a certain Loan and Security Agreement dated September 30, 1998 among Borrower, Agent and the Lenders now or hereafter identified on the signature pages thereof, as amended from time to time ("Loan Agreement") and certifies that all information contained herein and representations and warranties made in the Loan Agreement are true and correct as of the date hereof. FIDELITY LEASING, INC. DATE:_______________ BY:__________________________________ EX-11 4 EXHIBIT 11 EXHIBIT 11 CALCULATION OF BASIC AND FULLY DILUTED EARNINGS PER SHARE (in thousands except per share data)
BASIC EARNINGS PER SHARE 1998 1997 1996 Net income $27,611 $10,951 $5,147 Weighted average number of shares outstanding 16,703 10,434 5,670 ------- ------- ------ Net income per share - Basic $ 1.65 $ 1.05 $ 0.91 ======= ======= ====== DILUTED EARNINGS PER SHARE 1998 1997 1996 Net income $27,611 $10,951 $5,147 Add-interest on short-term debt, net of tax effect, on application of assumed proceeds from exercise of options and warrants in excess of 20% limitation 0 0 0 ------- ------- ------ Net income, as adjusted $27,611 $10,951 $5,192 Additional adjustment to weighted average number of shares outstanding: Weighted average number of shares outstanding 16,703 10,434 5,670 Add-Dilutive effect of outstanding options and warrants (as determined by the application of the treasury stock method) 565 2,640 2,601 ------- ------- ------ Weighted average number of shares outstanding 17,268 13,074 8,271 Net income per share - diluted $ 1.60 $ 0.84 $ 0.62 ======= ======= ======
EX-12 5 EXHIBIT 12 EXHIBIT 12 COMPUTATION OF RATIOS (in thousands)
September 30, 1998 1997 1996 ---- ---- ---- Income from continuing operations before income taxes $40,740 $14,931 $ 7,353 Fixed charges 17,464 5,273 872 ------ ------ ------ Total $58,204 $20,204 $ 8,225 Earnings to fixed charges(1) 3.33 3.83 9.43
(1) Calculated by dividing income from continuing operations before income taxes, extraordinary gains and cumulative effect of a change in accounting principle plus fixed charges by fixed charges. Fixed charges represent total interest expense, including amortization of debt expense and discount relating to indebtedness. EX-21 6 EXHIBIT 21 EXHIBIT 21 LIST OF SUBSIDIARIES Entity State of Incorporation - - ------ ---------------------- Resource Energy, Inc. Delaware DAC Acquisition Corporation Delaware REI-NY, Inc. Delaware Resource Well Services, Inc. Delaware St. Julien III Corporation Pennsylvania Atlas America, Inc. Pennsylvania AIC, Inc. Delaware Anthem Securities, Inc. Pennsylvania Atlas Energy Corporation Ohio Transatco, Inc. Ohio Atlas Gas Marketing, Inc. Pennsylvania PA Industrial Energy, Inc. Pennsylvania Mercer Gas Gathering, Inc. Pennsylvania Atlas Information Management, L.L.C. Pennsylvania Atlas Energy Group, Inc. Ohio AED Resources, Inc. Delaware Atlas Resources, Inc. Pennsylvania ARD Investments, Inc. Delaware Resource Leasing, Inc. Delaware Fidelity Leasing, Inc. Pennsylvania Fidelity Leasing SPC I, Inc. Delaware FL Partnership Management, Inc. Delaware FL Financial Services, Inc. Delaware Resource Properties, Inc. Delaware Resource Properties II, Inc. Delaware Resource Properties III, Inc. Delaware Resource Properties IV, Inc. Delaware Resource Properties V, Inc. Delaware Resource Properties VI, Inc. Delaware Resource Properties VII, Inc. Delaware Resource Properties VIII, Inc. Delaware Resource Properties IX, Inc. Delaware Resource Properties X, Inc. Delaware Resource Properties XI, Inc. Delaware Resource Properties XII, Inc. Delaware Resource Properties XIII, Inc. Delaware Resource Properties XIV, Inc. Delaware Resource Properties XV, Inc. Delaware Resource Properties XVI, Inc. Delaware Resource Properties XVII, Inc. Delaware Resource Properties XVIII, Inc. Delaware Resource Properties XIX, Inc. Delaware Resource Properties XX, Inc. Delaware Resource Properties XXI, Inc. Delaware Resource Properties XXII, Inc. Delaware Entity State of Incorporation - - ------ ---------------------- Resource Properties XXIII, Inc. Delaware Resource Properties