-----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, UXhVsfIzjOmzJ6jJ94Fk++8+V3nUXrg78iqZhtHISuHH2LBESzTYXa5nhLh0bSgy wdbgo1TAeK7jzRA7w/QdpA== 0000950116-00-002948.txt : 20001229 0000950116-00-002948.hdr.sgml : 20001229 ACCESSION NUMBER: 0000950116-00-002948 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESOURCE AMERICA INC CENTRAL INDEX KEY: 0000083402 STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [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: 797219 BUSINESS ADDRESS: STREET 1: 1521 LOCUST ST STREET 2: 4TH FL CITY: PHILADELPHIA STATE: PA ZIP: 19102 BUSINESS PHONE: 2155465005 MAIL ADDRESS: STREET 1: 1521 LOCUST ST CITY: PHILADELPHIA STATE: PA ZIP: 19102 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 0001.txt 10-K 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, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission file number: 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: Common stock, par value $.01 per share -------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [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 15, 2000, was approximately $155 million. The number of outstanding shares of the registrant's common stock on December 15, 2000 was 17,448,125. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for registrant's 2001 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. RESOURCE AMERICA, INC. AND SUBSIDIARIES INDEX TO ANNUAL REPORT ON FORM 10-K
PART I Page ---- Item 1: Business.................................................................................. 3 Item 2: Properties................................................................................ 26 Item 3: Legal Proceedings......................................................................... 26 Item 4: Submission of Matters to a Vote of Security Holders....................................... 26 PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters..................... 27 Item 6: Selected Financial Data................................................................... 28 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation.............................................................. 29 Item 7A: Quantitative and Qualitative Disclosures About Market Risk................................ 38 Item 8: Financial Statements and Supplementary Data............................................... 41 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................ 75 PART III Item 10: Directors and Executive Officers of the Registrant........................................ 76 Item 11: Executive Compensation.................................................................... 76 Item 12: Security Ownership of Certain Beneficial Owners and Management............................ 76 Item 13: Certain Relationships and Related Transactions............................................ 76 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................................... 77 SIGNATURES ...................................................................................... 83
2 PART I ITEM 1. BUSINESS General We operate energy and real estate finance businesses through our subsidiaries, Atlas America, Inc. and Resource Properties, Inc. In energy, we drill for and produce natural gas in the Appalachian Basin and, as of September 30, 2000, owned interests, either directly or through partnerships managed by us in 4,067 wells. In addition, we own 100% of the general partner and a majority of the limited partner interest in Atlas Pipeline Partners, L.P., a publicly traded (AMEX symbol "APL") master limited partnership that owns natural gas pipeline systems in the Appalachian Basin. Our interest in Atlas Pipeline includes the right to receive incentive distributions if the partnership meets or exceeds its minimum quarterly distribution obligations. In real estate, we own and manage a portfolio of commercial loans on office buildings, multifamily housing, commercial and hotel properties located primarily in the Washington D.C.-Baltimore, Philadelphia, and Chicago metropolitan areas. We also sponsored and own approximately 14% of the common shares of RAIT Investment Trust (AMEX symbol "RAS"), a real estate investment trust. For information regarding each of our businesses, you should review Note 18 of the notes to consolidated financial statements. During the past two fiscal years, our energy business has undergone a significant expansion through an increased commitment of corporate assets and management resources and the acquisitions of The Atlas Group (now Atlas America, Inc.) in September 1998 and Viking Resources Corporation in August 1999. Our revenues from energy operations have risen substantially, from $6.7 million in fiscal 1998 to $55.1 million in fiscal 1999 and $70.6 million in fiscal 2000. Our energy business now accounts for 71% of our total revenues, as compared to 51% of total revenues in fiscal 1999 and 10% in fiscal 1998, and 30% of our total assets and 39% of non-cash assets, as compared to 26% of total assets and 27% of non-cash assets in fiscal 1999 and 23% of total assets and 28% of non-cash assets in fiscal 1998. Concurrently we have been reducing our involvement in financial activities. In August 2000, we sold our small ticket equipment leasing business to subsidiaries of ABN AMRO Bank, N.V. for $583.0 million, including the assumption of approximately $431.0 million in debt payable to third parties. In November 2000, we disposed of Fidelity Mortgage Funding, Inc., our residential mortgage lending business. In fiscal 2000 we did not acquire any new real estate loans. Energy Operations General Our energy operations are concentrated in the Western New York, Eastern Ohio and Western Pennsylvania region of the Appalachian Basin. As of September 30, 2000: o We had, either directly or through partnerships and joint ventures managed by us, interests in 4,067 wells (including royalty or overriding royalty interest in 540 wells), of which we operate 3,472 wells. o Wells in which we have an interest produced, net to our interest, approximately 17,600 thousand cubic feet ("mcf") of natural gas per day. o We owned proved reserves of approximately 124 billion cubic feet equivalent ("bcfe") of natural gas and oil with a net present value of $140.8 million. (Net present value is defined as the pre-tax future net revenues from the reserves priced at approximately $4.49 per mcf of natural gas and $26.84 per barrel of oil, discounted at 10% over the productive life of the reserves). o We had an interest in 396,000 gross acres (325,000 net acres) of undeveloped properties. o We owned and operated, directly or through our Atlas Pipeline subsidiary, over 900 miles of gas gathering systems and pipelines. Since 1976, we or our predecessors have financed our development and production operations through private and, since 1992, public drilling partnerships sponsored by us. We act as the managing general partner of each of these partnerships, contribute the leases on which the partnership drills, and contribute a proportionate share of the partnership's cash capital. We retain a percentage interest in the wells through our general partner's interest, generally between 25% and 32% and receive a monthly administrative fee. In 3 addition, we typically act as the drilling contractor and operator of the wells drilled by the partnerships on a fee basis. In the fiscal year ended September 30, 2000, we obtained funding of $30.3 million through two private and one public investment partnerships. Natural gas produced from wells we operate is collected in gas gathering pipeline systems owned and operated by Atlas Pipeline. We sell the natural gas produced to customers such as gas brokers and local utilities under a variety of contractual arrangements. We sell oil produced to regional oil refining companies at the prevailing spot price for Appalachian crude oil. Industry Overview Natural gas is the second largest energy source in the United States, after liquid petroleum. The 22 trillion cubic feet of natural gas consumed in 1999 represented approximately 23% of the total energy used in the United States. The Appalachian Basin (in which substantially all of our wells are located) accounted for 3.2% of total 1999 domestic natural gas production, or 627 billion cubic feet ("bcf"). Furthermore, according to the Energy Information Administration of the U.S. Department of Energy, the Appalachian Basin holds 8,707 bcf of economically recoverable reserves representing approximately 6% of total domestic reserves as of December 31, 1998. Although the potential to find recoverable quantities of oil and gas exists at depths below 6,500 feet, the vast majority of wells in Appalachia produce from depths between 1,000 and 6,500 feet. Companies drilling at these depths, including us, have historically realized well completion rates of greater than 90% and well production periods that last longer than 20 years. The Appalachian Basin is strategically located near the energy consuming population centers in the Mid-Atlantic and Northeastern United States, which generally allows Appalachian producers to sell their natural gas at a premium to the benchmark price for natural gas on the New York Mercantile Exchange. Business Strategy Our goal is to expand our natural gas reserves, production and revenues. Our strategy to achieve these goals includes the following key elements: o Acquiring additional oil and gas leasehold acreage in the Appalachian Basin. o Developing leasehold acreage currently in our inventory. o Acquiring other small capitalization energy companies through merger, consolidation or purchase. o Increasing the amount of development financing provided by our drilling partnerships. o Testing deeper formations on leasehold acreage on which we already have drilled wells. 4 Exploration, Development and Operation The following table sets forth information as of September 30, 2000 regarding productive natural gas and oil wells in which we have a working interest:
Number of Productive Wells ----------------------------------- Gross(1) Net(1) ------------ ------------- Oil wells......................................................... 313 178 Gas wells......................................................... 3,214 1,672 -------- --------- Total ................................................... 3,527 1,850 ======== =========
- ------------- (1) Includes our equity interest in wells owned by 85 partnerships and various joint ventures. Does not include our royalty or overriding interests in 540 other wells. As of December 15, 2000, we were in the process of drilling 46 gross (12 net) wells. The following table sets forth the quantities of natural gas and oil produced (net to our interest), average sales prices, and average production (lifting) costs per equivalent unit of production, for the periods indicated:
Production Average Sales Price Average Lifting Fiscal ----------------------------- --------------------------- Cost per Period Oil(bbls) Gas(mcf) per bbl per mcf mcfe(1)(2) - ------ --------- -------- ------- ------- ------------ 2000 195,974 6,440,154 $24.50 $3.15 $0.95 1999(3) 85,045 4,342,430 $14.57 $2.37 $0.99 1998(4) 48,113 1,485,008 $14.38 $2.66 $1.13
- ------------- (1) "mcfe" means a thousand cubic feet equivalent. Oil production is converted to mcfe at the rate of six mcf per barrel ("bbl"). (2) Lifting costs include labor to operate the wells and related equipment, repairs and maintenance, materials and supplies, property taxes, insurance and gathering charges. (3) Includes production relating to Viking Resources for only the one month period from August 31, 1999, the date of its acquisition, to the end of the fiscal year. (4) Excludes production relating to Atlas America and Viking Resources, which we did not acquire until the end of the 1998 and 1999 fiscal years, respectively. 5 We are not, nor are the partnerships and joint ventures we manage, obligated to provide any fixed quantities of oil or gas in the future under existing contracts. The following table sets forth information with respect to the number of wells for which drilling was completed at any time during fiscal 2000, 1999 and 1998, regardless of when drilling was initiated.
Exploratory Wells Development Wells ----------------------------------------- --------------------------------------- Productive Dry Productive Dry --------------- --------------- --------------- -------------- Fiscal Period Gross Net Gross Net Gross Net Gross Net - ------ ----- --- ----- --- ----- --- ----- --- 2000 - - 1.0 .18 155.0 41.2 3 .80 1999(1) - - 1.0 .20 145.0 41.9 - - 1998(2) 1.0 .25 2.0 .75 3.0 3.0 - -
- ---------- (1) Includes wells drilled by Viking Resources only since August 31, 1999, the date of its acquisition. (2) Excludes wells drilled by Atlas America, which was not acquired until the end of the 1998 fiscal year. 6 We provide, on a fee basis, a variety of well services to wells we operate and to wells operated by independent third parties. These services include well operations, petroleum engineering, well maintenance and well work over and are provided at rates in conformity with general industry standards. Oil and Gas Reserve Information The following tables summarize information regarding our estimated proved natural gas and oil reserves as of September 30, 2000, 1999 and 1998. All of the reserves are located in the United States. The estimates relating to our proved natural gas and oil reserves and future net revenues of natural gas and oil reserves are based upon reports prepared by Wright & Company, Inc. In accordance with SEC guidelines, the standardized and SEC PV-10 estimates of future net cash flows from proved reserves are made using natural gas and oil sales prices in effect as of the dates of the estimates and are held constant throughout the life of the properties. Our estimates of proved reserves were based upon the following weighted average prices:
Years Ended September 30, ---------------------------------------- 2000 1999 1998 --------- -------- ---------- Natural gas (per mcf).................................................. $ 4.49 $ 2.91 $ 2.47 Oil (per bbl).......................................................... $ 26.84 $ 20.92 $ 13.40
Reserve estimates are imprecise and may be expected to change as additional information becomes available. Furthermore, estimates of oil and natural gas reserves, of necessity, are projections based on engineering data, and there are uncertainties inherent in the interpretation of this data as well as the projection of future rates of production and the timing of development expenditures. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Reserve reports of other engineers might differ from the reports of Wright & Company. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of this estimate. Future prices received from the sale of natural gas and oil may be different from those used by Wright & Company in preparing its reports. The amounts and timing of future operating and development costs may also differ from those used. Accordingly, we cannot assure you that the reserves set forth in the following tables will ultimately be produced nor can we assure you that the proved undeveloped reserves will be developed within the periods anticipated. You should not construe the discounted future net cash inflows as representative of the fair market value of our proved natural gas and oil properties. Discounted future net cash inflows are based upon projected cash inflows which do not provide for changes in natural gas and oil prices or for escalation of expenses and capital costs. The meaningfulness of these estimates is highly dependent upon the accuracy of the assumptions upon which they were based. All natural gas reserves are evaluated at constant temperature and pressure, which can affect the measurement of natural gas reserves. We deducted operating costs, development costs and some production-related and ad valorem taxes in arriving at the estimated future cash flows. We made no provision for income taxes, and based the estimates on operating methods and existing conditions prevailing at the dates indicated above. We cannot assure you that these estimates are accurate predictions of future net cash flows from natural gas and oil reserves or their present value. 7 For additional information concerning our natural gas and oil reserves and estimates of future net revenues, see Note 19 of the notes to consolidated financial statements included in this report.
Proved Natural Gas and Oil Reserves Years Ended September 30, ------------------------------------------ 2000 1999 1998 -------- -------- -------- Natural gas reserves (mmcf) (1): Proved developed reserves ........................................... 74,333 66,216 49,868 Proved undeveloped reserves ......................................... 38,810 41,956 40,016 -------- -------- -------- Total proved reserves of natural gas ................................ 113,143 108,172 89,884 -------- -------- -------- Oil reserves (mbbl) (2): Proved developed reserves ........................................... 1,767 1,685 573 Proved undeveloped reserves ......................................... -- -- -- -------- -------- -------- Total proved reserves of oil ........................................ 1,767 1,685 573 -------- -------- -------- Total proved reserves (mmcfe) (3): ..................................... 123,745 118,282 93,322 ======== ======== ======== PV-10 estimate of cash flows of proved reserves (in thousands) Proved developed reserves ........................................... $122,852 $ 66,134 $ 43,581 Proved undeveloped reserves ......................................... 17,929 9,083 5,570 -------- -------- -------- Total PV-10 estimate ............................................ $140,781 $ 75,217 $ 49,151 ======== ======== ========
- ------------- (1) "mmcf" means a million cubic feet. (2) "mbbl" means a thousand barrels. (3) "mmcfe" means a million cubic feet equivalent. Oil production is converted to mcfe at the rate of six mcf per barrel. Developed and Undeveloped Acreage The following table sets forth information about our developed and undeveloped natural gas and oil acreage as of September 30, 2000. The information in this table includes our equity interest in acreage owned by partnerships sponsored by us.
Developed Acreage Undeveloped Acreage ------------------- -------------------- Gross Net Gross Net -------- --------- -------- -------- Arkansas............................................... 2,560 403 - - Kansas................................................. 160 20 - - Kentucky............................................... 9,676 4,838 4,712 2,356 Louisiana.............................................. 1,819 206 - - Mississippi............................................ 40 3 2,410 241 New York............................................... 22,454 16,840 13,379 13,379 Ohio................................................... 106,893 82,575 49,862 46,973 Oklahoma............................................... 4,883 715 1,470 147 Pennsylvania........................................... 52,170 51,701 94,009 94,009 Texas.................................................. 5,160 369 603 151 Utah................................................... 160 37 4,954 1,151 West Virginia............................................ 1,348 674 17,304 8,652 -------- --------- -------- -------- 207,323 158,381 188,703 167,059 ======== ========= ======== ========
The terms of our oil and gas leases on our developed acreage generally extend for the life of wells on our developed acreage, while the terms of our oil and gas leases vary from less than one year to five years. Rentals of approximately $394,000 were paid in fiscal 2000 to maintain our leases. 8 We believe that we hold good and indefeasible title to our properties, in accordance with standards generally accepted in the natural gas industry, subject to exceptions stated in the opinions of counsel employed by us in the various areas in which we conduct our activities; we do not believe that these exceptions detract substantially from our use of any property. As is customary in the natural gas industry, only a perfunctory title examination is conducted at the time we acquire a property. Before we commence drilling operations, we conduct an extensive title examination; curative work is performed with respect to defects which we deem significant. We have obtained title examinations for substantially all of our managed producing properties. No single property represents a material portion of our holdings. Our properties are subject to royalty, overriding royalty and other outstanding interests customary in the industry. Our properties are also subject to burdens such as liens incident to operating agreements, current taxes, development obligations under natural gas and oil leases, farm-out arrangements and other encumbrances, easements and restrictions. We do not believe that any of these burdens will materially interfere with our use of our properties. Financing Our Drilling Activities Since our acquisition of Atlas America and Viking Resources, a substantial portion of our capital resources for drilling operations have been derived from our sponsored drilling partnerships. Accordingly, the amount of development activities we undertake depends upon our ability to obtain investor subscriptions to the partnerships. During fiscal 2000, our drilling partnerships invested $39.9 million in drilling and completing wells, of which we contributed $9.6 million. In fiscal 1999, drilling partnerships invested $38.8 million in drilling and completing wells, of which we contributed $9.4 million. Our drilling partnerships are generally structured so that, upon formation of the partnership, we contribute leaseholds to the partnership, enter into a drilling and well operating agreement and become the general or managing partner of the partnership. As general partner, we typically receive an interest in partnership net revenues in proportion to our contributed capital (including the costs of leases contributed), which increases as specified target levels of distributions to investors are met. Our interests in partnerships formed during the past three fiscal years range from 25.0% to 31.7%. We also receive monthly operating fees of approximately $275 per well and monthly administrative fees of $75 per well. Pipeline Operations In February 2000, we sold substantially all of our pipeline systems to Atlas Pipeline for $16.6 million in cash and 1,641,026 subordinated units of limited partnership interest. As of September 30, 2000, our subordinated units constituted a 51% interest in Atlas Pipeline. Atlas Pipeline Partners GP, LLC, an indirect wholly-owned subsidiary of ours, is the general partner of Atlas Pipeline and, on a consolidated basis, has a 2% interest in Atlas Pipeline. Atlas Pipeline Partners GP manages the activities of Atlas Pipeline using Atlas America and Viking Resources personnel who act as its officers and employees. At September 30, 2000, Atlas Pipeline owned approximately 900 miles of intrastate gathering systems located in Eastern Ohio, Western New York and Western Pennsylvania, to which 3,013 natural gas wells were connected. Our limited partnership interests are a special class of interest in Atlas Pipeline under which our rights to distributions are subordinated to those of the publicly-held common units. The subordination period extends until December 31, 2004 and will continue beyond that date if financial tests specified in the partnership agreement are not met. Our interests also include a right to receive incentive distributions if the partnership meets or exceeds its minimum quarterly distribution obligations to the common and subordinated units as follows: o of the first $.10 per unit available for distribution in excess of the minimum quarterly distribution of $.42, 85% goes to all unitholders (including to us as subordinated unitholders) and 15% goes to us as general partner; o of the next $.08 per unit available for distribution, 75% goes to all unitholders and 25% goes to us as general partner, and o after that, 50% goes to all unitholders and 50% goes to us as general partner. 9 In connection with our sale of the gathering systems to Atlas Pipeline, we entered into agreements that: o Require us to connect wells owned or controlled by us that are within specified distances of Atlas Pipeline's gathering systems to those gathering systems and to drill and connect a minimum of 225 wells (including wells drilled from January 1, 1999). o Require us to provide stand-by construction financing to Atlas Pipeline for gathering system extensions and additions to a maximum of $1.5 million per year for five years. o Require us to pay gathering fees to Atlas Pipeline for natural gas gathered by the gathering systems equal to the greater of $.35 per mcf ($.40 per mcf in certain instances) or 16% of the gross sales price of the natural gas transport. For the quarter ended September 30, 2000, these gathering fees averaged $.71 per mcf. o Require us to support a minimum quarterly distribution by Atlas Pipeline to holders of non-subordinated units of $0.42 per unit (an aggregate of $1.68 per fiscal year) until February 2003. We have established a letter of credit administered by PNC Bank to support our obligation. The face amount of the letter of credit as of September 30, 2000 is $5.7 million. The required face amount of the letter of credit reduces $630,000 per quarter. At September 30, 2000, we had drilled all of the required 225 wells. We have not been required to provide any construction financing or distribution support. Sources and Availability of Raw Materials We contract for drilling rigs and purchase 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 our annual needs. During fiscal 2000, we faced no shortage of these goods and services. We anticipate that natural gas price increases that have occurred after the end of fiscal 2000 may increase the demand for drilling rigs and other goods. This may result in an increase in our costs, decreased availability of rigs or goods, or both which could adversely affect our energy operations. Major Customers During fiscal 2000, gas sales to three purchasers accounted for 37%, 11% and 11%, respectively, of our total production revenues. Also during fiscal 2000, oil sales to one purchaser accounted for 17% of such revenues. During fiscal 1999, gas sales to two purchasers accounted for 26% and 14%, respectively, and during fiscal 1998 such sales to two purchasers accounted for 35% and 15% respectively. Competition The oil and gas business is intensely competitive in all of its aspects. Competition arises not only from numerous domestic and foreign sources of natural gas and oil but also from other industries that supply alternative sources of energy. Moreover, competition is intense for the acquisition of leases considered favorable for the development of natural gas and oil in commercial quantities. Product availability and price are the principal means of competition in selling oil and natural gas. Many of our competitors possess greater financial resources than ours. While it is impossible for us to accurately determine our comparative industry position, we do not consider our operations to be a significant factor in the industry. Markets The availability of a ready market for natural gas and oil produced by us, and the price obtained, will depend upon numerous factors beyond our control, including the extent of domestic production, import of foreign natural gas and oil, political instability in oil and gas producing countries and regions, market demand, the effect of federal regulation on the sale of natural gas and oil in interstate commerce, other governmental regulation of the production and transportation of natural gas and oil and the proximity, availability and capacity of pipelines and other required facilities. Currently, there appears to be at least a near-term imbalance between the supply of natural gas and consumer demand. This imbalance has caused substantial increases in the current price of natural gas through December 15, 2000. We cannot predict whether or for how long these conditions will last, or their impact on our business strategy of acquiring additional natural gas properties and energy companies. 10 Governmental Regulation Our energy business and the energy industry in general are heavily regulated, including regulation of production, environmental quality and pollution control, and pipeline construction and operation. State and federal regulations generally are intended to prevent waste, protect rights to produce natural gas and oil between owners in a common reservoir and control contamination of the environment. Failure to comply with regulatory requirements can result in substantial fines and other penalties. We believe that we are in substantial compliance with applicable regulatory requirements. The following discussion of the regulation of the United States energy industry is not intended to constitute a complete discussion of the various statutes, rules, regulations and environmental orders to which our operations may be subject. Regulation of Exploration and Production. Many states require permits for drilling operations, drilling bonds and reports concerning operations, and impose requirements concerning the location of wells, the method of drilling and casing wells, the surface use and restoration of properties on which wells are drilled, the plugging and abandoning of wells and the disposal of fluids used in connection with operations. Many states also impose various conservation requirements, including regulation of the size of drilling and spacing (or proration) units, the density of wells which may be drilled and the unitization or pooling of properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely primarily or exclusively on voluntary pooling of lands and leases. In areas where pooling is voluntary, it may be more difficult to form units and, therefore, more difficult to develop a project if the operator owns less than 100% of the leasehold. In addition, some state conservation laws establish requirements regarding production rates and generally prohibit the venting or flaring of natural gas. The effect of these regulations may limit the amount we can produce and may limit the number of wells or the locations at which we can drill. The regulatory burden on the energy industry increases our costs of doing business and, consequently, affects our profitability. Inasmuch as such laws and regulations are frequently expanded, amended and reinterpreted, we are unable to predict the future cost or impact of complying with such regulations. Regulation of Pipelines. While natural gas pipelines generally are subject to regulation by the Federal Energy Regulatory Commission under the Natural Gas Act of 1938, because Atlas Pipeline's individual gathering systems perform primarily a gathering function, as opposed to the transportation of natural gas in interstate commerce, Atlas Pipeline believes that it is not subject to regulation under the Natural Gas Act. However, Atlas Pipeline delivers a significant portion of the natural gas it transports to interstate pipelines subject to FERC regulation. The regulation principally involves transportation rates and service conditions which affect revenues we receive for our natural gas production. Through a series of initiatives by FERC, the interstate natural gas transportation and marketing system has been substantially restructured to increase competition. In particular, in Order No. 636, FERC required that interstate pipelines provide transportation separate, or "unbundled," from their sales activities, and required that interstate pipelines provide transportation on an open access basis that is equal for all natural gas suppliers. Although Order No. 636 does not directly regulate our production and marketing activities, it does affect how buyers and sellers gain access to the necessary transportation facilities and how we and our competitors sell natural gas in the marketplace. The courts have largely affirmed the significant features of Order No. 636 and the numerous related orders pertaining to individual pipelines, although some appeals remain pending and FERC continues to review and modify its regulations regarding the transportation of natural gas. For example, FERC has recently begun a broad review of its transportation regulations, including how its regulations operate in conjunction with state proposals for retail natural gas marketing restructuring, whether to eliminate cost-of-service based rates for short-term transportation, whether to allocate all short-term capacity on the basis of competitive auctions, and whether changes to its long-term transportation service policies may be appropriate to avoid a market bias toward short-term contracts. We cannot predict what action FERC will take on these matters, nor can we accurately predict whether FERC's actions will achieve the goal of increasing competition in markets in which our natural gas is sold. However, we do not believe that any action taken will affect us in a way that materially differs from the way it affects other natural gas produces, gatherers and marketers. State-level regulation for pipeline operations in Ohio, New York and Pennsylvania is generally through the Public Utility Commission of Ohio, the New York Public Service Commission and the Pennsylvania Public Utilities Commission, respectively. Atlas Pipeline has been granted an exemption from regulation by the Public Utility Commission of Ohio, and is not subject to New York or Pennsylvania regulation since it does not provide service to the public generally. 11 Environmental and Safety Regulation. Under the Comprehensive Environmental Response, Compensation and Liability Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, the Oil Pollution Act of 1990, the Clean Air Act, and other federal and state laws relating to the environment, owners and operators of wells producing natural gas or oil, and pipelines, can be liable for fines, penalties and clean-up costs for pollution caused by the wells or the pipelines. Moreover, the owners' or operators' liability can extend to pollution costs from situations that occurred prior to their acquisition of the assets. Natural gas pipelines are also subject to safety regulation under the Natural Gas Pipeline Safety Act of 1968 and the Pipeline Safety Act of 1992 which, among other things, dictate the type of pipeline, quality of pipeline, depth, methods of welding and other construction-related standards. The state public utility regulators referenced above have either adopted federal standards or promulgated their own safety requirements consistent with the federal regulations. We do not anticipate that we will be required in the near future to expend amounts that are material in relation to our revenues by reason of environmental laws and regulations, but inasmuch as these laws and regulations change frequently, we cannot predict the ultimate cost of compliance. We cannot assure you that more stringent laws and regulations protecting the environment will not be adopted or that we will not otherwise incur material expenses in connection with environmental laws and regulations in the future. Energy Technology We own a 50% interest in Optiron Corporation, with a right, through conversion of a note from Optiron, to increase that interest to 68.5%, in Optiron Corporation. Optiron's business, which focuses on providing the energy industry with information management software, currently offers one principal product, the ReadiSystem(TM) (Retail Energy Automated Data Integration). The ReadiSystem(TM) consolidates all billing and customer account information into a single source and features online bill paying for customers, flexible invoice generation, account and payment history tracking, management of payment adjustments, delinquent customer tracking and production of collection notices and service/work order dispatching and tracking. The technology also provides accounting and management reporting functions. Although originally designed for natural gas and electric utility companies, we believe that the ReadiSystem(TM) can be used by other mass market distribution companies such as telecommunications and water utility companies. Real Estate Finance General From fiscal 1991 through fiscal 1999, we sought to purchase and resolve troubled commercial real estate loans at discounts to their outstanding loan balances and the appraised value of their underlying properties. During fiscal 2000, we determined to concentrate our real estate finance activities on managing our existing loan portfolio and did not acquire any new loans. As part of the management process, we anticipate that we may sell selected portfolio loans in appropriate circumstances. At September 30, 2000, our loan portfolio consisted of 38 loans with aggregate outstanding loan balances of $691.4 million. These loans were acquired at an investment cost of $447.3 million, including subsequent advances. During the fiscal years ended September 30, 2000, 1999 and 1998, the yield on our net investment in our portfolio loans equaled 9%, 22% and 40%, respectively, including gains on sale of senior lien interests in, and gains, if any, resulting from refinancing of, the loans. Gross profit from our real estate finance activities for the same periods was $11.8 million, $35.3 million and $43.7 million, respectively. For these purposes, we calculate gross profit as revenues from loan activities minus costs, including interest, provision for possible losses and less depreciation and amortization, without allocation of corporate overhead. We seek to reduce the amount of our capital invested in portfolio loans, and to enhance our returns, through borrower refinancing of the properties underlying our loans. Before January 1, 1999, we also sought to sell senior lien interests; since that date, we have sought to structure our senior lien transactions as financings rather than sales. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of 12 Operations: Real Estate Finance." During fiscal 2000, borrowers refinanced three loans, incurring $129.5 million in new senior lien indebtedness. At September 30, 2000, senior lenders held outstanding obligations of $351.9 million. Pursuant to agreements with most borrowers, we generally retain the excess of operating cash flow over required debt service on senior lien obligations as debt service on the outstanding balance of our loans. As a result of the troubled nature of our portfolio loans at the time of their acquisition, they are typically subject to forbearance agreements pursuant to which we defer foreclosure or other action on a loan so long as the terms of the agreement are met. Generally, our forbearance agreements require: o payment of all revenues from the property into an operating account controlled by us or our managing agent; o payment of all property expenses (including debt service, taxes, operational expenses and maintenance costs) from the operating account, after our review and approval; o receipt by us of specified minimum monthly payments; o retention by us of all cash flow above the minimum monthly payment and application to accrued but unpaid debt service; o appointment of a property manager acceptable to us; o receipt of our approval before concluding any material contract or commercial lease; and o submission of monthly cash flow statements and occupancy reports. We may alter these arrangements in appropriate circumstances. Where a borrower has refinanced a portfolio loan (or where we acquired a loan subject to existing senior debt), we 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 us. As of September 30, 2000, revenues are being paid directly to senior lienholders with respect to one loan (loan 7 in the table under "Loan Status,"). Where the property is being managed by Brandywine Construction and Management, Inc., a property manager affiliated with us, we may direct that property revenues be paid to Brandywine as our managing agent. As of September 30, 2000, revenues are being paid to Brandywine with respect to two loans (loans 25 and 30). Where we believe that operating problems with respect to an underlying property have been substantially resolved, we may permit the borrower to retain revenues and pay property expenses directly. As of September 30, 2000, we permitted borrowers with respect to seven loans (loans 24, 31, 32, 41, 47, 50 and 51) to do so. As a result of the requirement of retaining a property management firm acceptable to us, Brandywine has assumed responsibility for supervisory and, in many cases, day-to-day management of the underlying properties with respect to substantially all of our portfolio loans as of September 30, 2000. In ten instances, the president of Brandywine (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 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, are not recognized as revenue until actually paid. See "Business - Real Estate Finance: Accounting for Discounted Loans". When we refinance or sell a senior loan interest, the forbearance agreement typically will remain in effect, subject to any modifications required by the refinance lender or senior lien holder. At the end of a forbearance agreement, the borrower must 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 to the particular property), and general economic conditions. If the borrower does not or cannot repay the loan, we anticipate it will seek to sell the property underlying the 13 loan or otherwise liquidate the loan. Alternatively, where we already control all of the cash flow and other economic benefits from the property, or where we believe that the cost of foreclosure is more than any benefit we could obtain from foreclosure, we may continue our forbearance. Business Strategy We seek to increase the income and value of the properties underlying our portfolio loans. To achieve our goal, we employ experienced property managers either to manage the properties directly or to supervise local property managers. We encourage our managers to take an active management role to increase rents, improve property conditions and, where possible, achieve cost efficiencies in property operations. We may sell portfolio loans as appropriate opportunities arise. Refinancings In refinancings, we reduce the amount outstanding on our loan by the amount of net refinancing proceeds and either convert the outstanding balance of the original note into the stated principal amount of an amended note on the same terms as the original note, or retain the original loan obligation as paid down by the amount of refinance proceeds we receive. The interest rate on the refinancing is typically less than the interest rate on our retained interest. Before January 1, 1999, we sought to sell senior lien interests in our loans. Although we made a strategic decision to structure our transactions after that date as financings, we retain the right to sell a senior interest in a loan where it is economically advantageous to do so. When we sell a senior lien interest, the outstanding balance of our loan at the time of sale remains outstanding, including as a part of that balance the amount of the senior lien interest. Thus, our remaining interest effectively "wraps around" the senior lien interest. As of September 30, 2000, senior lien interests with an aggregate balance of $12.0 million relating to seven portfolio loans obligate us, in the event of a default on a loan, to replace the loan with a performing loan. One other senior lien interest obligates us, upon its maturity in fiscal 2003, to repurchase the senior lien interest (if not already paid off) at a price equal to the outstanding balance of the senior lien interest plus accrued interest. The aggregate outstanding balance will be $2.5 million at maturity, assuming all debt service payments have been made. See "Business - Real Estate Finance: Loan Status." After a refinancing or sale of a senior lien interest, our retained interest will usually be secured by a subordinate lien on the property. In some situations, however, our retained interest may not be formally secured by a mortgage because of conditions imposed by the senior lender. In these situations, we 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 our consent, a pledge of the borrower's equity or a similar device. Our retained interests in seven loans aggregating $31.0 million and constituting 16.9%, by book value, of our loan portfolio as of September 30, 2000 are not secured by a lien on the underlying property. Loan Status At September 30, 2000, our loan portfolio consisted of 38 loans. We acquired 32 of these loans as first mortgage liens and six loans as junior lien obligations. As of September 30, 2000: o We had sold senior lien interests in 16 loans, including senior interests in three loans initially acquired as junior lien loans. o We had purchased senior lien interests in two loans initially acquired as junior lien loans. o Borrowers with respect to 17 loans had obtained refinancing. After these sales, acquisitions and refinancings, we hold subordinated interests in 32 loans. The following table sets forth information about our portfolio loans, grouped by the type of property underlying the loans, as of September 30, 2000. 14
Loan Type of Number Property Location Seller/Originator ------ -------- -------- ----------------- Office Properties 005 Office Pennsylvania Shawmut Bank(8) 011(10) Office Washington, D.C. First Union Bank(8) 014 Office Washington, D.C. Nomura/Cargill/Eastdil Realty(11) 020 Office New Jersey Cargill/Eastdil Realty(11) 026(10) Office Pennsylvania The Metropolitan Fund/First Trust Bank 029(10) Office Pennsylvania Castine Associates, L.P.(12) 035(14)(10) Office Pennsylvania Hudson United Bank (8) 036 Office North Carolina Union Labor Life Insurance Co. 044(16) Office Washington, D.C. Dai-Ichi Kangyo Bank 046 Office Pennsylvania Corestates Bank, N.A. 048(18) Office Pennsylvania Institutional Property Assets 049(19) Office Maryland Bre/Maryland 053(20)(32) Office Washington, D.C. Sumitomo Bank, Limited Office Totals Multifamily Properties 001(21) Multifamily Pennsylvania Alpha Petroleum Pension Fund 003 Multifamily New Jersey RAM Enterprises/Glenn Industries Pension Plan 015 Condo/Multifamily North Carolina First Bank/ SouthTrust Bank 021(10)(22) Multifamily Pennsylvania Bruin Holdings/Berkley Federal Savings Bank 022 Multifamily Pennsylvania FirsTrust FSB 024 Multifamily Pennsylvania U.S. Dept. of Housing and Urban Development 028 Condo/Multifamily North Carolina First Bank/South Trust Bank 031 Multifamily Connecticut John Hancock Mutual Life Ins. Co. 032(16) Multifamily New Jersey John Hancock Mutual Life Ins. Co. 034 Multifamily Pennsylvania Resource America, Inc. 037(31) Multifamily Florida Howe, Soloman & Hall Financial, Inc. 041 Multifamily Connecticut J.E. Robert Companies 042 Multifamily Pennsylvania Fannie Mae(23) 043(24) Multifamily Pennsylvania Downingtown National Bank 047(10) Multifamily New Jersey Credit Suisse First Boston Mortgage Capital, Inc. 050 Multifamily Illinois J.E. Roberts Companies 051 Multifamily Illinois J.E. Roberts Companies 054(26) Multifamily Connecticut Resource America, Inc. Multifamily Totals Commercial Properties 007 Single User/Retail Minnesota Prudential Insurance, Alpha Petroleum Pension Fund 013(10)(27) Single User/CommercialCalifornia California Federal Bank, FSB 017(10)(28) Single User/Retail West Virginia Triester Investments(8) 018 Single User/Retail California Emigrant Savings Bank/ Walter R. Samuels & Jay Furman(29) 033 Single User/Retail Virginia Brambilla, LTD Commercial Totals Hotel Properties 025 Hotel/Commercial Georgia Bankers Trust Co. 030 Hotel Nebraska CNA Insurance Hotel Totals
Fiscal Value Year Outstanding of Property Loan Loan Underlying Acquired Receivable(1) Loan(2) -------- ------------- ------- Office Properties 1993 $ 8,425,072 $ 1,700,000 1995 1,691,890 1,500,000 1995 19,872,000 14,000,000 1996 8,082,379 4,600,000 1997 9,801,128 5,000,000 1997 8,767,634 4,025,000 1997 2,536,126 2,550,000 1997 4,978,742 4,150,000 1998 107,214,122 98,000,000 1998 6,061,494 5,300,000 1998 68,601,530 65,000,000 1998 103,038,924 99,000,000 1999 128,452,325 86,700,000 ------------ ------------ Office Totals $477,523,366 $391,525,000 ------------ ------------ Multifamily Properties 1991&99 9,564,294 5,350,000 1993 3,212,109 1,350,000 1995&97 5,302,906 5,019,500 1996&97 7,569,827 3,868,130 1996 6,080,003 4,300,000 1996 3,326,094 3,800,000 1997 505,795 455,500 1997 12,257,174 12,500,000 1997 12,854,851 13,278,000 1997 426,352 450,000 1997 8,628,535 3,500,000 1998 20,987,573 21,000,000 1998 6,336,986 5,740,000 1998 2,177,130 2,275,000 1998 2,629,051 3,375,000 1998 50,306,758 23,400,000 1998 24,612,352 24,000,000 1999 1,600,000 2,000,000 ------------ ------------ Multifamily Totals $178,377,790 $135,661,130 ------------ ------------ Commercial Properties 1993 5,049,726 2,545,000 1994 2,792,769 2,600,000 1996 1,627,864 1,900,000 1996 3,062,264 6,400,000 1997&99 4,657,837 2,650,000 ------------ ----------- Commercial Totals $ 17,190,460 $ 16,095,000 ------------ ------------ Hotel Properties 1997 7,512,818 8,000,000 1997 10,792,885 6,300,000 ------------ ----------- Hotel Totals $ 18,305,703 $ 14,300,000 ------------ ------------ Balance as of September 30, 2000 $691,397,319 $557,581,130 ============ ============
15
Maturity Resource America's of Loan/ Ratio of Proceeds from Net Interest in Expiration Cost of Refinancing or Outstanding of Cost of Investment to Sale of Senior Net Book Value Loan Forbearance Investment(3) Appraised Value Lien Interests Investment(4) of Investment(5) Receivables(6) Agreement(7) - ------------- --------------- ---------------- ------------- ---------------- -------------- ------------ $ 1,348,851 79% $ 940,000(9) $ 408,851 $ 952,562 $ 7,585,072 02/07/01 1,189,904 79% 660,000(9) 529,904 762,172 1,006,890 06/01/00(12a) 12,539,475 90% 6,487,000 6,052,475 7,546,955 13,231,989 11/30/98(12a) 3,317,878 72% 2,562,000 755,878 2,502,670 5,731,199 02/07/01 2,609,410 52% 2,231,693 377,717 1,824,851 7,674,329 09/30/03 3,088,476 77% 2,625,000(13) 463,476 1,385,290 6,219,579 07/01/02 1,841,889 72% 1,750,000(15) 91,889 789,907 810,107 09/25/02 3,094,950 75% 1,750,000(15) 1,344,950 2,008,853 3,254,241 12/31/11 79,990,948 82% 71,500,000(17) 8,490,948 20,692,832 27,349,128 08/01/08 3,995,859 75% 0 3,995,859 4,054,704 6,061,494 09/30/14 60,620,417 93% 44,000,000 16,620,417 19,612,890 25,639,531 08/01/08 90,190,604 91% 60,000,000 30,190,604 38,282,501 43,038,924 04/01/11 70,612,010 81% 65,000,000 5,612,010 11,769,066 55,167,726 01/15/06 - ------------- ------------ ------------- ------------ ------------ $ 334,440,671 $259,505,693 $ 74,934,978 $112,185,253 $202,770,209 - ------------- ------------ ------------- ------------ ------------ 4,763,730 89% 0 4,763,730 5,253,412 9,564,294 08/01/21 1,122,353 83% 627,000 495,353 102,212 2,616,505 01/01/03 2,079,434 41% 3,000,000 (920,566) 2,355,734 2,362,602 03/23/09 2,531,574 65% 3,695,674(9) (15) (1,164,100) 757,219 4,719,242 07/01/16 2,471,782 57% 3,435,000 (963,218) 986,849 2,682,874 05/03/29 2,743,136 72% 2,318,750 424,386 795,627 896,073 11/01/22 451,510 99% 0 451,510 485,820 505,795 03/23/09 4,788,642 38% 9,375,000 (4,586,358) 1,628,209 3,007,271 10/14/14 7,404,156 56% 6,000,000(17) 1,404,156 5,410,620 7,410,085 09/01/05 401,500 89% 0 401,500 424,183 426,352 10/01/02 2,807,945 80% 2,096,000(9) 711,945 1,206,266 6,532,535 06/01/10 14,733,084 70% 14,100,000 633,084 7,176,034 7,130,129 01/01/09 4,287,056 75% 4,450,000 (162,944) 1,290,701 1,889,738 07/12/30 1,589,381 70% 1,000,000(25) 589,381 1,044,588 1,177,130 07/01/02 2,656,969 79% 1,800,000(15) 856,969 1,019,572 846,098 02/01/05 18,654,699 80% 15,350,000 3,304,699 7,921,612 35,097,805 09/30/09 17,375,252 72% 0 17,375,252 19,281,718 24,612,352 09/30/02 1,140,666 57% 0 1,140,666 1,600,000 1,600,000 04/01/11 - ------------- ------------ ------------- ------------ ------------ $ 92,002,869 $ 67,247,424 $ 24,755,445 $ 58,740,376 $113,076,880 - ------------- ------------ ------------- ------------ ------------ 1,359,055 53% 2,099,000 (739,945) 719,958 3,095,160 12/31/14 1,701,049 65% 1,975,000(9) (273,951) 515,718 792,769 05/01/01 894,660 47% 1,000,000(15) (105,340) 567,741 652,753 12/31/16 2,427,268 38% 1,969,000(9) 458,268 975,739 1,093,264 12/01/00(12a) 2,425,090 92% 1,800,000(15) 625,090 951,239 2,957,034 02/01/21 - ------------- ------------ -------------- ------------ ------------ $ 8,807,122 $ 8,843,000 $ (35,878) $ 3,730,395 $ 8,590,980 - ------------- ------------ -------------- ------------ ------------ 7,062,222 88% 875,000(30) 6,187,222 7,900,909 6,637,818 12/31/15 5,022,695 80% 2,400,000(9) 2,622,695 3,383,314 8,392,885 09/30/02 - ------------- ------------ -------------- ------------ ------------ $ 12,084,917 $ 3,275,000 $ 8,809,917 $ 11,284,223 $ 15,030,703 - ------------- ------------ ------------- ------------ ------------ $ 447,335,579 $338,871,117 $ 108,464,462 $185,940,247 $339,468,772 ============= ============ ============= ============ ============
16 (1) Consists of the original stated or face value of the obligation plus interest and the amount of the senior lien interest at September 30, 2000. (2) We generally obtain appraisals on each of the properties underlying our portfolio loans at least once every three years. Accordingly, appraisal dates range from 1997 - 2000, except with respect to loan 3. However, after the end of fiscal 2000, the property underlying loan 3 was sold and our loan was repaid. (3) Consists of the original cost of our investment, including the amount of any senior lien obligation to which the property remains subject, plus subsequent advances, but excludes the proceeds to us from the sale of senior lien interests or borrower refinancings. (4) Represents the unrecovered costs of our investment, calculated as the cash investment made in acquiring the loan plus subsequent advances, less cash received from the sale of a senior lien interest in or borrower refinancing of the loan. Negative amounts represent our receipt of proceeds from the sale of senior lien interests or borrower refinancings in excess of our investment. (5) Represents the book cost of our investment 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 $2.0 million. For a discussion of accretion of discount and allocation of gains, see "- Accounting for Discounted Loans." (6) Consists of the amount set forth in the column "Outstanding Loan Receivable" less senior lien interests at September 30, 2000. (7) With respect to loans 7, 14, 17, 25, 27, 30, 31, 32, 34, 37, 42, 44, 46, 47, 48, 49, 53 and 54, the date given is for the maturity of our 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 (24) below). For the remaining loans, the date given is the expiration date of the related forbearance agreement. (8) Successor by merger to the seller. (9) Senior lien interest sold subject to the right of the holder, upon default, to require us to substitute a performing loan. (10) With respect to loans 13, 17 and 26, the president of Brandywine 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 35, he is the president of the general partner of the borrower. In addition, with respect to loan 21, which consists of 22 separate mortgage loans on 36 individual condominium units in a single building, the president of Brandywine is the trustee of one borrower (for 11 mortgage loans) and the president of the general partner of another borrower (for four mortgage loans). (11) Seller was a partnership of these entities. (12) From 1993 to October 1997, one of our executive officers served as the general partner of the seller. (12a) We are attempting to maximize our return by selling the properties underlying these loans in cooperation with the borrowers. In the meantime, we continue to forbear from exercising our remedies with respect to these loans since we believe we receive all of the economic benefit from the properties without having to incur the expense of foreclosure. (13) Represents a senior lien interest sold to an institution. We have the obligation to repurchase this interest on or after March 31, 2003. (14) The borrower is a limited partnership formed in 1991. The general partner of the partnership is owned by the president of Brandywine; our chairman and his wife beneficially own a 49% limited partnership interest in the partnership and our former executive vice president and vice chairman beneficially owns a 1% limited partnership interest. (15) Senior lien interest sold subject to the right of the holder, upon default by borrower, to require us to substitute a performing loan. (16) See note 3 to Consolidated Financial Statements, "- Relationships with RAIT." (17) A senior lien interest was sold to RAIT. See "Business - Real Estate Finance: Sponsorship of Real Estate Investment Trust." (18) The borrower is a partnership in which Brandywine owns an 11% interest and RAIT owns an 89% interest. (19) The borrower is a limited liability company whose manager is a corporation of which our former vice chairman and current director of the Company is the sole shareholder, officer and director. The chairman, two directors of the Company and the president of Brandywine are equal limited partners (25% each) of a partnership that is a 59% limited partner of the managing partner which has a (99)% interest in the sole member of the borrower. (20) We jointly purchased this loan with RAIT, which contributed $10.0 million of the purchase price. RAIT's interest was subsequently paid down to $8.3 million. 17 (21) We acquired a first mortgage loan at face value from RAIT. The loan is secured by property in which we have held a subordinate interest since 1991. (22) Consists of 22 separate mortgage loans on 36 individual condominium units in a single building. Nine of such loans are due July 1, 2016, nine are due January 1, 2015, one is due October 1, 2007, one is due July 7, 2003, one is due May 5, 2001 and one due October 9, 2001. The president of Brandywine 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 Brandywine and the beneficiary of which is a limited partnership for which one of our directors is general partner. (23) Original lending institution. (24) Consists of two related loans to one borrower secured by a single property in the original principal amounts of $1.6 million and $404,026. (25) Senior lien interest sold to a limited partnership in which our chairman and our former executive vice president and vice chairman and current director beneficially own a 14.4% limited partnership interest. (26) Construction loan with a maximum borrowing of $1.6 million. (27) Our chairman and his wife beneficially own a 40% limited partnership interest in the borrower. (28) Consists of a series of notes becoming due yearly through December 31, 2016. (29) Amounts advanced by us 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. (30) In May 1999, we borrowed $875,000 from a limited partnership in which our chairman and our former executive vice president and vice chairman and current director beneficially own a 22% limited partnership interest. The loan is secured by a first priority lien on loan 25. Accordingly, the debt is included in the cost of investment carried on our books. (31) The borrower is a limited partnership of which our former executive vice president and vice chairman and current director is the president of the general partner and our chairman, two of our directors and the president of Brandywine are equal limited partners of the borrower. (32) One of our subsidiaries is the manager of the borrower. 18 The following table sets forth average monthly cash flow from the properties underlying our portfolio loans, average monthly debt service payable to senior lienholders and refinance lenders, average monthly payments with respect to our retained interest and cash flow coverage (the ratio of cash flow from the properties to debt service payable on senior lien interests) for the three months ended September 30, 2000. The loans are grouped by the type of property underlying the loans.