XXIV, Inc. Delaware Resource Properties XXV, Inc. Delaware Resource Properties XXVI, Inc. Delaware Resource Properties XXVII, Inc. Delaware Resource Properties XXVIII, Inc. Delaware Resource Properties XXIX, Inc. Delaware Resource Properties XXX, Inc. Delaware Resource Properties XXXI, Inc. Delaware Resource Properties XXXII, Inc. Delaware Resource Properties XXXIII, Inc. Delaware Resource Properties XXXIV, Inc. Delaware Resource Properties XXXV, Inc. Delaware Resource Properties XXXVI, Inc. Delaware Resource Properties XXXVII, Inc. Delaware Resource Properties XXXVIII, Inc. Delaware Resource Properties XXXIX, Inc. Delaware Resource Properties XL, Inc. Delaware Resource Properties XLI, Inc. Delaware Resource Properties XLII, Inc. Delaware Resource Properties XLIII, Inc. Delaware Resource Properties XLIV, Inc. Delaware Resource Properties XLV, Inc. Delaware Resource Properties XLVI, Inc. Delaware Resource Properties XLVII, Inc. Delaware Resource Properties XLVIII, Inc. Delaware Resource Properties XLIX, Inc. Delaware Resource Properties 50, Inc. Delaware Resource Properties 51, Inc. Delaware Resource Properties 52, Inc. Delaware Resource Properties 53, Inc. Delaware RAI Financial Services, Inc. Delaware 10 Melrose Avenue, Inc. Delaware RPI Mortgage Funding, Inc. Delaware Rancho Investments, Inc. Delaware Resource Commercial Mortgages, Inc. Delaware Resource Financial Services, Inc. Delaware Resource Programs, Inc. Delaware WS Mortgage Acquisition Corporation Delaware Resource Funding, Inc. Delaware Resource Housing Investors I, Inc. Delaware Resource Housing Investors II, Inc. Delaware Resource Housing Investors III, Inc. Delaware Resource Housing Investors IV, Inc. Delaware Abb Associates I, Inc. Delaware Abb Associates II, Inc. Delaware Oseb GP, Inc. Delaware Resource Brokerage, Inc. Delaware Entity State of Incorporation - - ------ ---------------------- Fidelity Mortgage Funding, Inc. Delaware Bryn Mawr Resources, Inc. Delaware BMR Holdings, Inc. Delaware Bryn Mawr Energy Company Pennsylvania Bryn Mawr Properties Advisors, Inc. Pennsylvania EX-23.1 7 EXHIBIT 23.1 EXHIBIT 23.1 Wright & Company, Inc. December 23, 1998 Mr. Jeffrey C. Simmons Executive Vice President Resource Energy, Inc. 2876 S. Arlington Road Akron, OH 44312 Gentlemen: Wright & Company, Inc. (Wright) hereby consent to the use of our report dated November 24, 1998, on oil and gas reserves owned by Resource Energy, Inc. and Atlas America, Inc., wholly owned subsidiaries of Resource America, Inc., in Resource America, Inc.'s Annual Report on Form 10-K for the fiscal year ending September 30, 1998. Very truly yours, Wright & Company, Inc. By: /s/ D. Randall Wright ------------------------- D. Randall Wright President - - -------------------------------------------------------------------------------- 5200 Maryland Way o Suite 100 2929 Briarpark Drive o Suite 138 Brentwood, Tennessee 37027 Houston, Texas 77042 (615) 730-0755 Fax (615) 370-0756 (713) 977-7655 Fax (713) 789-3591 E-mail: wrinah@aol.com EX-23 8 EXHIBIT 23.2 EXHIBIT 23.2 E.E. Templeton & Associates, Inc. 407 1/2 Second Street Marietta, Ohio 45750 (614) 373-5046 November 1998 Resource Energy, Inc. Attention: Mr. Jeffrey C. Simmons 2876 S. Arlington Road Akron, Ohio 44312 Gentlemen: We hereby consent to the use of our audit reports dated October 15, 1996 and October 23, 1997 on reserves and revenue as of September 30, 1996, and September 30, 1997, respectively, from certain properties owned by Resource Energy, Inc. a wholly-owned subsidiary of Resource America, Inc., in Resource America, Inc.'s Annual Report for the fiscal year ending September 30, 1998. Very truly yours, /s/E.E. Templeton - - --------------------------------- E.E. Templeton & Associates, Inc. EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS YEAR SEP-30-1998 OCT-01-1998 SEP-30-1998 1 78,080 11,912 9,461 0 0 90,650 60,400 16,915 426,447 52,410 133,016 0 0 230 236,248 4,682 87,467 2,525 20,036 0 2,213 17,464 40,740 13,368 27,372 0 239 0 27,611 0 1.65 1.60
-----END PRIVACY-ENHANCED MESSAGE-----