Average Monthly Average Monthly Interest Principal Payment on Debt Payment on Debt Average Monthly Average Service on Service on Payment to Loan Monthly Cash Flow Refinancing or Refinancing or Resource America's Cash Flow Number from Property(1) Senior Lien Interests Senior Lien Interest Interest Coverage ------ ----------------- ---------------------- --------------------- ------------------ --------- Office - ------ 005 $ 7,593 $ 6,825 $ 0 $ 768 1.11 011 9,572 5,566 0 4,006 1.72 014 76,098 44,510 18,223 13,365 1.21 020 41,560 17,903 1,624 22,033 2.13 026 31,885 17,694 3,906 10,285 1.48 029 31,695 19,419 2,835 9,441 1.42 035 24,914 14,408 1,494 9,012 1.57 036(5) 3,604 14,396 1,506 (12,298) N/A 044 716,096 489,013 67,088 159,995 1.29 046 31,900 0 0 31,900 N/A 048 393,288 245,728 42,586 104,974 1.36 049 744,170 378,000 72,000 294,170 1.65 053 712,961 554,717 37,923 120,321 1.20 ----------- ----------- ----------- ---------- Office Totals $ 2,825,336 $ 1,808,180 $ 249,184 $ 767,973 1.37 =========== =========== =========== ========== Multifamily - ----------- 001 $ 26,473 $ 0 $ 0 $ 26,473 N/A 003 6,296 4,735 1,323 238 1.04 015&028(2)(6) 21,442 19,995 3,680 (2,233) N/A 021(4) 15,261 24,329 536 (9,604) N/A 022 27,744 22,045 2,623 3,076 1.12 024 25,926 15,804 2,158 7,964 1.44 031 85,355 60,034 10,901 14,420 1.20 032 105,407 54,927 23,878 26,602 1.34 034 3,422 0 0 3,422 N/A 037 25,630 17,030 0 8,600 1.50 041 132,500 86,115 13,490 32,895 1.33 042 55,267 22,424 2 752 30,091 2.20 043 12,096 8,343 0 3,753 1.45 047 17,876 14,883 1,474 1,519 1.09 050 147,916 100,854 11,137 35,925 1.32 051 77,292 0 0 77,292 N/A 054 18,085 0 0 18,085 N/A ----------- ----------- ----------- ---------- Multifamily Totals $ 803,988 $ 451,519 $ 73,951 $ 278,518 1.53 =========== =========== =========== ========== Commercial - ---------- 007 $ 20,400 $ 14,423 $ 5,977 $ 0 1.00 013 25,023 15,833 0 9,190 1.58 017 10,690 8,142 945 1,603 1.18 018(3) 26,443 15,998 0 10,445 1.65 033 21,940 14,258 5,084 2,598 1.13 ----------- ----------- ----------- ---------- Commercial Totals $ 104,496 $ 68,654 $ 12,006 $ 23,836 1.30 =========== =========== =========== ========== Hotel - ----- 025 $ 46,659 $ 7,292 $ 0 $ 39,367 6.40 030(7) 0 0 0 0 N/A ----------- ----------- ----------- ---------- Hotel Totals $ 46,659 $ 7,292 $ 0 $ 39,367 6.40 =========== =========== =========== ========== Total Properties $ 3,780,479 $ 2,335,645 $ 335,141 $1,109,695 1.42 =========== =========== =========== ==========
19 (1) Cash flow consists of 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) The properties underlying loans 15 and 28 are different condominium units in the same building and, accordingly, are combined for cash flow purposes. (3) Includes one-twelfth of an annual payment of $120,000 received in December of each year. (4) Loan 21 consists of 22 separate mortgage loans on 36 individual condominium units. During fiscal 2000 we were repaid, and recorded gains on, four of the units and held two units vacant in anticipation of future repayments. Accordingly, cash flow from the property decreased while debt service on refinancing or senior lien interests remained constant. (5) In the quarter ending 12/30/99, the property underlying this loan lost its biggest tenant, accounting for approximately 53% of the total square footage. The space is marketed for lease and is currently unoccupied. (6) The property underlying these loans is located in an area that has recently seen an increase in construction of similar residential properties. Due to the new construction in the area, the property's vacancy rate has increased, consequently, cash flow has decreased. (7) The property underlying the loan is a hotel property located in Omaha, Nebraska. The forbearance agreement requires minimum monthly payments of cash flows from the property based on net operating income. During fiscal 2000, there was a temporary economic decline in the Omaha market, consequently, cash flows have been negatively impacted. We anticipate resumption of cash flows within the next fiscal period. Investments in Real Estate Ventures In fiscal 1999, we became the owner of a hotel property in Savannah, Georgia as a result of receiving a deed-in-lieu of foreclosure. Our carrying cost in this property was $4.6 million at September 30, 2000. Also in fiscal 1999, the borrower with respect to an office property in Philadelphia, Pennsylvania, exercised its right under the loan documents to satisfy its loan by paying us $29.6 million in cash and giving us a 50% equity interest in the property. Our carrying cost in this property is $11.4 million at September 30, 2000. Accounting for Discounted Loans We accrete the difference between our cost basis in a portfolio loan and the sum of projected cash flows from the loan into interest income over the estimated life of the loan using the interest method, which results in a level rate of interest over the life of the loan. We review projected cash flow, which include amounts realizable from the underlying property, on a quarterly basis. Changes to projected cash flows reduce or increase the amounts accreted into interest income over the remaining life of the loan. We record our investments in portfolio loans at cost, which is significantly discounted from the stated principal amount of, and accrued interest and penalties (collectively, the face value) on the loans. This discount from face value, as adjusted to give effect to refinancings and sales of senior lien interests, totaled $156.5 million, $158.3 million and $139.7 million at September 30, 2000, 1999 and 1998, respectively. We review on a quarterly basis the carrying value of our loans to determine whether it is greater than the sum of the future projected cash flows. If we determine that carrying value is greater, we provide an appropriate allowance through a charge to operations. In establishing our allowance for possible losses, we also consider the historic performance of our loan portfolio, characteristics of the loans and their underlying properties, 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 tenants') specific industries. For the year ended September 30, 2000, we recorded a provision for possible losses of $936,000, which increased our allowance for possible losses at September 30, 2000 to $2.0 million. 20 Depending on the structure of the transaction, we can recognize gains or losses on the sale of a senior lien interest in a loan. These gains and losses are calculated by allocating our cost basis between the portion of the loan sold and the portion retained based upon the fair value of those respective portions on the date of sale. Gains resulting from the refinancing of a property by its owners arise only when the financing proceeds exceed the carried cost of our investment in the loan. Any gain recognized on a sale of a senior lien interest or a refinancing is credited to income at the time of the sale or refinancing. Before January 1, 1999, most of our financing transactions involving the sale of senior lien interests in our loans were structured to meet the criteria for sale under generally accepted accounting principles. Thus, for transactions that were completed before January 1, 1999, we recorded gains on sale. Effective January 1, 1999, we made a strategic decision to structure future transactions as financings. The cash flows available to us, which are generally derived from the cash flows on the properties underlying our portfolio loans were unaffected by the modification. The primary effect of the change is that, instead of recognizing an immediate gain on the sale of a senior lien interest, we retain our full investment in the loan on our books, recognize interest income over the life of the loan, record as debt the proceeds from the senior lien interest and recognize interest expense on that debt. Sponsorship of Real Estate Investment Trust We are the sponsor and a 14% shareholder of RAIT Investment Trust ("RAIT"), a real estate investment trust that began operations in January 1998. RAIT acquires or originates commercial mortgage loans in situations that generally do not conform to the underwriting standards of institutional lenders or sources that provide financing through securitization. Betsy Z. Cohen, spouse of our chairman, chief executive officer and president, Edward E. Cohen, and mother of Daniel G. Cohen, one of our directors, is the chairman and chief executive officer of RAIT. Jonathan Z. Cohen, another son of Mr. and Mrs. Cohen and one of our senior vice presidents, is our nominee to RAIT's board of trustees and is the secretary of RAIT. Scott F. Schaeffer, president of RAIT, is one of our directors; Mr. Schaeffer was, until September 13, 2000, our executive vice president and vice chairman of our Board of Directors. Our relationship with RAIT is subject to the following: o So long as we own 5% or more of RAIT's common shares, we will have the right to nominate one person to RAIT's board of trustees. o RAIT's declaration of trust permits it to acquire loans from us to a maximum of 30% of RAIT's investments (on a cost basis), excluding investments acquired from us at the time of RAIT's initial public offering. o If we sponsor a real estate investment trust with investment objectives similar to those of RAIT, our representative on RAIT's board of trustees must 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 we are then sponsoring. For transactions between RAIT and us, see Part III, Item 13 of this report, and Note 3, "Certain Relationships and Related Party Transactions-Relationship with RAIT" in Notes to Consolidated Financial Statements. Partnership Management Through our subsidiary, F.L. Partnership Management, Inc. we act as the general partner and manager of five public limited partnerships formed between 1986 and 1990. These partnerships had total assets at September 30, 2000 of $33.8 million, including $2.2 million (book value) of equipment with an original cost of $13.4 million, and investments in direct financing leases of $18.1 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. 21 We receive management fees and an interest in partnership cash distributions for our services as general partner. Management fees range from 4% to 6% of gross rents except for full-payout leases where 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. Our general partner's interest in cash distributions is 3.5% (one partnership) and 1% (four partnerships). The partnerships reimburse us for 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. Discontinued Operations Residential Mortgage On September 28, 1999, we adopted a plan to discontinue our residential mortgage lending business. The business was disposed of in November 2000. Accordingly, our financial statements report the business as a discontinued operation for the years ended September 30, 2000, 1999 and 1998. Net assets of the discontinued operation at September 30, 2000 consisted primarily of loan receivables. Equipment Leasing On August 1, 2000, we sold our small ticket equipment leasing subsidiary, Fidelity Leasing, to European American Bank and AEL Leasing Co., Inc., subsidiaries of ABN AMRO Bank, N.V. We received total consideration of $152.2 million, including repayment of indebtedness of Fidelity Leasing to us; the purchasers also assumed approximately $431.0 million in debt payable to third parties and other liabilities. Of the $152.2 million consideration, $16.0 million was paid by a non-interest bearing promissory note. The promissory note is payable to the extent that payments are made on a pool of Fidelity Leasing lease receivables and refunds are received with respect to certain tax receivables. The lease receivable pool consists of receivables that, as of June 30, 2000, were aged more than 90 days or on Fidelity Leasing's "watch list," or had an outstanding balance of $200,000 or more that would have been rated "not pass" under the purchasers' credit policies. In addition, $10.0 million was placed in escrow until March 31, 2004 as security for our indemnification obligations to the purchasers. In connection with the sale, we made $15.5 million of payments to Fidelity Leasing's management and incurred $3.4 million in expenses. Credit Facilities and Senior Notes The following is a summary of the terms of our credit facilities outstanding as of September 30, 2000 and of our senior notes: Credit Facilities We have an $18.0 million revolving credit facility with Hudson United Bank, formerly Jefferson Bank, for our real estate finance operations. The facility expires in February 2001. The facility bears interest at the prime rate reported in The Wall Street Journal plus .75%, and is secured by our interest in certain commercial loans. As amended in December 1999, credit availability is based upon the amount of assets pledged as security for the facility and is subject to the lender's approval of additional collateral. Credit availability at September 30, 2000 was $7.0 million, all of which had been drawn at that date. 22 We also established an $18.0 million line of credit with Sovereign Bank. The facility bears interest at the prime rate reported in The Wall Street Journal and expires in July 2002. The facility is secured by our interest in certain of our portfolio loans and real estate and by certain bonds held by us. Credit availability is based on the value of the collateral pledged as security and was $18.0 million as of September 30, 2000, all of which had been drawn at that date. The facility imposes limitations on the incurrence of future indebtedness by our subsidiaries whose properties were pledged, and on sales, transfers or leases of their assets, and requires the subsidiaries to maintain both a specified level of equity and a specified debt service coverage ratio. At the same time, we established a similar $5.0 million line of credit with Sovereign Bank. This facility bears interest at the same rate as the $18.0 million line of credit and also expires in July 2002. The facility is secured by a pledge of our RAIT common shares and by a guaranty from the subsidiaries involved in the $18.0 million line of credit. Credit availability is based on the value of those shares and was $5.0 million as of September 30, 2000, all of which had been drawn at that date. The facility restricts us from making loans to our affiliates (except for subsidiaries) other than: o existing loans, o loans in connection with lease transactions in an aggregate not to exceed $50,000 in any fiscal year, and o loans to RAIT made in the ordinary course of business. In September 1999, our energy subsidiaries, Atlas America, Resource Energy and Viking Resources, entered into a $40.0 million revolving credit facility administered by PNC Bank. Credit availability under the facility, as amended in February 2000, is based on the proved developed producing, proved developed non-producing and proved undeveloped natural gas and oil reserves attributable to the borrowers' wells and the borrowers' projected fees and revenues from the operation of wells and management of drilling partnerships, and was $40.0 million at September 30, 2000. Up to $10.0 million of the borrowings under the facility may be in the form of standby letters of credit. A letter of credit in the original amount of $7.5 million was issued to Atlas Pipeline under this facility to secure our obligation to support, through February 2003, minimum quarterly distributions by Atlas Pipeline to holders of its non-subordinated units. The letter of credit reduces each quarter as the distribution support obligation reduces. Borrowings under the facility are secured by the assets of the borrowers and their subsidiaries, including the stock of subsidiaries and interests in Atlas Pipeline Partners GP and Atlas Pipeline. Loans under the facility bear interest at one of the following two rates, at the borrowers' election, which increase as the amount outstanding under the facility increases: o the PNC Bank prime rate plus 0 to 75 basis points, or o the Eurodollar rate plus 150 and 225 basis points. Draws under any letter of credit bear interest at the PNC Bank prime rate plus 0 to 75 basis points. The credit facility contains financial covenants, including requirements that we maintain: o a current ratio of .85 to 1.0, o a ratio of earnings to fixed charges of 1.5 to 1.0, increasing to 2.0 to 1.0 in September 2000 and 2.5 to 1.0 in March 2002, and o a leverage ratio of not less than 3.0 to 1.0. In addition, the facility prohibits the borrowers' exploration expenses from exceeding 20% of capital expenditures and limits sales, leases or transfers of property by the borrowers and the incurrence of additional indebtedness. The facility terminates in June 2003, when all outstanding borrowings must be repaid. At September 30, 2000, $29.5 million of the facility (including the letter of credit, which had an outstanding balance of $5.7 million at such date) had been drawn. 23 Senior Notes Our 12% senior notes are unsecured general obligations with interest payable only until maturity on August 1, 2004. The senior notes are not subject to mandatory redemption except upon a change in control, as defined in the indenture governing the senior notes, when the noteholders have the right to require us to redeem the senior notes at 101% of principal amount plus accrued interest. There is no sinking fund for the senior notes. At our option, we may redeem the senior notes 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. At September 30, 2000, $80.4 million of these notes were outstanding. The indenture contains covenants that, among other things, require us to maintain certain levels of net worth (generally, an amount equal to $200.0 million plus a cumulative 25% of our consolidated net income less an adjustment based upon the principal amount of senior notes we repurchase) and liquid assets (generally, an amount equal to 100% of required interest payments for the next succeeding interest payment date); and limit our ability to: o incur indebtedness, but excluding secured indebtedness used to acquire assets or refinance acquisitions; o 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; o engage in specified transactions with affiliates; o dispose of subsidiaries; o create liens and guarantees with respect to pari passu or junior indebtedness; o enter into any arrangement that would impose restrictions on the ability of subsidiaries to make dividend and other payments to us except in connection with specified indebtedness; o merge, consolidate or sell all or substantially all of our assets; o incur additional indebtedness if our "leverage ratio" exceeds 2.0 to 1.0; or o incur pari passu or junior indebtedness with a maturity date prior to that of the senior notes. As defined by the indenture, the leverage ratio is the ratio of all indebtedness (excluding debt used to acquire assets, obligations to repurchase loans or other financial assets sold by us, guarantees of either of the foregoing, non-recourse debt and certain securities issued by securitization entities, as defined in the indenture) to our consolidated net worth. Employees As of September 30, 2000, we employed 199 persons, including 13 in general corporate, 176 in energy, 8 in partnership management and 2 in real estate finance. Risk Factors Statements made by us in written or oral form to various persons, including statements made in filings with the SEC, that are not strictly historical facts are "forward-looking" statements that are based on current expectations about our business and assumptions made by management. These statements are subject to risks and uncertainties that exist in our operations and business environment that could result in actual outcomes and results that are materially different than predicted. The following includes some, but not all, of those factors or uncertainties: 24 General o Unforeseen interest rate increases will increase our interest costs under our four credit facilities as well as interest costs relating to some of the senior lien interests encumbering our portfolio loans. This could have many material adverse effects, including reduction of net revenues from both our energy and real estate finance operations. Energy 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 we have no control. Depending on the purchasers' needs, the price obtainable for our natural gas, or the amount of natural gas which we are able to sell, our energy revenues and our ability to obtain financing for our drilling and development operations through sponsored drilling partnerships may be materially adversely affected. While the effect of the current imbalance between the supply of natural gas and consumer demand has substantially increased prices for natural gas, we cannot predict the duration of these conditions. Generally, however, while the increased prices for natural gas increase our revenues, they may make it more difficult, or more expensive, to drill and complete wells due to potentially increased competition for drilling rigs and related materials, whose services we obtain through subcontracting, or to execute our business strategy of acquiring additional natural gas properties and energy companies. o The energy business involves operating hazards such as well blowouts, cratering, 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 us. In addition, we may be liable for environmental damage caused by previous owners of properties purchased or leased by us. As a result, we may incur substantial liabilities to third parties or governmental entities which could materially adversely affect our results of operations or financial condition. In accordance with customary industry practices, we maintain insurance against some, but not all, of such risks and losses. We may elect to self-insure if we believe that insurance, although available, is excessively costly 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 our business, financial condition and results of operations. In addition, pollution and environmental risks generally are not fully insurable. o Although wells we drill are generally to formations that have a high probability of resulting in commercially productive natural gas reservoirs, the amount of recoverable reserves may vary significantly from well to well. We may drill wells that, while productive, do not produce sufficient net revenues to return a profit after drilling, operating and other costs. If we do not drill productive and profitable wells, our ability to finance our drilling activities through drilling partnerships or otherwise could be materially impaired, which would materially adversely affect the financial condition and future revenues of our energy business. o We account for our energy properties under the successful efforts method. The carrying value of our energy properties is reviewed quarterly under standards outlined in FASB 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Under these rules, the assets carrying value (ignoring deferred income taxes) is compared with expected undiscounted future pre-tax cash flows. The calculation of these future cash flows may include adjustments for expected prices, costs and production volumes. Impairment is limited to the assets fair market value. Although "market conditions" ultimately establish an assets fair value, the assets' future pre-tax cash flows, using an appropriate discount rate is often used as a standard. We may be required to write-down the carrying value of our energy properties when natural gas and oil 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 natural gas and oil properties is not reversible at a later date. o The estimates of our proved natural gas and oil reserves and the estimated future net revenues referred to immediately above are based upon reserve reports that rely upon various assumptions, including assumptions required by the SEC, as to natural gas and oil prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Such estimates are inherently 25 imprecise. Actual future production, natural gas and oil prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas and oil reserves may vary substantially from our estimates or estimates contained in the reserve reports. Any significant variance in these assumptions could materially affect the estimated quantity of our reserves. Our properties also may be susceptible to hydrocarbon drainage from production by other operators on adjacent properties. In addition, our proved reserves may be subject to downward or upward revision based upon production history, results of future exploration and development, prevailing natural gas and oil prices, mechanical difficulties, governmental regulation and other factors, many of which are beyond our control. o The rate of production from natural gas and oil properties declines as reserves are depleted. Our proved reserves will decline as reserves are produced unless we acquire additional properties containing proved reserves, successfully develop new or existing properties or identify additional formations with primary or secondary reserve opportunities on our properties. If we are not successful in expanding our reserve base, our future natural gas and oil production, the primary source of our energy revenues, will be adversely affected. Our ability to find and acquire additional reserves depends on our generating sufficient cash flow from operations and other sources of capital, principally our sponsored drilling partnerships. We cannot assure you that we will have sufficient cash flow or cash from other sources to expand our reserve base. o The growth of our energy operations has resulted from both our acquisition of energy companies such as Atlas America and Viking Resources and our ability to obtain capital funds through our sponsored drilling partnerships. If we are unable to identify acquisition candidates on acceptable terms, or if our ability to obtain capital funds through our partnerships is impaired, we may be unable to increase or maintain our inventory of properties and reserve base, or be forced to curtail drilling, production or other activities. This would materially adversely affect our energy operations and their growth prospects. Real Estate Finance o Many of our portfolio loans are secured by properties that, while income producing, are unable to generate sufficient revenues to pay the full amount of debt service required under the original loan terms or are subject to other problems. Although we generally control cash flow from the properties underlying the loans and, where appropriate, have made financial accommodations to take into account the operating conditions of the underlying properties, there may be a higher risk of default with these loans as compared to conventional loans. o Declines in real property values generally and/or in those specific markets where the properties underlying our portfolio loans are located due to changes in economic factors or otherwise could affect the value of and default rates under those loans. o Many of our portfolio loans were acquired as or became (as a result of borrower refinancing) junior lien obligations. Subordinate lien financing carries a greater credit risk, including a substantially greater risk of non-payment of interest or principal, than senior lien financing. In the event a loan is foreclosed, we will be entitled to share only in the net foreclosure proceeds after payment of all senior lienors. It is therefore possible that we will not recover the full amount of a foreclosed loan or of our unrecovered investment in the loan. o At September 30, 2000, our allowance for possible losses was $2.0 million or (1%) of the book value of our loan portfolio. You should not assume that this allowance will prove to be sufficient or that future provisions for loan losses will not be materially greater, either of which could materially reduce our earnings or adversely affect our financial condition. 26 ITEM 2. PROPERTIES We maintain our executive office and our real estate finance operations in Philadelphia, Pennsylvania under a month-to-month lease for 7,173 square feet of office space. We also maintain a 2,100 square foot office in New York, New York under a lease agreement which expires December 2001. As a result of the Atlas America and Viking Resources acquisitions, we own a 24,000 square foot office building in Pittsburgh, Pennsylvania, a 17,000 square foot field office and warehouse facility in Jackson Center, Pennsylvania and a field office in Deerfield, Ohio. We also rent two field offices in Ohio and New York on a month-to-month basis. We rent 7,585 square feet of office space in Uniontown, Ohio under a lease expiring in March 2006. All of these properties are used for our energy operations. During fiscal 2000, we sold our Akron and Canton, Ohio offices. ITEM 3. LEGAL PROCEEDINGS We are a defendant, together with certain of our officers and directors and our independent auditor, Grant Thornton LLP, in consolidated actions that were instituted on October 14, 1998 in the U.S. District Court for the Eastern District of Pennsylvania by stockholders, putatively on their own behalf and on behalf of similarly situated stockholders, who purchased shares of our common stock between December 17, 1997 and February 22, 1999. The complaint seeks damages in an unspecified amount for losses allegedly incurred as the result of misstatements and omissions allegedly contained in our periodic reports and a registration statement filed with the SEC. The asserted misstatements and omissions relate, among other matters, to (i) use of the accretion of discount method of recognizing revenue on distressed loans we purchased at a discount and (ii) accounting for the profit we realized on our sale of senior lien interests in such loans. We believe that the complaint is without merit and are defending ourselves vigorously. We are also a defendant in a suit filed in February 2000 in the New York Supreme Court, Chautauqua County, by individuals, putatively on their own behalf and on behalf of similarly situated individuals, who leased acreage to us. The complaint alleges that we are not paying landowners the proper amount of royalty revenues derived from the natural gas produced from the wells on the lease property. The complaint seeks damages in an unspecified amount for the alleged difference between the amount of royalties actually paid and the amount of royalties that allegedly should have been paid. We believe the complaint is without merit and intend to defend ourselves vigorously. We are also party to various routine legal proceedings arising out of the ordinary course of our business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 27 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our 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 our last two fiscal years and fiscal 2001 through December 15, 2000.
High Low ---- --- Fiscal 2001 First Quarter (through December 15, 2000).......................... $10.25 $ 7.47 Fiscal 2000 Fourth Quarter..................................................... 9.22 6.50 Third Quarter...................................................... 8.75 6.38 Second Quarter .................................................... 8.25 6.25 First Quarter...................................................... 9.25 6.75 Fiscal 1999 Fourth Quarter..................................................... 15.88 6.50 Third Quarter...................................................... 18.50 8.50 Second Quarter .................................................... 12.31 8.56 First Quarter...................................................... 13.69 7.56
As of December 15, 2000, there were 17,448,125 shares of common stock outstanding held by 575 holders of record. We have paid regular quarterly cash dividends on our common stock (as adjusted for stock dividends) of $.03 per share commencing with the fourth quarter of fiscal 1995. Under the terms of our senior notes, the payment of dividends on our common stock is restricted unless certain financial tests are met. See "Business - Credit Facilities: Senior Notes." 28 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read together with the financial statements, the notes to the financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" which are included elsewhere in this report. The selected financial data set forth below for each of the years ended September 30, 2000, 1999 and 1998, and at September 30, 2000 and 1999 are derived from financial statements appearing elsewhere in this report, audited by Grant Thornton LLP. The selected financial data for the years ended September 30, 1997 and 1996 and at September 30, 1998, 1997 and 1996 are derived from financial statements audited by Grant Thornton LLP not included in this report.
For the Years Ended September 30, ---------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (in thousands, except per share data) Income statement data: Revenues Energy............................................ $ 70,552 $ 55,093 $ 6,734 $ 5,608 $ 5,157 Real estate finance............................... 18,649 45,907 55,834 19,144 7,171 Interest and other................................ 10,410 8,089 6,912 3,859 4,657 ---------- ---------- --------- --------- --------- Total revenues....................................... $ 99,611 $ 109,089 $ 69,480 $ 28,611 $ 16,985 ========== ========== ========= ========= ========= Income from continuing operations before income taxes, extraordinary item and cumulative effect of a change in accounting principle........................... $ 5,700 $ 35,291 $ 40,776 $ 13,758 $ 7,800 Provision for income taxes........................... 1,638 11,110 13,011 3,375 2,358 ---------- ---------- --------- --------- --------- Income from continuing operations before extraordinary item and cumulative effect of a change in accounting principle.............................. $ 4,062 $ 24,181 $ 27,765 $ 10,383 $ 5,442 Discontinued operations: Income (loss) from operations of subsidiary, net of taxes.................................... 476 (5,686) (393) 568 (295) Gain (loss) on disposal of subsidiary, net of taxes.................................... 12,944 (275) - - - Extraordinary item, net of taxes..................... 683 299 239 - - Cumulative effect of change in accounting principle, net of taxes........................... - (59) - - - ---------- ---------- --------- --------- --------- Net income........................................... $ 18,165 $ 18,460 $ 27,611 $ 10,951 $ 5,147 ========== ========== ========= ========= ========= Net income per common share-basic: From continuing operations........................ $ .18 $ 1.09 $ 1.66 $ .79 $ .66 Discontinued operations........................... .57 (.26) (.02) .04 (.04) Extraordinary item................................ .03 .01 .01 - - Cumulative effect of change in accounting principle....................................... - (.01) - - - ---------- ----------- --------- -------- --------- Net income per common share-basic.................... $ .78 $ .83 $ 1.65 $ .83 $ .62 ========== ========== ========= ======== ========= Net income per common share-diluted: From continuing operations........................ $ .17 $ 1.06 $ 1.61 $ .79 $ .66 Discontinued operations........................... .56 (.25) (.02) .04 (.04) Extraordinary item................................ .03 .01 .01 - - Cumulative effect of change in accounting principle....................................... - (.01) - - - ---------- ---------- --------- -------- --------- Net income per common share-diluted.................. $ .76 $ .81 $ 1.60 $ .83 $ .62 ========== ========== ========= ======== ========= Cash dividends per common share...................... $ .13 $ .13 $ .13 $ .13 $ .13 ========== ========== ========= ======== ========= Balance sheet data: Total assets......................................... $ 509,204 $ 540,132 $ 392,083 $ 193,340 $ 43,855 Long-term debt....................................... 127,682 220,695 140,280 118,786 8,966 Stockholders' equity................................. 281,215 263,789 236,478 64,829 31,123
29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Overview of Fiscal 2000 Our operating results and financial condition for fiscal 2000 reflect the further expansion of our energy operations continuing a trend which began with the acquisition of Atlas Group (now Atlas America) at the end of fiscal 1998 and continued with the acquisition of Viking Resources at the end of fiscal 1999. The importance of our energy operations was significantly increased in fiscal 2000 as a result of the discontinuance and sale of our equipment leasing business. The expansion of our energy operations over the past three years is shown in the following tables, which have been restated to reflect the sale of our equipment leasing business: Revenues as a Percent of Total Revenues(1)
Years Ended September 30, ----------------------------------------- 2000 1999 1998 ---- ---- ---- Energy ................................................................ 71% 51% 10% Real estate finance.................................................... 19% 42% 80%
Assets as a Percent of Total Assets(2)
September 30, ----------------------------------------- 2000 1999 1998 ---- ---- ---- Energy(3) ............................................................. 30% 26% 23% Real estate finance.................................................... 40% 51% 54%
- ------------- (1) The balance (10% in 2000, 7% in 1999 and 10% in 1998) is attributable to revenues derived from corporate assets not allocated to a specific industry segment, including cash and the common shares held in RAIT. (2) The balance (30% in 2000, 23% in 1999 and 23% in 1998) is attributable to corporate assets not attributable to a specific industry segment, as referred to above. (3) Energy assets expressed as a percent of total assets, excluding cash, were 39%, 27% and 28% for the fiscal years ending September 2000, 1999 and 1998, respectively. Before the sale of our equipment leasing business, for fiscal 1999 equipment leasing had accounted for 28% of our revenues and 48% of our assets, while real estate finance had accounted for 32% of our revenues and 30% of our assets and energy had accounted for 38% of our revenues and 15% of our assets. The discontinuance and sale of our equipment leasing business also significantly affected our liquidity and capital resources by increasing our cash and cash equivalents to $117.1 million (23% of total assets) at September 30, 2000 as compared to $32.5 million (6% of total assets) at September 30, 1999. In October 2000, we used a portion ($49.7 million) of the September 30, 2000 cash balance to acquire approximately 5.5 million shares of our common stock at $9.00 per share in a "dutch auction" tender offer. In addition, we used $7.1 million to repurchase 793,000 shares in a private transaction. 30 Results of Operations: Energy In September 1998 and August 1999, we acquired Atlas Group and Viking Resources, respectively. Results of operations for the respective years of acquisition include the operations of these companies from their respective dates of acquisition and, accordingly, are not comparable to the similar periods of the prior years. The following tables set forth information relating to revenues recognized and costs and expenses incurred, daily production volumes, average sales prices, production costs as a percentage of natural gas and oil sales, and production cost per equivalent unit for our energy operations during fiscal 2000, 1999 and 1998:
Years Ended September 30, ------------------------------------------ 2000 1999 1998 ----------- ----------- ----------- (in thousands) Revenues: Production.......................................................... $ 25,231 $ 12,233 $ 4,682 Well drilling....................................................... 31,869 32,421 - Well services....................................................... 8,682 6,120 1,644 Transportation...................................................... 4,770 3,310 408 Gain on sales of assets............................................. - 1,009 - ----------- ----------- ----------- $ 70,552 $ 55,093 $ 6,734 =========== =========== =========== Costs and expenses: Exploration and production.......................................... $ 8,339 $ 5,366 $ 2,525 Well drilling....................................................... 25,806 26,312 - Well services....................................................... 3,772 1,378 1,019 Transportation...................................................... 2,842 649 117 Non-direct.......................................................... 7,619 5,372 694 ----------- ----------- ----------- $ 48,378 $ 39,077 $ 4,355 =========== =========== =========== Years Ended September 30, ------------------------------------------ 2000 1999 1998 ----------- ----------- ----------- Revenues (in thousands): Gas (1)............................................................. $ 20,286 $ 10,994 $ 3,944 Oil................................................................. $ 4,802 $ 1,239 $ 692 Production volumes: Gas (thousands of cubic feet (mcf)/day)(1).......................... 17,596 11,897 4,069 Oil (barrels (bbls)/day)............................................ 535 233 132 Average sales price: Gas (per mcf)....................................................... $ 3.15 $ 2.37 $ 2.66 Oil (per bbl)....................................................... $ 24.50 $ 14.57 $ 14.38 Production costs: As a percent of sales............................................... 29% 39% 43% Gas (per mcf)....................................................... $ .95 $ .99 $ 1.13 Oil (per bbl)....................................................... $ 5.70 $ 5.94 $ 6.80
(1) Excludes sales of residual gas and sales to landowners. 31 Year Ended September 30, 2000 Compared to Year Ended September 30, 1999 Our natural gas revenues were $20.3 million in fiscal 2000, an increase of $9.3 million (85%) from $11.0 million in fiscal 1999. The increase was due to a 48% increase in production volumes, principally due to the completion of 24 wells and the additional Viking Resources production, and a 33% increase in the average sales price of natural gas. Of the $9.3 million increase in gas revenues, $6.6 million was attributable to volume increases while $2.7 million was attributable to price increases. Our oil revenues were $4.8 million in fiscal 2000, an increase of $3.6 million (288%) from $1.2 million in fiscal 1999. The increase was due to a 130% increase in production volumes, principally due to the additional Viking Resources production, and a 68% increase in the average sales price of oil. Of the $3.6 million increase in oil revenues, $2.7 million was attributable to volume increases while $900,000 was attributable to price increases. Without the addition of Viking Resources, gas and oil revenues would have been $13.4 million and $1.3 million, respectively, resulting in an overall increase of $3.9 million (28%) compared to fiscal 1999. Average daily gas production volumes would have been 11,911 mcf, a 4% increase compared to 1999. The average sales price per mcf would have been $3.08 per mcf as compared to $2.34 per mcf. Average daily oil production volumes would have decreased 56 barrels per day (28%) from 1999, offset by a 79% increase in the average sales price per barrel of oil to $24.01. Our well drilling revenues and expenses in fiscal 2000 represent the billing and costs associated with the completion of 168 wells for partnerships sponsored by Atlas America and Viking Resources as compared to 145 wells completed in fiscal 1999, an increase of 23 wells. Well services revenues and related costs increased significantly as a result of an increase in the number of wells operated due to the acquisition of Viking Resources and the operations associated with new partnership wells drilled during the year. Transportation revenues increased $1.5 million (44%) to $4.8 million in the year ended September 30, 2000, as compared to the same period of the prior year. This increase principally resulted from the additional revenue associated with the Viking pipeline systems. Our production costs, excluding exploration costs of $1.1 million, increased $2.4 million (50%) to $7.2 million in fiscal 2000, as compared to $4.8 million in fiscal 1999 as a result of the acquisition of Viking Resources' interests in producing properties and the drilling activities referred to above. Our non-direct expenses were $7.6 million in fiscal 2000, an increase of $2.2 million (42%) from $5.4 million in fiscal 1999. Fiscal 2000 non-direct expenses increased due to the growth in our Energy Division. Atlas Pipeline Partners, a public entity, was formed in February 2000 and incurs those normal costs associated wiith public entities. Fiscal 2000 also includes a full twelve months of costs associated with Viking. Finally, certain allocations changed such that more costs remain in non-direct expense, rather than being allocated to another energy function (Production, Drilling, Well Services, Well Operations). Amortization of oil and gas property costs as a percentage of oil and gas revenues was 9% in fiscal 2000 compared to 25% in fiscal 1999. The variance from period to period is directly attributable to changes in our oil and gas reserve quantities, product prices and fluctuations in the depletable cost basis of our gas and oil properties. Year Ended September 30, 1999 Compared to Year Ended September 30, 1998 Our natural gas revenues increased to $11.0 million in fiscal 1999, an increase of $7.1 million (179%) from $3.9 million in fiscal 1998. The increase was due to a 192% increase in production volumes, principally due to the added Atlas America production, partially offset by an 11% decrease in the average sales price of natural gas. Of the $7.1 million increase in gas revenues, $6.7 million was attributable to volume increases which was partially offset by $400,000 in price decreases. 32 Our oil revenues were $1.2 million in fiscal 1999, an increase of $547,000 (79%) from $692,000 in fiscal 1998. The increase was due to a 77% increase in production volumes, principally due to the added Atlas America production and a 1% increase in the average sales price of oil. Of the $547,000 increase in oil revenues, $538,000 was attributable to volume increases while $9,000 was attributable to price increases. Without the additions of Atlas America and Viking Resources, gas and oil revenues would have been $3.6 million and $853,000 respectively, resulting in an overall decrease of $182,000 (4%) compared to 1998. Average daily gas production volumes would have been 3,498 mcf, a 3% decrease compared to 1998. The average sales price per mcf would have been $2.50 per mcf as compared to $2.37. Average daily oil production would have increased 39 barrels (29%) over 1998, offset by a 5% decrease in the average sales price per barrel to $13.67. Our well drilling revenues and expenses in fiscal 1999 represent the billing and costs associated with the completion of 145 wells for partnerships sponsored by Atlas America. Well services revenues and related costs increased significantly as a result of an increase in the number of wells operated due to the acquisition of the Atlas Group and Viking Resources. Our transportation revenues increased $2.9 million (711%) to $3.3 million in the year ended September 30, 1999 as compared to the same period of the prior year. Of this increase, $2.8 million was associated with the Atlas pipeline operations acquired in September 1998. Our production costs, excluding exploration costs of $560,000, increased $3.0 million (149%) to $5.0 million in the year ended September 30, 1999, as compared to the same period in the prior year as a result of the Atlas Group and Viking Resources acquisitions. Our transportation expenses increased $532,000 (455%) to $649,000 as compared the same period of the prior year, of the increase, $528,000 was related to the Atlas pipeline operations acquired in September 1998. Our non-direct expenses were $5.4 million in fiscal 1999, an increase of $4.7 million (674%) from $694,000 in fiscal 1998. This increase was due to the additional ongoing expenses associated with Atlas America. Amortization of oil and gas property costs as a percentage of oil and gas revenues was 25% in the year ended September 30, 1999 compared to 17% in the year ended September 30, 1998. The variance from period to period was directly attributable to changes in our natural gas and oil reserve quantities, product prices and fluctuations in the depletable cost basis of natural gas and oil properties. Results of Operations: Real Estate Finance During fiscal 2000, we focused on managing our existing portfolio of real estate loans rather than on acquiring further real estate loans. As a result of this shift in focus, as well as the sale of three portfolio loans and the partial repayment of two additional loans with a book value of $72.9 million, our portfolio decreased from 41 loans with a book value of $250.2 million in fiscal 1999 to 38 loans with a book value of $183.9 million in fiscal 2000. The following table sets forth certain information relating to the revenue recognized and cost and expenses incurred in our commercial real estate finance operations during the periods indicated:
Years Ended September 30, ------------------------------------------ 2000 1999 1998 ----------- ----------- ----------- (in thousands) Revenue: Interest.......................................................... $ 11,229 $ 17,280 $ 13,179 Accreted discount (net of collection of interest)................. 5,802 18,965 6,520 Gains on sales of senior lien interests and loans................. 1,443 3,784 30,196 Net rental and fee income......................................... 175 5,878 5,939 ----------- ----------- ----------- $ 18,649 $ 45,907 $ 55,834 =========== =========== =========== Cost and expenses...................................................... $ 3,256 $ 3,102 $ 1,801 =========== =========== ===========
33 Year Ended September 30, 2000 Compared to Year Ended September 30, 1999 Revenues from our real estate finance operations decreased $27.2 million (59%), from $45.9 million in fiscal 1999 to $18.6 million in fiscal 2000. We attribute the decrease primarily to the following: o A decrease of $19.2 million (53%) in interest income, including a decrease of $13.2 (69%) million of accretion of discount, attributable to the following: - The repayment in June 1999 of a loan which decreased interest income by $9.7 million during fiscal 2000 compared to fiscal 1999. - The repayment by a borrower in October 1999 of approximately $58.8 million of another loan, which decreased interest income by $1.4 million during fiscal 2000 compared to fiscal 1999. - Three additional loans were repaid during fiscal 2000 resulting in a decrease in interest income of $1.9 million in fiscal 2000 as compared to fiscal 1999. - The completion of accretion of discount in fiscal 2000 on five loans as to which $6.2 million accretion had been taken in fiscal 1999. o A decrease of $5.7 million (97%) in net rental and fee income during fiscal 2000, to $175,000 in fiscal 2000 from $5.9 million in fiscal 1999. The decrease primarily resulted from one-time fees of $3.4 million and $1.2 million earned in fiscal 1999 for services rendered to property owners in connection with the operation, leasing and supervision of the collateral securing two of our portfolio loans. We earned no comparable fees during fiscal 2000. In addition, we experienced a non-cash loss on one rental real estate venture of approximately $219,000 in fiscal 2000, attributable to accounting for the investment on the equity method. o A decrease of $2.3 million (62%) in gains on sales of senior lien interests and loans due to a decrease in the number of loans sold. Prior to January 1, 1999, we structured most of our transactions in which senior lien interests were created to meet the criteria under generally accepted accounting principles for sales of those interests to the senior lienors. Effective January 1, 1999, we made a strategic decision to structure future transactions as financings rather than as sales. Thus, for most transactions that were completed prior to January 1, 1999, we recorded a gain on sale which we included in our revenues; refinancing proceeds received subsequent to that date, although included in our cash flow, are not recordable as revenues under generally accepted accounting principles. This policy change resulted in a shift from the recognition of an immediate gain upon the sale of a senior lien interest in a loan receivable to the recognition of interest income over the life of the loan receivable. However, during fiscal 2000, we sold three loans and were partially repaid on a fourth loan, resulting in gains of $1.4 million. Costs and expenses of our real estate finance operations increased $154,000 (5%) to $3.3 million in the year ended September 30, 2000. We attribute the increase primarily to the increase in professional fees. Year Ended September 30, 1999 Compared to Year Ended September 30, 1998 Revenues from our real estate finance operations decreased $9.9 million (18%) from $55.8 million in fiscal 1998 to $45.9 million in fiscal 1999. We attribute the decrease primarily to a decrease of $26.4 million (87%) in gains from sales of senior lien interests and loans. The decrease resulted primarily from a decrease in the number of loans sold or loans in which senior lien interests were sold from 39 loans in fiscal 1998 to two loans in fiscal 1999 due to the change in structure of our financing transactions as referred to in our discussion of fiscal 2000 above. The change in structure did not, however, affect our cash flow from financing transactions. 34 The decrease in gain on sale revenues was partially offset by an increase of $16.5 million (84%) in our interest income, including an increase of $12.4 million of accretion of discount, of which $6.6 million resulted from accretion of discount adjustments we made in connection with the June 1999 loan repayment referred to in our discussion of fiscal 2000, above. In addition, two loans acquired at the end of fiscal 1998 contributed $3.8 million of interest income in fiscal 1999 as compared to $35,000 in fiscal 1998. As a consequence of these factors, our yield decreased to 22% in fiscal 1999 as compared to 40% in fiscal 1998. Costs and expenses of our real estate finance operations increased $1.3 million (72%) to $3.1 million in the year ended September 30, 1999. The increase primarily resulted from hiring additional personnel, increased compensation to existing employees and legal costs relating to management of our portfolio. Results of Operations: Other Revenues, Costs and Expenses Year Ended September 30, 2000 Compared to Year Ended September 30, 1999 Our interest and other income was $10.4 million in fiscal 2000, an increase of $2.3 million (29%) from $8.1 million in fiscal 1999. The increase in fiscal 2000 primarily resulted from intercompany interest on increased lending to our discontinued small-ticket equipment leasing subsidiary ($1.8 million). Also, as a result ofa substantial increase in our uncommitted cash balances from the sale of our equipment leasing operations, and the temporary investment of such balances interest income increased by $419,000. Our general and administrative expenses were $7.9 million in fiscal 2000, an increase of $3.0 million (62%) from $4.9 million in fiscal 1999. The increase primarily resulted from increases in pension costs ($2.0 million), occupancy costs ($200,000), insurance and taxes ($271,000) Our depreciation, depletion and amortization expense was $9.9 million in fiscal 2000, an increase of $3.9 million (65%) from $6.0 million in fiscal 1999. This increase primarily resulted from depletion ($2.6 million) and amortization and depreciation ($1.2 million) associated with the acquisition of Viking Resources. Our interest expense was $18.6 million in fiscal 2000, a decrease of $1.6 million (8%) from $20.2 million in fiscal 1999. This decrease primarily resulted from the repayment of one loan in October 1999 and lower average borrowings on our credit facilities partially offset by higher interest rates as compared to fiscal 1999. In the fourth quarter of fiscal 2000, because of the sale of our leasing operation and the re-emphasis on our energy operations, both our president and vice chairman of the board, who was also president of the commercial real estate finance business, were separated from the Company. Both officers were parties to employment agreements and were terminated in accordance with the terms of those agreements. Accordingly, continuing results of operations were charged $1.8 million and discontinued operations were charged $2.3 million. The minority interest in Atlas Pipeline Partners, L.P. represents 47% of the net earnings of Atlas Pipeline as a result of the sale in February 2000 of our natural gas gathering operations to Atlas Pipeline. Because we own more than 50% of Atlas Pipeline it is included in our consolidated financial statements and the ownership by the public is shown as a minority interest. Our equity in the loss of an unconsolidated affiliate represents 50% of the net loss of Optiron and its predecessor, and a provision for possible losses of $500,000 against advances made. Our provision for possible losses increased to $936,000 in fiscal 2000, an increase of $436,000 (87%) from $500,000 in fiscal 1999. This increase resulted from an increase to the provision in the fourth quarter of fiscal 2000 caused by the partial write-down of one loan in the amount of $328,000 during the fourth quarter of 2000. 35 Our effective tax rate decreased to 29% in fiscal 2000 compared to 31% in fiscal 1999, as a result of a reduction in pre-tax earnings, coupled with a consistent level of permanent differences between book and taxable income. Year Ended September 30, 1999 Compared to Year Ended September 30, 1998 Our interest and other income was $8.1 million in fiscal 1999, an increase of $1.2 million (17%) from $6.9 million in fiscal 1998, as a result of the following: o A substantial decrease in our uncommitted cash balances decreased interest income by $1.9 million as compared to fiscal 1998. o Reimbursement, in the third quarter of fiscal 1998, of payroll and administrative costs in the amount of $513,000 for services we provided to a partnership in connection with the partnership's investment in an unrelated business (in which our former president is the president of the general partner). There were no similar reimbursements in fiscal 1999. o The above increases were partially offset by of $1.7 million of dividend income from RAIT in fiscal 1999, as compared to $801,300 in fiscal 1998. Our general and administrative expenses were $4.9 million in fiscal 1999, an increase of $1.2 million (32%) from $3.7 million in fiscal 1998, primarily as a result of hiring additional corporate staff and increases in the compensation of senior officers, together with an increase in occupancy costs as we leased additional office space to accommodate our increased staff. Interest expense was $20.2 million in fiscal 1999, an increase of $3.3 million (20%) as from $16.9 million in fiscal 1998, primarily reflecting increased borrowings in our real estate and energy divisions. Our effective tax rate decreased to 31% in the year ended September 30, 1999 from 32% in the year ended September 30, 1998. The fiscal 1999 decrease resulted from an increase in the generation of depletion for tax purposes due to the Atlas Group acquisition and an increase in tax credits. These increases in tax benefits were partially offset by an increase in state income taxes. Liquidity and Capital Resources Following the sale of our equipment leasing operations, our major sources of liquidity have been the proceeds of that sale, funds generated by operations, and borrowings under our existing energy and real estate finance credit facilities. We have employed these funds principally in the expansion of our energy operations and repurchase of senior notes. The following table sets forth our sources and (uses) of cash for the years ended September 30, 2000, 1999, and 1998:
Years Ended September 30, ------------------------------------------ 2000 1999 1998 ----------- ----------- ----------- (in thousands) Provided by operations................................................. $ 8,547 $ 7,778 $ 127 Provided by (used in) investing activities............................. 177,818 (89,858) (71,860) (Used in) provided by financing activities............................. (75,437) 89,556 96,247 Used in discontinued operations........................................ (26,325) (48,317) (18,478) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents....................... $ 84,603 $ (40,841) $ 6,036 =========== ============ ===========
After the end of fiscal 2000, we employed $49.7 million of our funds to repurchase 5,472,021 shares of our common stock in a "dutch auction" tender offer and $7.1 million to repurchase 793,000 shares of our common stock in a private transaction. 36 Year Ended September 30, 2000 Compared to Year Ended September 30, 1999 We had $117.1 million in cash and cash equivalents on hand at September 30, 2000 as compared to $32.5 million at September 30, 1999. Our ratio of earnings to fixed charges was 1.42 to 1.0 in the fiscal year ended September 30, 2000 as compared to 2.74 to 1.0 in the fiscal year ended September 30, 1999. Cash provided by operating activities in fiscal 2000 increased $769,000 as compared to fiscal 1999. The increase is mostly due to an additional $8.2 million in non-cash charges offset by a $5.5 million decrease in accretion (net of interest) and a $12.9 million gain on disposal from our two discontinued subsidiaries. Our cash provided by investing activities increased $267.7 million in the fiscal year ended September 30, 2000 as compared to the fiscal year ended September 30, 1999 primarily as a result of the following: o Proceeds from sale of our equipment leasing operations increased cash provided by investing activities $122.3 million during fiscal 2000. o Principal payments on notes receivable increased $44.7 million mostly due to the sale or refinancing of four real estate loans during fiscal year 2000. o Lower investments in real estate loans and ventures increased investing cash flows in fiscal year 2000 by $92.4 million as compared to fiscal year 1999. Our cash flows used in financing activities increased $165.0 million in fiscal 2000 as compared to the fiscal year ended September 30, 1999. This increase resulted from a $179.5 million change in net borrowings in fiscal year 2000 as compared to fiscal year 1999. This change is offset by the net proceeds of $15.3 million from the sale of our gathering systems to Atlas Pipeline. There was no comparable sale in fiscal 1999. Year Ended September 30, 1999 Compared to Year Ended September 30, 1998 We had $32.5 million in cash and cash equivalents on hand at September 30, 1999, as compared to $73.3 million at September 30, 1998. Our ratio of earnings to fixed charges was 2.74 to 1.0 in the year ended September 30, 1999 as compared to 3.42 to 1.0 in the year ended September 30, 1998. Cash provided by operating activities in fiscal 1999 increased $7.7 million as compared to fiscal 1998. Primarily the increase is due to an increase of $4.5 million in non-cash changes offset by increased losses from our discontinued subsidiaries of $5.6 million coupled with a decrease of $4.3 million in accretion of discount (net of interest). Our cash used in investing activities increased $18.0 million in the year ended September 30, 1999 as compared to the year ended September 30, 1998 as a result of the following: o In energy, cash used increased $30.5 million principally as a result of our participation in the drilling of 145 wells through Atlas America ($11.6 million) and cash used to acquire Viking Resources ($15.9 million). o In real estate finance, cash used increased $1.0 million as a result of a decrease of $247.4 million in principal payments and proceeds from the sale of loans, offset by a $245.7 decrease in investments in real estate loans and ventures. o Cash used also decreased as a result of a $12.0 million investment in RAIT in fiscal 1998 which was not repeated in fiscal 1999. Our cash flow provided by financing activities decreased $6.7 million during the year ended September 30, 1999 as compared to the year ended September 30, 1998. This increase resulted from a $106.7 million increase in our net borrowings, and a decrease of $4.3 million in purchases of treasury stock, partially offset by a decrease of $118.5 million in proceeds from the issuance of common stock in fiscal 1999 resulting from an offering of common stock in fiscal 1998. There was no comparable offering in fiscal 1999. 37 Dividends In the years ended September 30, 2000, 1999 and 1998, $3.1 million, $2.9 million and $2.3 million were paid in dividends, respectively. We have paid regular quarterly dividends since August 1995. The determination of the amount of future cash dividends, if any, to be declared and paid is in the sole discretion of our Board of Directors and will depend on the various factors affecting our financial condition and other matters the Board of Directors deems relevant, including restrictions which may be imposed pursuant to the Indenture under which the senior notes were issued. Environmental Regulation A continuing trend to greater environmental and safety awareness and increasing environmental regulation has generally resulted in higher operating costs for the oil and gas industry. We monitor environmental and safety laws and believe we are in compliance with applicable environmental laws and regulations. To date, however, compliance with environmental laws and regulations has not had a material impact on our capital expenditures, earnings or competitive position. We believe, however, that environmental and safety costs will increase in the future. We cannot offer you any assurance that compliance with environmental laws and regulations will not, in the future, materially adversely affect our operations through increased costs of doing business or restrictions on the manner in which we conduct our operations. 38 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Real Estate Finance Assets The following table sets forth information regarding 37 of the 38 loans held in our portfolio as of September 30, 2000. The presentation, for each category of information, aggregates the loans by their maturity dates for maturities occurring in each of the fiscal years 2001 through 2005 and separately aggregates the information for all maturities arising after the 2005 fiscal year. We do not believe that these loans are sensitive to changes in interest rates since: o 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 us and thus are not currently being paid based on the stated interest rates of the loans; o all senior lien interests are at fixed rates and are thus not subject to interest rate fluctuation that would affect payments to us; and o 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. For information regarding specific loans, you should review Item 1 of this report, "Business - Real Estate Finance: Loan Status," and the tables included in that section.
Portfolio Loans, Aggregated by Maturity Dates,(1) For the Years Ended September 30, ---------------------------------------------------------------------------------------------------- 2001(2) 2002 2003 2004 2005 Thereafter Totals ------------ ----------- ----------- ---- ---------- ------------ ------------ Outstanding loan receivable balances (to Resource America's interest) $29,441,183 $41,212,053 $45,814,991 N/A $8,256,183 $171,705,438 $296,429,848 Book value of investment (fixed rate) $11,977,926 $24,499,527 $10,170,646 N/A $6,430,192 $86,772,510 $139,850,801 Average stated interest rate (fixed rate) 11.00% 9.67% 8.13% N/A 9.13% 18.18% Book value of investment (variable rate) $1,277,890 $1,385,290 $102,212 N/A N/A $5,041,553 $7,806,945 Average stated interest rate (variable rate) 7.61% 13.60% 9.00% N/A N/A 9.29% Average interest payment rate (3) (3) (3) N/A (3) (3) Principal balance of related senior lien interests (4) $14,485,191 $7,674,074 $17,931,356 N/A $7,227,719 $244,610,207 $291,928,547 Average interest rate of senior lien interests (fixed rate) 8.75% 9.40% 9.98% N/A 11.51% 12.32%
1) Maturity dates of related forbearance agreement or our interest in the loan. 2) Includes two loans whose forbearance agreements expired during the fiscal year ended September 30, 2000. These loans aggregated $14.2 million of outstanding loan receivables (to our interest). The carried costs (fixed rate and variable rate) of the loans were $7.5 million and $762,000, respectively, and the principal balance of the related senior lien interests was $7.3 million. 3) Pay rates are equal to the net cash flow from the underlying properties after payments on senior lien interests and, accordingly, depend upon future events not determinable as of the date hereof. 39 4) Maturity dates for senior lien interests according to the maturity of the underlying Resource loans 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, 2000 ------------- ------------- --------------------- 2000(a) 2000(b) $ 685,000 2010 6,640,011 2001 2000(b) 2,000,000 2001 2,809,000 2007 2,351,180 2002 2003 5,274,074 2004 2,400,000 2003 2003 15,804,557 2006 2,126,799 2004 2004 None 2005 2004 1,782,953 2010 5,444,766 Thereafter 2001 2,010,000 2004 2,096,000 2003 3,540,197 2004 2,575,803 2006 73,284,599 2008 125,257,014 2009 29,444,780 2010 4,447,248 2014 1,954,566 -------------- Total $ 291,928,547 ==============
- ------------- (a) The forbearance agreements of the Company's underlying loans came due during the fiscal year ended September 30, 2000. We continue to forbear from exercising our remedies with respect to these loans since we believe we receive all of the economic benefit from the properties without having to incur the expense of foreclosure. (b) The senior lien interests with respect to two loans came due during the fiscal year ending September 30, 2000. Currently we are negotiating with the senior lien holder to either extend the maturity of these loans or repurchase the senior lien interest. 40 The following table sets forth information concerning one of the 38 loans held in our portfolio at September 30, 2000 that we believe may be deemed to be interest rate sensitive. Outstanding receivable balance (to Resource America's interest)........................ $ 43,038,924 Book value of investment.................... $ 38,282,501 Stated interest rate........................ 10.0% 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 interest). LIBOR plus 200 basis points Current interest payment rate (senior lien interest)................................... 8.8%(1) Maturity date (senior lien interest)........ 10/01/05 - ------------- (1) The loan was refinanced in September 2000. In conjunction with this refinancing, the Company purchased an interest rate swap. As a result of this swap, the interest pay rate was locked at 8.8%. Although the stated interest rate on the loan continues to fluctuate over LIBOR, the Company will never pay more than the 8.8% locked-in rate. If the effective rate for a particular pay period is greater than the lock-in rate, then the Company receives the benefit of this difference. For a discussion of the changes in our loan portfolio, you should review Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation: Real Estate Finance." Corporate Liabilities The following table sets forth certain information regarding our debt obligations as of September 30, 2000. For further information regarding our senior notes and credit facilities, you should review Item 1, "Business - Credit Facilities and Senior Notes," and Note 5 to the consolidated financial statements.
2001 2002 2003 2004 2005 Thereafter Total ---- ---- ---- ---- ---- ---------- ----- Fixed rate.............. - - - $81,266,000 - - $ 81,266,000 Average interest rate... - - - 11.98% - - Variable rate........... $7,250,006 $23,219,054 $23,197,086 - - - $ 53,666,146 Average interest rate... 10.19% 9.49% 8.54% - - - Totals $7,250,006 $23,219,054 $23,197,086 $81,266,000 - - $134,932,146
Futures Contracts For information regarding open natural gas futures contracts relating to natural gas sales for fiscal 2000 and the results of natural gas hedging during fiscal 2000, 1999 and 1998, you should review Note 10 of the notes to consolidated financial statements. 41 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, 2000 and 1999, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2000. 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the consolidated results of their operations and cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States. We have also audited Schedule IV as of September 30, 2000. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. Grant Thornton LLP Cleveland, Ohio November 29, 2000 42 RESOURCE AMERICA, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2000 AND 1999
2000 1999 ---------- ----------- (in thousands, except share data) ASSETS Current assets: Cash and cash equivalents................................................. $ 117,107 $ 32,504 Accounts and notes receivable............................................. 15,546 11,563 Prepaid expenses.......................................................... 2,531 971 ---------- ----------- Total current assets.................................................... 135,184 45,038 Investments in real estate loans (less allowance for possible losses of $2,013 and $1,405)..................................... 183,927 250,231 Investments in real estate ventures.......................................... 17,723 18,159 Investment in RAIT Investment Trust.......................................... 10,533 9,300 Property and equipment: Oil and gas properties and equipment (successful efforts)................. 86,028 78,923 Gas gathering and transmission facilities................................. 18,775 18,061 Other..................................................................... 7,037 6,949 ---------- ----------- 111,840 103,933 Less - accumulated depreciation, depletion and amortization (26,977) (20,004) ---------- ----------- Net property and equipment................................................ 84,863 83,929 Net assets of discontinued operations........................................ 779 82,306 Other assets (less accumulated amortization of $8,641 and $5,064)............ 76,195 51,169 ---------- ----------- Total assets.......................................................... $ 509,204 $ 540,132 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................................... $ 7,250 $ 13,333 Accounts payable.......................................................... 11,690 9,461 Accrued interest.......................................................... 1,966 3,243 Accrued liabilities....................................................... 26,768 11,359 Estimated income taxes.................................................... 7,470 2,563 ---------- ----------- Total current liabilities............................................. 55,144 39,959 Long-term debt: Senior.................................................................... 80,391 101,400 Non-recourse.............................................................. 42,040 113,718 Other..................................................................... 5,251 5,577 ---------- ----------- 127,682 220,695 Deferred revenue and other liabilities....................................... 7,676 2,620 Deferred income taxes........................................................ 19,567 13,069 Minority interest............................................................ 17,920 - 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................ 246 244 Additional paid-in capital................................................ 221,361 221,084 Less treasury stock, at cost.............................................. (15,778) (17,002) Less loan receivable from Employee Stock Ownership Plan (ESOP)............ (1,393) (1,488) Accumulated other comprehensive loss...................................... (974) (1,762) Retained earnings......................................................... 77,753 62,713 ---------- ----------- Total stockholders' equity.......................................... 281,215 263,789 ---------- ----------- $ 509,204 $ 540,132 ========== ===========
See accompanying notes to consolidated financial statements 43 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
2000 1999 1998 ---------- ----------- ----------- (in thousands, except per share data) REVENUES Energy..................................................................... $ 70,552 $ 55,093 $ 6,734 Real estate finance........................................................ 18,649 45,907 55,834 Interest and other......................................................... 10,410 8,089 6,912 ---------- ----------- ----------- 99,611 109,089 69,480 COSTS AND EXPENSES Energy..................................................................... 48,378 39,077 4,355 Real estate finance........................................................ 3,256 3,102 1,801 General and administrative................................................. 7,894 4,859 3,679 Depreciation, depletion and amortization................................... 9,872 5,985 1,493 Interest................................................................... 18,632 20,226 16,871 Provision for possible losses.............................................. 936 500 505 Termination charge......................................................... 1,753 - - Minority interest in Atlas Pipeline Partners, L.P.......................... 2,058 - - Equity in loss of unconsolidated affiliate................................. 1,132 49 - ---------- ----------- ----------- 93,911 73,798 28,704 ---------- ----------- ----------- Income from continuing operations before income taxes, extraordinary item and cumulative effect of a change in accounting principle................................................. 5,700 35,291 40,776 Provision for income taxes................................................. 1,638 11,110 13,011 ---------- ----------- ----------- Income from continuing operations before extraordinary item and cumulative effect of a change in accounting principle............... 4,062 24,181 27,765 ---------- ----------- ----------- Discontinued operations: Income (loss) from operations of subsidiary............................. 476 (5,686) (393) Gain (loss) on disposal of subsidiary................................... 12,944 (275) - ---------- ------------ ----------- 13,420 (5,961) (393) Extraordinary item, net of taxes of $367, $142 and $112.................... 683 299 239 Cumulative effect of a change in accounting principle, net of taxes of $28. - (59) - ---------- ------------ ----------- Net income................................................................. $ 18,165 $ 18,460 $ 27,611 ========== =========== =========== Net income per common share - basic: From continuing operations.............................................. $ .18 $ 1.09 $ 1.66 Discontinued operations................................................. .57 (.27) (.02) Extraordinary item...................................................... .03 .01 .01 Cumulative effect of a change in accounting principle................... - - - ---------- ----------- ----------- Net income per common share - basic..................................... $ .78 $ .83 $ 1.65 ========== =========== =========== Weighted average common shares outstanding................................. 23,413 22,108 16,703 ========== =========== =========== Net income per common share - diluted: From continuing operations.............................................. $ .17 $ 1.06 $ 1.61 Discontinued operations................................................. .56 (.26) (.02) Extraordinary item...................................................... .03 .01 .01 Cumulative effect of a change in accounting principle................... - - - ---------- ------------ ----------- Net income per common share - diluted................................... $ .76 $ .81 $ 1.60 ========== =========== =========== Weighted average common shares............................................. 23,828 22,803 17,268 ========== =========== ===========
See accompanying notes to consolidated financial statements 44 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
2000 1999 1998 ---------- ----------- ----------- (in thousands) Net income................................................................. $ 18,165 $ 18,460 $ 27,611 Other comprehensive income (loss): Unrealized gain (loss) on investment.................................... 1,201 (2,612) (65) Tax effect......................................................... (413) 893 22 ----------- ----------- ----------- 788 (1,719) (43) ---------- ----------- ----------- Comprehensive income....................................................... $ 18,953 $ 16,741 $ 27,568 ========== =========== ===========
See accompanying notes to consolidated financial statements 45 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998 (in thousands, except share data)
Common Stock Additional Treasury Stock ESOP ------------------------- Paid-In --------------------------- Loan Shares Amount Capital Shares Amount Receivable ------------------------------------------------------------------------------------- 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......... 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 $ 208,588 (1,109,151) $ (17,890) $ (1,591) Treasury shares issued.................... (498) 47,719 1,001 Issuance of common stock.................. 1,416,171 14 12,994 Treasury shares acquired.................. (10,000) (113) Net unrealized loss on investment......... Cash dividends ($.13 per share)........... Repayment of ESOP Loan.................... 103 Net income................................ - --------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1999............... 24,385,279 $ 244 $ 221,084 (1,071,432) $ (17,002) $ (1,488) Treasury shares issued.................... (917) 66,450 1,396 Issuance of common stock.................. 236,683 2 1,194 Purchase of treasury shares............... (25,000) (172) Net unrealized gain on investment......... Cash dividends ($.13 per share)........... Repayment of ESOP Loan.................... 95 Net income................................ - --------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 2000............... 24,621,962 $ 246 $ 221,361 (1,029,982) $ (15,778) $ (1,393) ========== ========= ============= =========== =========== =========
Accumulated Other Totals Comprehensive Retained Stockholders' Income (Loss) Earnings Equity ---------------------------------------------- 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) (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............... $ (43) $ 47,184 $ 236,478 Treasury shares issued.................... 503 Issuance of common stock.................. 13,008 Treasury shares acquired.................. (113) Net unrealized loss on investment......... (1,719) (1,719) Cash dividends ($.13 per share)........... (2,931) (2,931) Repayment of ESOP Loan.................... 103 Net income................................ 18,460 18,460 - ------------------------------------------------------------------------------------------ Balance, September 30, 1999............... $ (1,762) $ 62,713 $ 263,789 Treasury shares issued.................... 479 Issuance of common stock.................. 1,196 Purchase of treasury shares............... (172) Net unrealized gain on investment......... 788 788 Cash dividends ($.13 per share)........... (3,125) (3,125) Repayment of ESOP Loan.................... 95 Net income................................ 18,165 18,165 - ------------------------------------------------------------------------------------------ Balance, September 30, 2000............... $ (974) $ 77,753 $ 281,215 ========== ========== ===========
See accompanying notes to consolidated financial statements 46 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
2000 1999 1998 ---------- ----------- ----------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................................... $ 18,165 $ 18,460 $ 27,611 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, depletion and amortization.................................. 9,872 5,985 1,493 Amortization of discount on senior notes and deferred finance costs....... 1,110 1,241 1,045 Provision for possible losses............................................. 936 500 505 Minority interest in Atlas Pipeline Partners L.P.......................... 2,058 - - Equity in loss of unconsolidated subsidiary............................... 1,132 49 - (Gain) loss from operations of discontinued subsidiary.................... (476) 5,686 393 (Gain) loss from disposal of discontinued subsidiary...................... (12,944) 275 - Deferred income taxes..................................................... 5,825 (639) (4,317) Accretion of discount..................................................... (5,802) (18,965) (6,520) Collection of interest.................................................... 5,697 13,369 5,229 Extraordinary gain on debt extinguishment................................. (683) (299) (239) Cumulative effect of change in accounting principle....................... - 59 - Gain on asset dispositions................................................ (1,628) (4,728) (30,211) Property impairments and abandonments..................................... 877 (6) 260 Change in operating assets and liabilities: (Increase) decrease in accounts receivable and other assets............... (6,305) (3,519) 2,338 (Decrease) increase in accounts payable and other liabilities............. (9,287) (9,690) 2,540 ---------- ------------ ----------- Net cash provided by operating activities of continuing operations........... 8,547 7,778 127 CASH FLOWS FROM INVESTING ACTIVITIES: Net cash (paid) acquired in business acquisitions............................ - (15,942) 10,058 Proceeds from sale of subsidiary............................................. 126,276 4,017 - Capital expenditures......................................................... (11,066) (11,556) (2,331) Principal payments on notes receivable....................................... 73,259 28,516 76,915 Proceeds from sale of assets................................................. 1,269 192 197,668 (Increase) decrease in other assets.......................................... (10,115) 2,349 (12,903) Investments in real estate loans and ventures................................ (5,193) (97,594) (343,270) Increase in other liabilities................................................ 3,388 160 2,003 ---------- ----------- ----------- Net cash provided by (used in) investing activities of continuing operations. 177,818 (89,858) (71,860) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings................................................................... 104,292 244,578 16,147 Principal payments on borrowings............................................. (192,569) (153,331) (31,630) Net proceeds from Atlas Pipeline Partners L.P. public offering............... 15,251 - - Dividends paid............................................................... (3,125) (2,931) (2,297) Purchase of treasury stock................................................... (172) (113) (4,435) Repayment of ESOP loan....................................................... 95 41 - (Increase)decrease in other assets........................................... (67) 237 (1,149) Proceeds from issuance of stock.............................................. 858 1,075 119,611 ---------- ----------- ----------- Net cash provided by (used in) financing activities of continuing operations. (75,437) 89,556 96,247 ---------- ----------- ----------- Net cash used in discontinued operations..................................... (26,325) (48,317) (18,478) ---------- ----------- ----------- Increase (decrease) in cash and cash equivalents............................. 84,603 (40,841) 6,036 Cash and cash equivalents at beginning of year............................... 32,504 73,345 67,309 ---------- ----------- ----------- Cash and cash equivalents at end of year..................................... $ 117,107 $ 32,504 $ 73,345 ========== =========== ===========
See accompanying notes to consolidated financial statements 47 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS Resource America, Inc. (the "Company") is involved in two business segments: energy and real estate finance. In energy, the Company drills for and sells natural gas and, to a significantly lesser extent, oil. Through Atlas Pipeline Partners, L.P. a majority owned subsidiary partnership, the Company transports natural gas from wells it owns and operates to interstate pipelines and, in some cases, to end users. The Company finances a substantial portion of its drilling activities through drilling partnerships it sponsors. The Company typically acts as the general or managing partner of these partnerships and has a material partnership interest. In real estate finance, the Company manages a portfolio of real estate loans. These loans were, at the time of acquisition, typically troubled loans purchased at a discount both to their outstanding loan balances and to the appraised value of their underlying properties. The loans are generally secured by junior liens on the underlying property. In some instances, the Company's loans are secured by devices other than a lien on the underlying properties. The borrowers on the Company's loans typically have entered into agreements requiring them to pay all of the net cash flow from the underlying property to the Company and imposing management controls, including appointment of Brandywine Construction and Management, Inc., a real estate manager affiliated with the Company, as property manager or supervisor. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company also owns an individual interest in the assets and is separately liable for its share of liabilities of oil and gas partnerships in which it has an ownership interest. In accordance with established practice in the oil and gas industry, the Company also includes its prorata share of income and expenses of the oil & gas partnerships in which the Company has an interest. All material intercompany transactions have been eliminated. Reclassifications In prior years, consistent with the presentation of other specialty finance companies, the Company presented its consolidated balance sheet on a non-classified basis, which does not segregate assets and liabilities into current and non-current categories. As a result of the sale of its small ticket equipment leasing subsidiary, the Company believes that it would be more appropriate to present a classified balance sheet. The consolidated balance sheet at September 30, 1999 has been reclassified to conform with this new presentation. Additionally, the assets of the small ticket leasing subsidiary at September 30, 1999 have been reclassified as "Net assets of discontinued operations" (See Note 12). Certain other reclassifications have also been made to the fiscal years 1999 and 1998 consolidated financial statements to conform with the fiscal 2000 presentation. 48 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Use of Estimates Preparation of the financial statements in conformity with accounting principles generally accepted in the United States 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. Allowance for Possible Losses In establishing its allowance for possible losses, the Company's real estate finance operation reviews the carrying value of its loans on a quarterly basis to determine whether it is greater than the sum of the anticipated future projected cash flows from the loans. It also considers the historic performance of the Company's loan portfolio, characteristics of the loans in the portfolio and the properties underlying those loans, 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 tenants') specific industry. As indicated by these factors, an appropriate allowance is then provided through charges to operations. 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 As permitted by Statement of Financial Accounting Standards No. 123 (SFAS123), "Accounting for 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 SFAS 123. Equity Securities The Company has classified its investment in RAIT Investment Trust ("RAIT") (formerly Resource Asset Investment Trust), 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 within accumulated other comprehensive income. Comprehensive Income Comprehensive income includes net income and all other changes in the equity of a business during a period from transactions and other events and circumstances from non-owner sources. These changes, other than net income, are referred to as "other comprehensive income" and for the Company include changes in the fair value of marketable securities. 49 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Operating Segments SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the Company's chief operating decision makers in deciding how to allocate resources and in assessing performance. New Accounting Standards In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging." SFAS 133 will require the Company to recognize all derivatives as either assets or liabilities in its consolidated balance sheet and to measure those instruments at fair value. The Company is required to adopt SFAS 133 effective October 1, 2000. The effect of adopting SFAS 133 on the Company's consolidated financial position, results of operations and cash flows will be dependent on the extent of future hedging activities and fluctuations in interest rates. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101, as amended, summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. Management does not expect the adoption of SAB 101 to have a material effect on the Company's operations or financial position. The Company is required to adopt SAB 101 effective October 1, 2000. 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 and proved 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 proved developed gas and oil 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, 2000. 50 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Oil and Gas Properties - (Continued) 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 estimates the salvage value of equipment recoverable upon abandonment. At both September 30, 2000 and 1999, the Company's estimate 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 gas and oil 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 gas and oil reserves. Depreciation of property and equipment, other than gas and oil properties, is computed using the straight-line method over the estimated economic lives, which range from three to 39 years. Other Assets Included in other assets are intangible assets that consist primarily of contracts acquired through acquisitions recorded at fair value on their acquisition dates, the excess of the acquisition cost over the fair value of the net assets of a business acquired (goodwill) and deferred financing costs. The contracts acquired are being amortized on a declining balance method, except for the 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, 2000 and 1999 were: 2000 1999 ---------- ----------- (in thousands) Contracts acquired (including syndication network).................. $ 17,378 $ 18,636 Goodwill............................................................ 28,484 25,147 Deferred financing costs............................................ 2,533 4,866 Investments......................................................... 8,581 - Note and escrow received upon disposal of subsidiary (net of allowance for possible losses of $8,944).................. 16,080 - Other (net of allowance for possible losses of $500)................ 3,139 2,520 ---------- ----------- $ 76,195 $ 51,169 ========== ===========
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. 51 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) For investments in real estate loans, because each loan is a unique transaction involving a discrete property, it is impractical to determine their fair values. However, 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. The following table provides information on other financial instruments:
Carrying Estimated Amount Fair Value ------------- ---------- (in thousands) Energy non-recourse debt............................................ $ 23,165 23,165 Real estate finance non-recourse debt............................... 25,875 25,875 Senior debt......................................................... 80,391 73,960 Other debt.......................................................... 5,501 5,501 ------------- ------------ $ 134,932 $ 128,501 ============= ============
Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of periodic temporary investments of cash. The Company places its temporary cash investments in high quality short-term money market instruments and deposits with high quality financial institutions and brokerage firms. At September 30, 2000, the Company had $121.3 million in deposits at various banks, of which $119.0 million is over the insurance limit of the Federal Deposit Insurance Corporation. No losses have been experienced on such investments. Revenue Recognition Energy Operations The Company conducts certain energy activities through, and a portion of its revenues are attributable to, sponsored limited partnerships ("Partnerships"). These Partnerships raise money from investors to drill gas and oil wells. The Company serves as general partner of the Partnerships and assumes customary rights and obligations for the Partnerships. As the general partner, the Company is liable for Partnership liabilities and can be liable to limited partners if it breaches its responsibilities with respect to the operations of the Partnerships. The income from the Company's general partner interest is recorded when the gas and oil are produced by a Partnership. The Company also contracts to drill the gas and oil wells owned by the Partnerships. The income from a drilling contract relating to a well is recorded upon substantial completion of the well. The Company is entitled to receive management fees according to the respective Partnership agreements. Such fees are recognized as income and are included in energy services. The Company sells interests in gas and oil wells and retains a working interest and/or overriding royalty. The income from the working interests and overriding royalties is recorded when the gas and oil are produced. 52 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Real Estate Finance The difference between the Company's cost basis in a real estate loan and the sum of projected cash flows from that loan is accreted into interest income over the estimated life of the loan using the interest method which recognizes a level interest rate over the life at the loan. 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 real estate loan are recognized based on an allocation of the Company's cost basis between the portion of the loan sold and the portion retained based upon the fair value of those respective portions on the date of sale. Gains on the refinancing of a real estate loan only arise when the financing proceeds exceed the cost of the loan financed. 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. Before January 1, 1999, most of the Company's transactions involving the sale of senior lien interests in its real estate loans were structured to meet the criteria for sale under generally accepted accounting principles. Thus, for transactions that were completed before January 1, 1999, the Company recorded gainS on sale. Effective January 1, 1999, the Company made a strategic decision to structure future transactions as financings t rather than as sales. The cash flows available to the Company, which are generally based on the cash flows of the properties underlying its loans, are unaffected by these modifications. The primary effect of this change in structure is a shift from the recognition of an immediate gain on the sale of a senior lien interest in a loan receivable to the retention of the full investment in the loan on the Company's books. The recognition of interest income on that investment over the life of the loan and the recording the proceeds from the senior lien interest as debt and recognizing interest expense on that debt. 53 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) 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:
Years Ended September 30, ------------------------------------------ 2000 1999 1998 ----------- ----------- ----------- (in thousands) Cash paid during the year for: Interest............................................................ $ 17,652 $ 17,614 $ 15,090 Income taxes (refunded) paid........................................ (787) 10,622 12,050 Non-cash activities include the following: Investment in real estate venture received in exchange for note receivable...................................... - 16,331 - Stock issued in acquisition(s)...................................... - 12,437 29,534 Details of acquisitions: Fair value of assets acquired....................................... $ - $ 48,289 $ 74,635 Stock issued........................................................ - (12,437) (29,534) Liabilities assumed................................................. - (19,910) (45,968) Amounts due seller.................................................. - - (9,191) ----------- ----------- ----------- Net cash paid (acquired).......................................... $ - $ 15,942 $ (10,058) =========== =========== =========== Disposal of business: Net liabilities assumed by buyer.................................. $ - $ 4,938 $ - =========== =========== =========== Other assets received upon disposal of subsidiary................. $ 25,969 $ - $ - =========== =========== ===========
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 operating loss carryforwards, using currently enacted tax rates. The deferred tax provision or benefit each year represents the net change during that year in the deferred tax asset and liability balances. 54 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Earnings Per Share Basic earnings per share is determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Earnings per share - diluted are computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding and dilutive potential shares issuable during the period. Dilutive potential shares of common stock consist of the excess of 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 shares during the period) with the proceeds received from the exercise of the options and warrants. The computations of basic and diluted earnings per share for each year were as follows:
Years Ended September 30, ------------------------------------------ 2000 1999 1998 ----------- ----------- ----------- (in thousands) Income from continuing operations before extraordinary item and cumulative effect of a change in accounting principle............... $ 4,062 $ 24,181 $ 27,765 Income (loss) from discontinued operations............................. 476 (5,686) (393) Gain (loss) on disposal of subsidiary.................................. 12,944 (275) - Extraordinary gain on early extinguishment of debt..................... 683 299 239 Cumulative effect of a change in accounting principle.................. - (59) - ----------- ----------- ----------- Net income........................................................ $ 18,165 $ 18,460 $ 27,611 =========== =========== =========== Basic average shares of common stock outstanding....................... 23,413 22,108 16,703 Dilutive effective of stock option and award plans..................... 415 695 565 ----------- ----------- ----------- Dilutive average shares of common stock................................ 23,828 22,803 17,268 =========== =========== ===========
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, RAIT and a law firm. As particular opportunities have arisen, the Company has purchased real estate loans from lenders, or involving borrowers, which are affiliated with officers of the Company. In two instances (excluding sales to RAIT) the Company has sold senior or junior lien interests in real estate loans to purchasers affiliated with officers of the Company. At September 30, 2000, loans held with respect to related borrowers or acquired from related lenders constitute 42.9% ($79.8 million), by book value, of the Company's portfolio loans, while senior or junior lien interests sold to related purchasers constituted .5% ($1.9 million) of all such interests. Transactions with affiliates must be approved by the Company's Board of Directors, including a majority of the outside directors. In addition, loan acquisitions must be approved by the Investment Committee of the Board of Directors which consists of three outside directors. A more detailed description of these relationships and transactions is set forth below. 55 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 3 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS - (Continued) Relationship with Brandywine Construction & Management, Inc. ("BCMI"). The properties underlying 28 of the Company's real estate loans and investments in real estate ventures 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 holding approximately 8% of BCMI's capital stock. 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 ten of the borrowers. In addition, BCMI owns an 11% limited partnership interest in another borrower. Relationship with Hudson United Bank. The Company maintains a normal banking and borrowing relationship with Hudson United Bank, formerly Jefferson Bank. The Company anticipates that it may effect other borrowings in the future from Hudson United Bank. The Chairman of the Company and his spouse were officers and directors of Jefferson Bank and its holding company, and were principal stockholders of that bank's holding company, until its acquisition in November 1999 by Hudson United Bancorp, the holding company for Hudson United Bank. The former President of the Company was a director of Jefferson Bank until its acquisition. Following the acquisition, the Chairman's spouse served as director of Hudson United Bancorp until July 2000. Hudson United Bank is also a tenant at one property owned by a partnership in which the Company holds a 50% interest. Relationship with RAIT. In January 1998, the Company acquired 15% of the outstanding common shares of beneficial interest in RAIT, a real estate investment trust sponsored by the Company for an investment of approximately $7.0 million. In June 1998, the Company acquired additional common shares in a second 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 RAIT's Board of Trustees until such time as its ownership of RAIT's outstanding common shares is less than 5%. A Senior Vice President of the Company, who is also the son of the Chairman of the Company and the brother of its former President, currently serves as the Company's nominee and as the secretary of RAIT. The former Vice Chairman and Executive Vice President of the Company is the President of RAIT. 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 during the fiscal year ended September 30, 1998. The Company has engaged in the following transactions with RAIT subsequent to the sale of the initial investments: Fiscal year ended September 30, 2000 o In December 1999, the Company sold 100% of the common stock in a wholly-owned subsidiary to RAIT for $9.9 million, recognizing a gain of $983,000. The subsidiary held a subordinate interest in a loan which was secured by a retail property located in Centreville, VA. The Company acquired the loan in 1998 for a net investment of $7.9 million. o In May 2000, the Company sold 100% of the common stock in a wholly-owned subsidiary to RAIT for $1.9 million. The subsidiary had a subordinated interest in a loan which it had originated for $1.3 million. At the time of the sale, the loan had a carrying value of $1.6 million; consequently, a gain of $273,000 was recognized by the Company. o In June 2000, pursuant to a Participation Termination Agreement, the Company paid to RAIT a $300,000 termination fee. The fee was in connection with a loan refinancing in which RAIT held a $4.9 million participation interest. 56 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 3 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS - (Continued) Fiscal year ended September 30, 1999 o In June 1999, the Company acquired a first mortgage loan at face value from RAIT for $2.5 million. The loan is secured by property in which the Company has held a subordinate interest since 1991. o In December 1998, the Company sold a senior lien interest in a loan for $4.0 million to RAIT and recognized a gain of $2.0 million. o In December 1998, the Company purchased a junior lien interest in a loan held by RAIT in the amount of $4.0 million. The junior lien interest was repaid in June 1999 for $4.1 million and the Company recognized a gain of $135,000. o The Company and RAIT jointly acquired a loan for $77.0 million of which $10.0 million was contributed by RAIT. o A senior lien interest sold by the Company to RAIT in fiscal 1998 was repaid in August 1999. Fiscal year ended September 30, 1998 o The Company sold senior lien interests in three loans to RAIT for an aggregate of $18.0 million and recognized aggregate gains of $5.1 million. o The Company and RAIT jointly acquired a loan for $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. The retained interest is subordinate both to RAIT's $4.0 million interest in the loan and a $12.0 million interest held by 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. Relationship with The Bancorp.com, Inc. In October and November 1999, the Company acquired 9.9% of the outstanding shares of The Bancorp.com, Inc. ("TBI") for an investment of approximately $1.8 million. At the time of the Company's investment, the Chairman of the Company was also Chairman of TBI, the then-President of the Company (a son of the Chairman of the Company) was the President of TBI, and a director of the Company, and the wife of the then-Vice-Chairman of the Company, were directors of TBI. Subsequently, the Company's Chairman relinquished his position at TBI with his son becoming Chairman and his spouse becoming Chief Executive officer of TBI. As of September 30, 2000, the Company had $25.4 million on deposit at TBI's banking subsidiary. Relationship with Law Firm. Until April 1996, the Chairman of the Company was of counsel to Ledgewood Law Firm, P.C. ("Ledgewood"), which provides legal services to the Company. Ledgewood was paid $1.6 million, $1.3 million, and $1.2 million during fiscal 2000, 1999, and 1998, respectively, for legal services rendered to the Company. The Chairman of the Company receives certain debt service payments from Ledgewood related to the termination of his affiliation with such firm and its redemption of his interest therein. Relationships with Certain Borrowers. The Company has from time to time purchased loans in which affiliates of the Company are affiliates of the borrowers. 57 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 3 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS - (Continued) In March 2000, the property securing a loan held by the Company was purchased by a limited partnership of which the former Executive Vice President and Vice Chairman of the Company is the president of the general partner. The Chairman of the Company, two directors of the Company and the President of BCMI are equal limited partners of a limited partnership which is the sole limited partner of the borrower. In July 2000, the Company split an investment in a loan with a balance of $4.4 million, including unpaid interest and penalties into two distinct loans, one for $4,450,000 and the other for $1,984,000. The Company sold the first loan to an unaffiliated third party for face value and exchanged the second loan for a similar loan from the general partner of the original borrower for face value. The former Executive Vice President and Vice Chairman of the Company is the president and a director of, such general partner. In September 1998, the Company acquired a defaulted loan in the original principal amount of $91.0 million. In September 2000, in connection with a refinancing and pursuant to a prior agreement, a newly formed limited liability company became the borrower. The Chairman, the former Executive Vice President and Vice Chairman and the former President of the Company and the President of BCMI are equal limited partners (24.75% each) of a partnership that is a 59% limited partner of the managing partner which has a 99% interest in the sole member of the borrower. In addition, the former Executive Vice President and Vice Chairman of the Company is the President of the general partner of the managing partner of the sole member of the borrower as well as the operating manager of the borrower and the general partner of the 59% limited partner described above. After September 30, 2000, the 59% interest was reduced to 30%. In March 1998, the Company acquired a loan under a plan of reorganization in 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 of Evening Star Associates and holds a 1% interest; the Chairman, former Executive Vice President and Vice Chairman, and former President of the Company purchased a 94% limited partnership interest in Evening Star Associates for $200,000. In August 1997, the Company acquired a loan with a face amount of $2.3 million from Jefferson Bank (now Hudson United Bank) at a cost of $1.6 million. The loan is secured by a property owned by a partnership in which the Company's former Executive Vice President and Vice Chairman, and the Chairman, together with the Chairman's spouse, are limited partners. The former Executive Vice President and Vice Chairman was previously the general partner of such partnership. The Company leases its headquarters space at such property. The Company occupies the space on a month-to-month tenancy at a rent of $9,564 per month. Ledgewood is a tenant at such property. In June 1997, the Company acquired a loan with a face amount of $7.0 million from a partnership in which the former Executive Vice President and Vice Chairman, and the Chairman of the Company, together with the Chairman's wife, are limited partners. The former Vice Chairman and Executive Vice President was previously the general partner of such partnership. The Company acquired such loan at a cost of $3.0 million. 58 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 3 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS - (Continued) 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 was owned by two partnerships: the Building Partnership, which owned the office building, and the Garage Partnership, which owned the parking garage. Pursuant to a loan restructuring agreement entered into in 1993, an affiliate of the holder of the loan was required to hold, as additional security for the loan, general partnership interests in both the Building Partnership and the Garage Partnership. The partnership interests in the Building Partnership and Garage Partnership were assigned to limited partnerships affiliated with the Company and certain of its officers. In June 1999, the loan was repaid pursuant to the terms of an existing loan restructuring agreement. The Company received $29.6 million in cash, plus a 50% interest in the Building and Garage Partnerships. The interest of the Company's officers was terminated. Relationships with Certain Lienholders. The Company holds a first mortgage lien on a hotel property which in January 1999 was foreclosed upon by another corporation ("Corporate Owner"). In August 1999, the Company's then-President (son of the Company's Chairman) became President of the Corporate Owner, and the Chairman of the Company became Chairman and a minority shareholder of the Corporate Owner. In addition, the Chairman of the Company is a limited partner holding a two-thirds interest in a partnership which holds convertible securities to acquire the common stock of the Corporate Owner. Furthermore, the President of the Corporate Owner is the sole officer, director and shareholder of another corporation which is this partnership's general partner. On a fully converted basis, of the Company's then-President and Chairman would have a 19% interest in the Corporate Owner. The Company has sold three senior lien interests and one junior lien interest in its real estate loans to entities in which officers and/or directors 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 $1.5 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 $1.9 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 the former Executive Vice President 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. In fiscal 1999, the Company sold, at book value, an $875,000 senior lien interest in industrial development revenue bonds it had acquired in a prior year to a limited partnership in which the Chairman and the former Executive Vice President and Vice Chairman of the Company beneficially owned a 22.0% limited partnership interest. 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 the former Executive Vice President and Vice Chairman of the Company beneficially own an 18.3% limited partnership interest. The senior lien interest was paid off in December 1997. 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 the former Executive Vice President and Vice Chairman of the Company beneficially own a 21.3% limited partnership interest. The junior lien interest was paid off in May 1999. Management believes that any other commercial real estate transactions and balances involving parties that may be considered to be related parties are not material. 59 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 4 - INVESTMENTS IN REAL ESTATE LOANS In acquiring real estate loans, the Company focused primarily on the purchase of income producing loans at a discount from both the face value of such loans and the appraised value of the properties underlying the loans. 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 loan is allocated between principal and interest. This accretion of discount amounted to $5.8 million, $19.0 million and $6.5 million during the years ended September 30, 2000, 1999, and 1998, respectively. As the Company sells senior lien interests or receives funds from refinancings of its loans, 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. At September 30, 2000 and 1999, the Company held real estate loans having aggregate face values of $691.4 million and $747.1 million, respectively, which were being carried at aggregate costs of $183.9 million and $250.2 million, including cumulative accretion. During fiscal 1999, the Company received, in exchange for its investment in a real estate loan, cash and a 50% interest in a partnership that owns a building which secured the loan. The Company also received a deed-in-lieu of foreclosure with respect to one real estate loan, taking title to the underlying property. The partnership interest and property have been classified as investments in real estate ventures. Amounts receivable, net of senior lien interests and deferred costs, were $339.5 million and $348.7 million at September 30, 2000 and 1999, 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, 2000 and 1999.
Years Ended September 30, ----------------------------------- 2000 1999 ------------- -------------- (in thousands) Balance, beginning of year...................................................... $ 250,231 $ 188,651 New loans....................................................................... - 88,869 Additions to existing loans..................................................... 4,994 8,558 Provisions for possible losses.................................................. (936) (500) Accretion of discount (net of collection of interest)........................... 5,802 18,965 Collections of principal........................................................ (63,379) (20,646) Cost of loans sold.............................................................. (12,785) (17,335) Loans reclassified to investments in real estate ventures....................... - (16,331) ------------- ------------ Balance, end of year............................................................ $ 183,927 $ 250,231 ============= ============
The following is a summary of activity in the Company's allowance for possible losses related to real estate loans for the years ended September 30, 2000 and 1999:
Years Ended September 30, ----------------------------------- 2000 1999 ------------- -------------- (in thousands) Balance, beginning of year...................................................... $ 1,405 $ 1,191 Provision for possible losses................................................... 936 500 Write-down...................................................................... (328) - Reclassification of possible losses-discontinued subsidiary..................... - (286) ------------- ------------ Balance, end of year............................................................ $ 2,013 $ 1,405 ============= ============
60 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 5 - DEBT Total debt consists of the following:
Years Ended September 30, ----------------------------------- 2000 1999 ------------- -------------- (in thousands) Senior debt....................................................................... $ 80,391 $ 101,400 Nonrecourse debt: Energy: Revolving and term bank loans................................................ 23,165 44,975 Real estate finance: Loan facilities.............................................................. - 58,901 Revolving credit facilities.................................................. 18,000 22,000 Other........................................................................ 875 875 ----------- ----------- Total non recourse debt.................................................. 42,040 126,751 Other debt........................................................................ 12,501 5,877 ----------- ----------- 134,932 234,028 Less current maturities........................................................... 7,250 13,333 ----------- ----------- $ 127,682 $ 220,695 =========== ===========
Following is a description of borrowing arrangements in place at September 30, 2000 and 1999. Nonrecourse Debt-Energy. The energy subsidiaries owned by the Company maintain a $40.0 million credit facility at PNC Bank ("PNC"). The facility permits draws based on the remaining proved developed non-producing and proved undeveloped natural gas and oil reserves attributable to the subsidiaries' wells and the subsidiaries' projected fees and revenues from operation of wells and administration of partnerships. Up to $10.0 million of the facility may be in the form of standby letters of credit. The facility is secured by the assets of all of the energy affiliates, and a breach of the loan agreement by any of the energy affiliates constitutes a default. The revolving credit facility has a term ending in June 2003 and bears 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 75 basis points, or (ii) the Eurodollar rate plus between 150 and 225 basis points. Draws under any letter of credit bear interest at the PNC prime rate plus 0 to 75 basis points. The credit facility contains financial covenants, including covenants requiring the Company to maintain specified financial notes and imposes the following limits: (a) the energy subsidiaries' exploration expense can be no more than 20% of capital expenditures plus exploration expense, without PNC's consent; (b) the amount of debt that can be incurred cannot exceed specified levels without PNC's consent; and (c) the energy affiliates may not sell, lease or transfer property without PNC's consent. At September 30, 2000, $29.5 million was outstanding under this facility, including the $5.7 million outstanding balance of a letter of credit issued unnder the facility. Nonrecourse Debt-Real Estate Finance Loan Facilities. Two loans outstanding at September 30, 1999, aggregating $58.9 million, were repaid in October 1999. Real Estate Finance-Revolving Credit Facilities. In March 1998, the Company, through certain operating subsidiaries, established an $18.0 million revolving credit facility with Jefferson Bank (now Hudson United Bank) for its commercial mortgage loan operations which was amended in August 1999. Credit availability is currently $7.0 million, all of which is outstanding at September 30, 2000. The credit facility bears interest at the prime rate reported in The Wall Street Journal (9.50% at September 30, 2000) plus .75%, and is secured by the borrowers' interests in certain commercial loans and by a pledge of their outstanding capital stock. Repayment of the credit facility is guaranteed by the Company. The facility is due February 1, 2001. 61 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 5 - DEBT - (Continued) In July 1999, the Company established a $15.0 million revolving line of credit with Sovereign Bank, which was increased to $18.0 million on March 30, 2000. Interest is payable monthly at The Wall Street Journal prime rate (9.50% at September 30, 2000) and principal is due upon expiration in July 2002. Advances under this line are to be utilized to acquire commercial real estate or interests therein, to fund or purchase loans secured by commercial real estate or interests, or to reduce indebtedness on loans or interests which the Company owns or holds. The advances are secured by the properties related to these funded transactions. At September 30, 2000, $18.0 million had been advanced under this line. Senior Debt. In July 1997, the Company issued $115.0 million of 12% Senior Notes (the "12% Notes") due August 2004 in a private placement. These notes were exchanged in November 1997 with a like amount of 12% Notes which were registered under the Securities Act of 1933. Provisions of the indenture under which the 12% Notes were issued limit dividend payments, mergers and indebtedness, place restrictions on liens and guarantees and require the maintenance of certain financial ratios. At September 30, 2000, the Company was in compliance with such provisions. At September 30, 2000 and 1999, $80.4 million and $101.4 million, respectively, of 12% Notes were outstanding. Other Debt. Other debt includes an amount outstanding under a $5.0 million revolving line of credit with Sovereign Bank which expires July 2002. Interest accrues at The Wall Street Journal prime rate (9.50% at September 30, 2000) and payment of accrued interest and principal is due upon the expiration date. Advances under this line are with full recourse to the Company and are to be utilized to repay bank debt to acquire commercial real estate or interests therein, to fund or purchase loans secured by commercial real estate or interests, or to reduce indebtedness on loans or interests which the Company owns or holds and for other general corporate purposes. At September 30, 2000, $5.0 million had been advanced under this line. Annual debt principal payments over the next five fiscal years ending September 30 are as follows: (in thousands) 2001 - $7.3 million, 2002 - $23.2 million, 2003 - $23.2 million, 2004 - $81.3 million and 2005 - $ 0. NOTE 6 - INCOME TAXES The following table details the components of the Company's income tax expense from continuing operations for the fiscal years 2000, 1999 and 1998.
Years Ended September 30, ----------------------------------------- 2000 1999 1998 ---- ---- ---- (in thousands) Provision for income tax Current Federal......................................................... $ - $ 11,595 $ 14,536 State........................................................... 116 707 - Deferred.......................................................... 1,522 (1,192) (1,525) ----------- ----------- ----------- $ 1,638 $ 11,110 $ 13,011 =========== =========== ===========
62 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 6 - INCOME TAXES - (Continued) The allocation of the fiscal 1999 provision reported above between current and deferred was based upon the Company's best estimate at the date reported. The actual current provision was ultimately less than reported while the actual deferred provision was ultimately greater than reported by a similar amount. The adjustment is reflected in the fiscal 2000 deferred provision. For fiscal 2000, there is no current federal tax provision for continuing operations because of the utilization of the credits and depletion allowance noted in the table below. A reconciliation between the statutory federal income tax rate and the Company's effective income tax rate is as follows:
Years Ended September 30, ----------------------------------------- 2000 1999 1998 ---- ---- ---- Statutory tax rate.................................................. 35% 35% 35% Statutory depletion................................................. (3) (1) - Non-conventional fuel and low-income housing credits................ (13) (4) (2) Excessive employee renumeration..................................... 2 - - Goodwill............................................................ 10 - - Tax-exempt interest................................................. (8) (1) (1) State income tax.................................................... 6 2 - ---- ---- ---- 29% 31% 32% ==== ==== ====
The components of the net deferred tax (liability) asset are as follows:
Years Ended September 30, --------------------------------- 2000 1999 ------------- ------------ (in thousands) Deferred tax assets related to: Tax credit carryforwards................................................ $ 488 $ 669 Alternative minimum tax credit carryforwards............................ - 1,189 Interest receivable..................................................... 883 738 Unrealized losses on investments........................................ 502 910 Accrued expenses........................................................ 2,514 1,562 Net operating loss carryforwards........................................ - 591 Provision for losses.................................................... 704 1,767 ------------- ------------ $ 5,091 $ 7,426 ------------- ------------ Deferred tax liabilities related to: Property and equipment basis difference................................. (21,879) (20,084) Investment in real estate ventures...................................... (2,678) - ESOP benefits........................................................... (101) (101) Other................................................................... - (310) ------------- ------------ (24,658) (20,495) ------------- ------------ Net deferred tax liability............................................ $ (19,567) $ (13,069) ============= ============
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. No valuation allowance was needed at September 30, 2000 and 1999. 63 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 7 - STOCKHOLDERS' EQUITY On May 12, 1998, the Board of Directors authorized a three-for-one stock split effected in the form of a 200% stock dividend. This stock dividend resulted in the issuance of 13.5 million additional shares of common stock. 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. Earnings per share and weighted average shares outstanding reflect the above transactions. NOTE 8 - 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 a prior year, the ESOP borrowed funds to purchase shares from the Company. The Company borrowed the funds for the ESOP loan from a bank which 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 Company's loan obligation and the unearned benefits expense (a reduction in stockholders' equity) will be reduced by the amount of any loan principal payments made by the Company. 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, 2000, there were 259,000 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 $140,200, $156,400 and $50,400 for the years ended September 30, 2000, 1999 and 1998, respectively. 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 15% 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, subject to certain limitations. Included in general and administrative expenses are $209,500, $167,700, and $188,500 for the Company's contributions for the years ended September 30, 2000, 1999 and 1998, respectively. Stock Options. The Company has three existing employee stock option plans, those of 1989, 1997 and 1999. No further grants may be made under the 1989 plan. Options under the 1989, 1997, and 1999 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 the date of grant. The 1989 plan authorizes the granting of up to 1,769,670 shares (as amended during the fiscal year ended September 30, 1996) 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"). 64 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 8 - EMPLOYEE BENEFIT PLANS - (Continued) In April 1997, the stockholders approved the Resource America, Inc. 1997 Key Employee Stock Option Plan. This plan, for which 825,000 shares were reserved, provides for the issuance of ISO's, non-qualified stock options and SAR's. In fiscal 2000, 1999 and 1998, options for 93,885, 10,000 and 669,115 shares were issued under this plan, respectively. On October 20, 1998, 744,115 of the 754,115 options granted under the 1997 Key Employee Stock Option Plan were canceled. 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. These options vest 25% per year commencing October 20, 1999. In March 1999, the stockholders approved the Resource America, Inc. 1999 Key Employee Stock Option Plan. This plan, for which 1,000,000 shares were reserved, provides for the issuance of ISO's, non-qualified stock options and SAR's. In fiscal 2000 and 1999, options for 106,115 and 728,500 shares, respectively, were issued under this plan. Transactions for the three stock option plans are summarized as follows:
Years Ended September 30, --------------- ---------------------------------------------------------------------- 2000 1999 1998 ------------------------- ------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Outstanding - beginning of year.. 1,870,035 $ 9.77 1,321,366 $ 13.18 685,959 $ 3.85 Granted....................... 200,000 $ 7.49 1,482,615 $ 11.72 669,115 $ 22.21 Exercised..................... (144,568) $ 2.95 (166,831) $ 2.82 (33,708) $ 2.73 Canceled...................... 0 $ - (744,115) $ 21.30 - - Forfeited..................... (282,500) $ 13.96 (23,000) $ 8.40 - - --------- ----------- --------- Outstanding - end of year..... 1,642,967 $ 9.38 1,870,035 $ 9.77 1,321,366 $ 13.18 ========= ========= ========== ========= ========= ======= Exercisable, at end of year...... 560,131 $ 7.10 320,456 $ 2.59 292,629 $ 3.22 ========= ========= ========== ========= ========= ======= Available for grant.............. 447,885 342,385 80,885 ========= ========== ========= Weighted average fair value per share of options granted during the year............... $ 4.93 $ 10.46 $ 19.41 ========= ========= =======
The following information applies to options outstanding as of September 30, 2000.
Outstanding Exercisable ---------------------------------------------- ---------------------------- Weighted Average Weighted Weighted Range of Contractual Average Average Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price - --------------- ------ ------------ -------------- ------ -------------- $.92 50,562 2.55 $ .92 50,562 $ .92 $2.73-$3.00 215,290 2.66 $ 2.87 215,290 $ 2.87 $7.47-$8.08 873,615 4.07 $ 7.94 168,404 $ 8.08 $15.50 503,500 8.64 $ 15.50 125,875 $15.50 --------- ---------- 1,642,967 560,131 ========= ==========
65 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 8 - EMPLOYEE BENEFIT PLANS - (Continued) In connection with the acquisition of Atlas (see Note 11), options for 91,693 shares were issued at an exercise price of $.11 per share to certain employees of Atlas who had held options of Atlas before its acquisition by the Company. As referred to 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, 60%, 125% and 99% in 2000, 1999 and 1998, respectively; risk free interest rate, 6.2%, 5.2% and 5.8% in 2000, 1999 and 1998, respectively; and no dividends during the expected term. 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 $16.4 million ($.69 per share), $16.7 million ($0.73 per share) and $26.2 million ($1.52 per share) in fiscal 2000, 1999 and 1998, respectively. In addition to the various stock option plans, in May 1997 the stockholders approved the Resource America, Inc. Non-Employee Director Deferred Stock and Deferred Compensation Plan (the "Non-Employee Director Plan") for which a maximum of 75,000 shares were reserved for issuance. Under the Non-Employee Director Plan, non-employee directors of the Company are awarded units representing the right to receive one share of Company common stock for each unit awarded. Units do not vest until the fifth anniversary of their grant, except that units will vest sooner upon a change of control of the Company or death or disability of a director, provided the director completed at least six months of service. Upon termination of service by a director, all unvested units are forfeited. In fiscal 2000, 15,000 units were granted under the Non-Employee Director Plan to the Company's five non-employee directors. The fair value of the grants (average $7.94 per unit, $119,100 in total) is being charged to operations over the five-year vesting period. At September 30, 2000, 57,000 units are outstanding under this plan. The tax benefit associated with the exercise of non-statutory stock options and disqualifying dispositions by employees of shares issued reduced taxes payable $405,000 in fiscal 1998; no such reduction was realized in fiscal 1999 or 2000. Such benefits are reflected as additional paid-in capital. 66 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 9 - COMMITMENTS AND CONTINGENCIES The Company leases office space and equipment under leases with varying expiration dates through 2005. Rental expense was $1.6 million, $1.7 million and $749,800 for the years ended September 30, 2000, 1999 and 1998, respectively. At September 30, 2000, future minimum rental commitments for the next five fiscal years were as follows (in thousands): 2001........................... $ 1,386 2002........................... 1,212 2003........................... 895 2004........................... 359 2005........................... 313 The Company is party to employment agreements with certain executives which provide for compensation and certain other benefits. The agreements also provide for severance payments under certain circumstances. 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 2000, 1999 and 1998, operations were charged $2.5 million, $556,000 and $204,000, respectively, with respect to these commitments. The Company is a defendant, together with certain of its officers and directors and its independent auditor, Grant Thornton LLP, in consolidated actions that were instituted on October 14, 1998 in the U.S. District Court for the Eastern District of Pennsylvania by stockholders of the Company, putatively on their own behalf and on behalf of similarly situated stockholders, who purchased shares of the Company's common stock between December 17, 1997 and February 22, 1999. The complaint seeks damages in an unspecified amount for losses allegedly incurred as the result of misstatements and omissions allegedly contained in our periodic reports and a registration statement filed with the SEC. The asserted misstatements and omissions relate, among other matters, to (i) use of the accretion of discount method of recognizing revenue on distressed loans the Company purchased at a discount and (ii) accounting for the profit we realized on its sale of senior lien interests in such loans. The Company believes that the complaint is without merit and is defending itself. The Company is also a defendant in a suit filed in February 2000 in the New York Supreme Court, Chautauqua County, by individuals, putatively on their own behalf and on behalf of similarly situated individuals, who leased property to the Company. The complaint alleges that the Company is not paying lessors the proper amount of royalty revenues derived from the natural gas produced from the wells on the leased property. The complaint seeks damages in an unspecified amount for the alleged difference between the amount of royalties actually paid and the amount of royalties that should have been paid to the plaintiffs and other royalty owners. The Company believes the compliant is without merit and intend 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 Company's financial condition or operations. 67 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 10 - HEDGING ACTIVITIES The Company, through its energy subsidiaries, enters into natural gas futures and option contracts to hedge its exposure to changes in natural gas prices. At any point in time, such contracts may include regulated New York Mercantile Exchange ("NYMEX") futures and options contracts and non-regulated over-the-counter futures contracts with qualified counterparties. NYMEX contracts are generally settled with offsetting positions, but may be settled by the delivery of natural gas. At September 30, 2000, the Company had 76 open natural gas futures contracts related to natural gas sales covering 205,200 dekatherms ("Dth") (net to the Company) maturing through March 2001 at a combined average settlement price of $3.05 per Dth. As these contracts qualify and have been designated as hedges, any gains or losses resulting from market price changes are deferred and recognized as a component of sales revenues in the month the gas is sold. Gains or losses on futures contracts are determined as the difference between the contract price and a reference price, generally prices on NYMEX. The Company's net unrealized loss related to open NYMEX contracts was approximately $435,000 at September 30, 2000, and its net unrealized gain was approximately $83,000 at September 30, 1999. The Company recognized a loss of $832,000 on settled contracts covering natural gas production for the year ended September 30, 2000, and gains of $35,000 and $161,000 for the years ended September 30, 1999 and 1998, respectively. Although hedging provides the Company some protection against falling prices, these activities could also reduce the potential benefits of price increases, depending upon the instrument. NOTE 11 - ACQUISITIONS On August 31, 1999, the Company acquired all of the common stock of Viking Resources in exchange for 1,243,684 shares of the Company's common stock and the assumption of Viking Resources' debt as described below. Viking Resources is a company primarily involved in the energy finance business through the syndication of oil and gas properties in the Appalachian Basin. The Viking Resources acquisition was recorded under the purchase method of accounting and, accordingly, the results of operations of Viking Resources are included in the Company's consolidated financial statements commencing September 1, 1999. The purchase price has been allocated to assets acquired and liabilities assumed based on the fair market value at the date of acquisition as summarized below (in thousands). Estimated fair value of assets acquired................................................. $ 48,289 Liabilities assumed..................................................................... (19,910) Common stock issued..................................................................... (12,437) --------------- Net cash (paid)......................................................................... $ (15,942) ===============
This acquisition was immaterial to the results of operations of the Company, and therefore pro forma information is excluded. On September 29, 1998, the Company acquired all the common stock of Atlas Group (now Atlas America) in exchange for 2,063,496 shares of the Company's common stock and the assumption of Atlas Group's debt as described below. Atlas Group is a company primarily involved in the energy finance business through the syndication of oil and gas properties in the Appalachian Basin. 68 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 11 - ACQUISITIONS - (Continued) The Atlas Group acquisition was recorded under the purchase method of accounting and, accordingly, the results of operations of Atlas Group are included in the Company's consolidated financial statements commencing September 29, 1998. The effect on the Company's operations for fiscal 1998 was immaterial. 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 ===========
The following table reflects unaudited pro forma combined results of operations of the Company and Atlas Group presented as if that the acquisition had taken place on October 1, 1997:
Year Ended September 30, ------------- 1998 (unaudited) (in thousands, except per share amounts) Revenues................................................................................ $ 107,653 Net income before extraordinary item.................................................... 26,584 Net income.............................................................................. 26,823 Basic earnings per share: Net income before extraordinary item.................................................. $ 1.42 Net income............................................................................ $ 1.43 Diluted earnings per share: Net income before extraordinary item.................................................. $ 1.38 Net income............................................................................ $ 1.38
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, 1997, or of future results of operations of the consolidated entities. 69 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 12 - DISCONTINUED OPERATIONS In February 2000, the Company adopted a plan to sell Fidelity Leasing, Inc. and subsidiaries ("FLI"), its small ticket equipment leasing business which was sold August 2000. Accordingly, FLI is reported as a discontinued operation for the three years ended September 30, 2000, 1999 and 1998. In connection with the sale, the Company received a non-interest bearing note that is payable to the extent that payments are made on a pool of FLI lease receivables and refunds are received with respect to certain tax receivables. The lease receivables pool consists of receivables that, as of June 30, 2000, were aged more than 90 days or on FLI's "watch list", or had an outstanding balance of $200,000 or more that would have rated "not pass" under purchaser's credit policy. In addition, $10.0 million was placed in escrow until March 31, 2004 as security for the Company's indemnification obligations to the purchaser. Under certain circumstances up to $5.0 million can be released from the escrow prior to March 31, 2004. The Company recorded a discount and an allowance for possible losses aggregating $8.9 million against the note and escrow. This allowance is reviewed periodically so that it is maintained at a level that is estimated by the Company to be necessary to provide for additional possible losses on the note and escrow. Net assets of FLI at September 30, 1999 were $79.9 million and are summarized in the following table (in thousands): Cash and cash equivalents............................................................................ $ 10,139 Investment in leases and notes receivable, net of $10,017 allowance.................................. 407,904 Net fixed assets..................................................................................... 4,040 Other assets......................................................................................... 19,084 Debt................................................................................................. (343,794) Accounts payable and accrued liabilities............................................................. (17,461) ------------- Net assets of discontinued FLI operations............................................................ $ 79,912 =============
Summarized operating results of discontinued FLI operation are as follows:
Years Ended September 30, ------------------------------------------ 2000 1999 1998 ----------- ----------- ----------- (in thousands) Net revenues........................................................... $ 29,552 $ 41,129 $ 13,561 =========== =========== =========== Income from operations before income tax provision..................... $ 775 $ 3,738 $ 4,207 Income tax provision................................................... (299) (1,737) (1,800) ----------- ----------- ----------- Income from discontinued operations.................................... $ 476 $ 2,001 $ 2,407 =========== =========== =========== Gain on disposal before income taxes................................... $ 24,259 $ - $ - Income tax provision................................................... (9,352) - - ----------- ----------- ----------- Gain on disposal of discontinued operations............................ $ 14,907 $ - $ - =========== =========== ===========
On September 28, 1999 the Company adopted a plan to discontinue Fidelity Mortgage Funding, Inc. ("FMF"), its residential mortgage lending business. The business was disposed of in November 2000. Accordingly, FMF is reported as a discontinued operation for the years ended September 30, 2000, 1999 and 1998. Net assets of FMF were $779,000 and $2,394,000 at September 30, 2000 and 1999, respectively, and consist primarily of loan receivables. 70 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 12 - DISCONTINUED OPERATIONS - (Continued) Summarized operating results of the discontinued FMF operation are as follows:
Years Ended September 30, ------------------------------------------ 2000 1999 1998 ----------- ----------- ----------- (in thousands) Net revenues........................................................... $ - $ 1,907 $ 7,022 Loss from operations before income tax benefit......................... - (9,877) (4,243) Income tax benefit..................................................... - 2,190 1,443 ----------- ----------- ----------- Loss from discontinued operations...................................... - (7,687) (2,800) Loss on disposal before income tax benefit............................. (2,952) (423) - Income tax benefit..................................................... 989 148 - ----------- ----------- ----------- Loss on disposal of discontinued operations............................ $ (1,963) $ (275) $ - =========== =========== =========== Summarized results of the discontinued FLI and FMF operations are: Income (loss) from operations of subsidiaries.......................... $ 476 $ (5,686) $ (393) =========== =========== =========== Gain (loss) on disposal of subsidiaries................................ $ 12,944 $ (275) $ - =========== =========== ===========
NOTE 13 -TERMINATION CHARGE As a result of the sale of the Company's equipment leasing operations on August 1, 2000 and its reduced emphasis on real estate finance, two of the Company's officers separated from the Company on September 13, 2000. One officer was the Company's president and chief operating officer and the other was the Company's executive vice President and vice chairman as well as the president of the commercial real estate finance business. Both officers were parties to employment agreements and were terminated in accordance with the terms of those agreements. Accordingly, continuing operations were charged $1.8 million and discontinued operations were charged $2.3 million in the year ended September 30, 2000. NOTE 14 - PUBLIC OFFERING OF UNITS BY PARTNERSHIP In February 2000, the Company's natural gas gathering operations were sold to Atlas Pipeline in connection with a public offering by Atlas Pipeline of 1,500,000 common units. The Company received $16.6 million for the gathering systems, and Atlas Pipeline issued to the Company 1,641,026 subordinated units constituting a 51% limited partner interest in Atlas Pipeline. Because the Company owns more than 50% of Atlas Pipeline, the assets, liabilities, revenues and expenses of Atlas Pipeline are consolidated with those of the Company, and the value represented by non-subordinated common units are shown as a minority interest on the Company's consolidated balance sheet. Our subordinated units are a special class of limited partnership interest in Atlas Pipeline under which our rights to distributions are subordinated to those of the publicly-held common units. The subordination period extends until December 31, 2004 and will continue beyond that date if financial tests specified in the partnership agreement are not met. Our interest also includes a right to receive incentive distributions if the partnership meets or exceeds its minimum operating distribution obligations. 71 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 14 - PUBLIC OFFERING OF UNITS BY PARTNERSHIP - (Continued) In connection with our sale of the gathering systems to Atlas Pipeline, we entered into agreements that: o Require us to connect wells owned or controlled by us that are within specified distances of Atlas Pipeline's gathering systems to those gathering systems and to drill and connect a minimum of 225 wells. o Require us to provide stand-by construction financing to Atlas Pipeline for gathering system extensions and additions to a maximum of $1.5 million per year for five years. o Require us to pay gathering fees to Atlas Pipeline for natural gas gathered by the gathering systems equal to the greater of $.35 per mcf ($.40 per mcf in certain instances) or 16% of the gross sales price of the natural gas transported. o Require us to support a minimum quarterly distribution by Atlas Pipeline to holders of non-subordinated units of $0.42 per unit (an aggregate of $1.68 per fiscal year) until February 2003. We have established a letter of credit administered by PNC Bank to support our obligation. The current face amount of the letter of credit is $5.7 million. The required face amount of the letter of credit reduces $630,000 per quarter. Through September 30, 2000, we had drilled all of the 225 wells required under our agreements with Atlas Pipeline. We have not been required to provide any construction financing. We provided $443,000 in distribution support for the initial quarter of Atlas Pipeline's operations. No distribution support has been required for any subsequent quarter. NOTE 15 - EXTRAORDINARY ITEM During fiscal 2000, 1999, and 1998 the Company acquired $21.0 million, $3.0 million, and $10.6 million, respectively, of its 12% Senior Subordinated Notes Payable at a discount. These transactions resulted in an extraordinary gain of $683,000 (net of taxes of $367,000) in fiscal 2000, $299,000 (net of taxes of $142,000) in fiscal 1999 and $239,000 (net of taxes of $112,000) in fiscal 1998. NOTE 16 - CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE The Company elected early adoption of the provisions of Statement of Position 98-5 effective October 1, 1998 and, accordingly, start-up costs of $59,000 (net of taxes of $28,000) which had been capitalized at September 30, 1998 were charged to operations on October 1, 1998 and are reflected in the consolidated statements of income for the year ended September 30, 1999 as a cumulative effect of a change in accounting principle. NOTE 17 - SUBSEQUENT EVENT In October 2000, the Company completed a dutch auction tender offer acquiring 5,472,021 shares of common stock for approximately $49.2 million, representing approximately 24% of the then outstanding common stock. The acquisition was funded through cash received upon the sale of its small ticket leasing subsidiary. Expenses related to this offer are expected to total approximately $500,000. The effect of this transaction on the September 30, 2000 financial statements would have been to decrease cash from $117.1 million to $67.4 million, to decrease stockholders' equity from $281.2 million to $231.5 million and to decrease outstanding shares from 23,591,980 to 18,119,959. 72 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 18 - OPERATING SEGMENT INFORMATION AND MAJOR CUSTOMERS The Company operates in two principal industry segments: energy and real estate finance. Segment data for the years ended September 30, 2000, 1999 and 1998 are as follows:
Years Ended September 30, ----------------------------------------- 2000 1999 1998 ----------- ----------- ----------- (in thousands) Revenues: Energy.............................................................. $ 70,552 $ 55,093 $ 6,734 Real estate finance................................................. 18,649 45,907 55,834 Corporate........................................................... 10,410 8,089 6,912 ----------- ----------- ----------- $ 99,611 $ 109,089 $ 69,480 =========== =========== =========== Depreciation, depletion and amortization: Energy.............................................................. $ 9,781 $ 5,512 $ 1,273 Real estate finance................................................. 195 136 50 Corporate........................................................... (104) 337 170 ----------- ----------- ----------- $ 9,872 $ 5,985 $ 1,493 =========== =========== =========== Operating profit (loss): Energy.............................................................. $ 7,013 $ 8,619 $ 1,659 Real estate finance................................................. 6,914 35,306 43,710 Corporate........................................................... (8,227) (8,634) (4,593) ----------- ----------- ----------- $ 5,700 $ 35,291 $ 40,776 =========== =========== =========== Identifiable assets: Energy.............................................................. $ 153,840 $ 139,098 $ 88,552 Real estate finance................................................. 202,335 273,922 211,251 Corporate........................................................... 153,029 127,112 92,280 ----------- ----------- ----------- $ 509,204 $ 540,132 $ 392,083 =========== =========== =========== Capital expenditures (excluding assets acquired in business acquisitions): Energy.............................................................. $ 10,936 $ 11,456 $ 2,095 Real estate finance................................................. 130 100 143 Corporate........................................................... - - 93 ----------- ----------- ----------- $ 11,066 $ 11,556 $ 2,331 =========== =========== ===========
Operating profit (loss) represents total revenues less costs attributable thereto, including interest and provision for possible losses, and less depreciation, depletion and amortization, excluding general corporate expenses. The information presented above does not eliminate intercompany transactions of $68,000 and $161,000 in the years ended September 30, 2000 and 1999, respectively. The Company's natural gas is sold under contract to various purchasers. For the year ended September 30, 2000, gas sales to three purchases accounted for 37%, 11% and 11%, respectively, of our total production revenues. Also during fiscal 2000, oil sales to one purchaser accounted for 17% of such revenues. During 1999 and 1998, gas sales to two purchasers accounted for, respectively, 26% and 14%, and 35% and 14% of the Company's total production revenues, respectively. In real estate finance, no revenues from a single borrower exceeded 10% of total revenues. 73 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 19 - SUPPLEMENTAL OIL AND GAS INFORMATION(UNAUDITED) Results of operations for oil and gas producing activities:
Years Ended September 30, ------------------------------------------ 2000 1999 1998 ----------- ----------- ----------- (in thousands) Revenues............................................................ $ 25,231 $ 12,233 $ 4,682 Production costs.................................................... (7,229) (4,806) (2,022) Exploration expenses................................................ (1,110) (560) (503) Depreciation, depletion, and amortization........................... (6,305) (2,897) (809) Income taxes........................................................ (3,759) (635) (263) ------------ ----------- ----------- Results of operations producing activities.......................... $ 6,828 $ 3,335 $ 1,085 =========== =========== ===========
Capitalized Costs Related to Oil and Gas Producing Activities. The components of capitalized costs related to the Company's oil and gas producing activities are as follows:
Years Ended September 30, ------------------------------------------ 2000 1999 1998 ----------- ----------- ----------- (in thousands) Proved properties................................................... $ 84,307 $ 77,207 $ 42,458 Unproved properties................................................. 1,003 847 1,164 Pipelines, equipment and other interests............................ 19,493 18,931 7,645 ----------- ----------- ----------- Total........................................................... 104,803 96,985 51,267 Accumulated depreciation, depletion and amortization................ (26,966) (19,019) (15,611) ----------- ----------- ----------- Net capitalized costs........................................... $ 77,837 $ 77,966 $ 35,656 =========== =========== ===========
Costs Incurred in Oil and Gas Producing Activities. The costs incurred by the Company in its oil and gas activities during fiscal years 2000, 1999 and 1998 are as follows:
Years Ended September 30, ------------------------------------------ 2000 1999 1998 ----------- ----------- ----------- (in thousands) Property acquisition costs: Unproved properties............................................... $ 168 $ 17 $ 378 Proved properties................................................. 1,017 37,454 19,436 Exploration costs................................................. 1,095 658 816 Development costs................................................. 9,422 9,008 416
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. a petroleum engineering firm. The Company's oil and gas reserves are located within the United States. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future net revenues and the timing of development expenditures. The reserve data presented represent estimates only and should not be construed as being exact. In addition, the standardized measures of discounted future net cash flows may not represent the fair market value of the Company's oil and gas reserves or the present value of future cash flows of equivalent reserves, due to anticipated future changes in oil and gas prices and in production and development costs and other factors for which effects have not been provided. 74 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 19 - SUPPLEMENTAL OIL AND GAS INFORMATION(UNAUDITED) - (Continued) The standardized measure of discounted future net cash flows is information provided for the financial statement user as a common base for comparing oil and gas reserves of enterprises in the industry.
Gas Oil ------------ ----------- (mcf) (bbls) ------------ ----------- Balance at September 30, 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 Current additions................................................... 29,705,025 - Purchase of reserves in place....................................... 18,786,968 1,187,326 Transfer to limited partnerships.................................... (18,221,632) - Revisions........................................................... (7,639,494) 10,196 Production.......................................................... (4,342,430) (85,045) ------------ ----------- Balance September 30, 1999.......................................... 108,172,010 1,684,991 Current additions................................................... 24,046,850 16,031 Sales of reserves in-place.......................................... (304,428) (14,200) Purchase of reserves in place....................................... 1,047,931 - Transfer to limited partnerships.................................... (18,039,097) - Revisions........................................................... 4,659,432 275,806 Production.......................................................... (6,440,154) (195,974) ------------- ------------ Balance September 30, 2000.......................................... 113,142,544 1,766,654 ============ =========== Proved developed reserves at September 30, 2000................................................ 74,332,754 1,766,654 September 30, 1999................................................ 66,215,748 1,684,991 September 30, 1998................................................ 49,868,113 572,514
75 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 19 - SUPPLEMENTAL OIL AND GAS INFORMATION(UNAUDITED) - (Continued) 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.
Years Ended September 30, ------------------------------------------ 2000 1999 1998 ----------- ----------- ----------- (in thousands) Future cash inflows................................................. $ 555,121 $ 349,953 $ 240,922 Future production and development costs........................... (208,451) (156,853) (102,557) Future income tax expense......................................... (104,004) (46,232) (14,278) ----------- ----------- ----------- Future net cash flows............................................... 242,666 146,868 124,087 Less 10% annual discount for estimated timing of cash flows............................................ (144,067) (88,093) (80,313) ----------- ----------- ----------- Standardized measure of discounted future net cash flows............................................. $ 98,599 $ 58,775 $ 43,774 =========== =========== ===========
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.
Years Ended September 30, ------------------------------------------ 2000 1999 1998 ----------- ----------- ----------- (in thousands) Balance, beginning of year............................................. $ 58,775 $ 43,774 $ 10,123 Increase (decrease) in discounted future net cash flows: Sales and transfers of oil and gas net of related costs............. (18,002) (7,427) (2,660) Net changes in prices and production costs.......................... 47,046 6,173 171 Revisions of previous quantity estimates............................ (1,204) (6,197) 597 Extensions, discoveries, and improved recovery less related costs....................................... 22,255 11,006 194 Purchases of reserves in-place...................................... 1,509 26,276 34,935 Sales of reserves in-place, net of tax effect....................... (293) - (30) Accretion of discount............................................... 7,522 4,915 1,012 Net change in future income taxes................................... (23,757) (15,814) (3,770) Other............................................................... 4,748 (3,931) 3,202 ----------- ----------- ----------- Balance, end of year................................................... $ 98,599 $ 58,775 $ 43,774 =========== =========== ===========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 76 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 our definitive proxy statement with respect to our 2001 annual meeting of stockholders, to be filed on or before January 29, 2001 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be set forth in our 2001 proxy statement, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item will be set forth in our 2001 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 our 2001 proxy statement, and is incorporated herein by reference. 77 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report on Form 10-K: 1. Financial Statements Report of Independent Certified Public Accountants Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 2. Financial Statement Schedules Schedule IV - Mortgage Loans on Real Estate 78 SCHEDULE IV RESOURCE AMERICA, INC. & SUBSIDIARIES MORTGAGE LOANS ON REAL ESTATE September 30, 2000
Final Periodic Maturity Payment Description Interest Rate Date Terms ----------- ------------- ---- ----- FIRST MORTGAGES Hotel/Commercial Office, GA Fixed interest rate of 14% 12/31/15 (a) Hotel, NE Fixed interest rate of 14.5% 09/30/02 (a) Condominium units, NC Fixed interest rate of 8% 03/31/02 (a) Apartment bldg. PA Fixed interest rate of 14% 10/01/02 (a) Office bldg., PA (3 loans) Interest at 85% of prime 09/30/14 (a) Apartment bldg., IL (3 loans) Fixed interest rate of 7.5% 09/30/02 (a) Apartment bldg., CT Fixed interest rate of 13% 09/30/11 (a) JUNIOR LIEN LOANS Apartment bldg., FL Fixed interest rate of 13% 06/01/10 (a) Office bldg., NC Fixed interest rate of 11.5% 12/31/11 (a) Apartment bldg. NJ Fixed interest rates of 11.25% 09/01/05 (a) Apartment bldg., CT Fixed interest rate of 15% 01/01/14 (a) Apartment bldg., PA Fixed interest rate of 14.5% 12/31/02 (a) Apartment bldg., NJ Fixed interest rate of 9% 01/01/03 (a) Apartment bldg., NJ Fixed rates of 8% 10/31/08 (a) Apartment bldg., IL Fixed interest rate of 7.5% 04/30/03 (a) Office bldg. MD Fixed at 8.8% 10/01/03 (a) Office bldg., PA (3 loans) Fixed rates ranging from 6.85% to 12% 08/01/08 (a) Office bldg., PA Fixed interest rate of 10.6% 02/07/01 (a) Office bldg., DC Interest rate of prime plus 3% 06/01/00 (a) Office bldg., NJ (3 loans) Fixed interest rate of 9.75% 02/07/01 (a) Office bldg., PA (3 loans) Rate ranging from 12% to 85% of the rate for 09/30/03 (a) $100,000 CD's Apartment bldg. CT Fixed interest rate of 7.5% 07/01/03 (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% 07/01/16 (a) Apartment bldg., PA 85% of 30 day $100,000 rate CD plus 2.75% 05/03/29 (a) Apartment bldg., PA Fixed interest rate of 9.28% 11/01/22 (a) Condominium Units, NC Fixed interest rate of 10% 03/23/09 (a) Office bldg., Washington, DC (2 loans) Fixed interest rate of 12% and two thirds of the 30 11/30/98 (a) day treasury rate Office bldg., PA Fixed interest rate of 9% 09/25/02 (a) Industrial bldg., Pasadena, CA 2.75% over the average cost of funds to FSLIC- 05/01/01 (a) insured savings and loan institutions Office bldg., Washington, DC Fixed interest rate of 15% 08/01/08 (a) Retail bldg., VA Fixed interest rate of 9% 02/01/21 (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% 12/01/00 (a) Office/Retail bldg., PA Interest rate of 5% plus 90% of prime 07/01/02 (a) Office bldg., MD Fixed interest rate of 10.635% 04/01/04 (a) - ---------- (a) All net cash flows from the property
79 SCHEDULE IV - (Continued) RESOURCE AMERICA, INC. & SUBSIDIARIES MORTGAGE LOANS ON REAL ESTATE September 30, 1999 (in thousands)
Face Carrying Subject Prior Amount of Amount of Delinquent Description Liens Mortgages Mortgages Interest ----------- ----- --------- --------- -------- FIRST MORTGAGES Hotel/Commercial Office, GA $ - $ 5,800 $ 7,901 $ - Hotel, NE - 6,005 3,383 - Condominium units, NC - 1,670 486 - Apartment bldg., PA - 400 424 - Office bldg., PA - 6,000 4,055 - Apartment bldg., IL (3 loans) - 17,460 19,282 - Apartment bldg., CT - 1,600 1,600 - JUNIOR LIEN LOANS Apartment bldg., FL 2,096 4,100 1,206 Office bldg., NC 1,750 3,500 2,009 - Apartment bldg., NJ 5,962 11,615 5,411 - Apartment bldg., CT 9,375 2,973 1,628 - Apartment bldg., PA 2,570 4,500 5,253 - Apartment bldg., NJ 625 1,798 102 139 Apartment bldg., NJ 2,136 2,600 1,020 - Apartment bldg., IL 10,000 24,083 7,922 - Office bldg., MD 60,000 31,000 38,282 - Office bldg., PA (3 loans) 43,925 44,000 19,613 - Office bldg., PA 840 5,400 952 - Office bldg., DC 685 900 762 - Office bldg., NJ (3 loans) 2,387 4,800 2,503 - Office bldg., PA (3 loans) 2,213 3,116 1,825 - Apartment bldg., CT 11,942 14,500 7,176 - Apartment bldg., PA (2 loans) 1,000 1,454 1,045 - Apartment bldg., PA 2,997 5,000 1,291 - Apartment bldg., PA (31 loans) 2,860 - 757 - Apartment bldg., PA 3,435 2,435 987 - Apartment bldg., PA 2,478 3,155 796 - Condominium Units, NC 3,000 2,064 2,356 - Office bldg., Washington, DC (2 loans) 6,548 13,283 7,547 - Office bldg., PA 1,750 1,150 790 - Industrial bldg., Pasadena, CA 2,000 3,000 516 - Office bldg., Washington, DC 80,684 100,971 20,693 - Retail bldg., VA 1,413 3,961 951 - Retail bldg., MN 2,088 1,776 720 - Retail bldg., WVA 994 1,400 568 - Retail bldg., CA 1,969 2,271 976 - Office/Retail bldg., PA 2,611 3,400 1,385 - Office bldg., MD 75,000 92,000 11,769 - ----------- ----------- -------- --------- Balance at September 30, 1999 $ 410,693 $ 487,839 $184,342 $ 139 =========== =========== ======== =========
80 3. Exhibits 2.1 Stock Purchase Agreement, dated as of May 17, 2000, among European American Bank, AEL Leasing Co., Inc., Resource America, Inc. and FLI Holdings, Inc. (1) 2.1(a) Amendment to Stock Purchase Agreement, dated May 17, 2000 3.1 Restated Certificate of Incorporation of Resource America (2) 3.2 Amended and Restated Bylaws of Resource America (2) 4.1 Indenture, dated as of July 22, 1997, between Resource America and The Bank of New York, as trustee, with respect to Resource America's 12% Senior Notes due 2004 (3) 10.1 Resource America's 1989 Key Employee Stock Option Plan, as amended (4) 10.2 Resource America's 1997 Key Employee Stock Option Plan (5) 10.3 Resource America's 1997 Non-Employee Director Deferred Stock and Deferred Compensation Plan (5) 10.4 Resource America's 1999 Key Employee Stock Option Plan (6) 10.5 Employment Agreement between Edward E. Cohen and Resource America (7) 10.6 Employment Agreement between Scott Schaeffer and Resource America(1) 10.6(a) Separation Agreement and General Release 10.7 Employment Agreement between Daniel G. Cohen and Resource America(1) 10.7(a) Separation Agreement and General Release 10.8 Employment Agreement between Steven J. Kessler and Resource America (1) 10.9 Employment Agreement between Nancy J. McGurk and Resource America(1) 10.10 Employment Agreement between Jonathan Z. Cohen and Resource America 10.11 Loan Agreement, dated as of September 28, 1999, among Atlas America, Inc., Resource Energy, Inc., Viking Resources Corporation, PNC Bank, National Association, as Issuing Bank and Agent, First Union National Bank, as Syndication Agent, and others(8) 10.11(a) First Amendment to Loan Agreement, dated as of January 24, 2000 10.12 Amended and Restated Loan Agreement, dated December 14, 1999, among Resource Properties XXXII, Inc., Resource Properties XXXVIII, Inc., Resource Properties II, Inc., Resource Properties 51, Inc., Resource Properties, Inc., Resource America and Jefferson Bank 10.13 Revolving Credit Loan and Security Agreement dated July 27, 1999 by and between Resource Properties, Inc., Resource Properties 53, Inc., Resource Properties XXIV, Inc., Resource Properties XL, Inc. and Sovereign Bank 10.13(a) Modification of Revolving Credit Loan and Security Agreement dated March 30, 2000 81 10.14 Revolving Credit Loan Agreement dated July 27, 1999 be and between Resource America, Inc. and Sovereign Bank 12 Computation of ratios 21 List of subsidiaries 23 Consent of Wright & Company, Inc. 27 Financial data schedule 82 (b) Reports on Form 8-K We filed a Form 8-K dated August 10, 2000 reporting, in Item 2, the completion of the sale of Fidelity Leasing. - --------------- (1) Filed previously as an exhibit to our Current Report on Form 8-K filed on May 18, 2000 and by this reference incorporated herein. (2) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended December 31, 1999 and by this reference incorporated herein. (3) Filed previously as an exhibit to our Registration Statement on Form S-4 (Registration No. 333-40231) and by this reference incorporated herein. (4) Filed previously as an exhibit to our Registration Statement S-1 (Registration No. 333-03099) and by this reference incorporated herein. (5) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and by this reference incorporated herein. (6) Filed previously as an exhibit to our Definitive Proxy Statement for the 1999 annual meeting of stockholders and by this reference incorporated herein. (7) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and by this reference incorporated herein. (8) Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended September 30, 1999 and by this reference incorporated herein. 83 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 28, 2000 By: /s/ Edward E. Cohen -------------------------------------- Chairman of the Board, President 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 28, 2000. /s/ Edward E. Cohen Chairman of the Board, President and Chief - --------------------------- Executive Officer EDWARD E. COHEN /s/ Carlos C. Campbell Director - --------------------------- CARLOS C. CAMPBELL /s/ Daniel G. Cohen Director - --------------------------- DANIEL G. COHEN /s/ Andrew M. Lubin Director - --------------------------- ANDREW M. LUBIN /s/ P. Sherrill Neff Director - --------------------------- P. SHERRILL NEFF /s/ Scott F. Schaeffer Director - --------------------------- SCOTT F. SCHAEFFER /s/ Alan D. Schreiber Director - --------------------------- ALAN D. SCHREIBER /s/ John S. White Director - --------------------------- JOHN S. WHITE /s/ Steven J. Kessler Senior Vice President and Chief Financial - --------------------------- Officer STEVEN J. KESSLER /s/ Nancy J. McGurk Vice President-Finance and Chief Accounting - --------------------------- Officer NANCY J. McGURK 84 EXHIBIT INDEX 2.1 Stock Purchase Agreement, dated as of May 17, 2000, among European American Bank, AEL Leasing Co., Inc., Resource America, Inc. and FLI Holdings, Inc. (1) 2.1(a) Amendment to Stock Purchase Agreement, dated May 17, 2000 3.1 Restated Certificate of Incorporation of Resource America (2) 3.2 Amended and Restated Bylaws of Resource America (2) 4.1 Indenture, dated as of July 22, 1997, between Resource America and The Bank of New York, as trustee, with respect to Resource America's 12% Senior Notes due 2004 (3) 10.1 Resource America's 1989 Key Employee Stock Option Plan, as amended (4) 10.2 Resource America's 1997 Key Employee Stock Option Plan (5) 10.3 Resource America's 1997 Non-Employee Director Deferred Stock and Deferred Compensation Plan (5) 10.4 Resource America's 1999 Key Employee Stock Option Plan (6) 10.5 Employment Agreement between Edward E. Cohen and Resource America (7) 10.6 Employment Agreement between Scott Schaeffer and Resource America(1) 10.6(a) Separation Agreement and General Release 10.7 Employment Agreement between Daniel G. Cohen and Resource America(1) 10.7(a) Separation Agreement and General Release 10.8 Employment Agreement between Steven J. Kessler and Resource America (1) 10.9 Employment Agreement between Nancy J. McGurk and Resource America(1) 10.10 Employment Agreement between Jonathan Z. Cohen and Resource America 10.11 Loan Agreement, dated as of September 28, 1999, among Atlas America, Inc., Resource Energy, Inc., Viking Resources Corporation, PNC Bank, National Association, as Issuing Bank and Agent, First Union National Bank, as Syndication Agent, and others(8) 10.11(a) First Amendment to Loan Agreement, dated as of January 24, 2000 10.12 Amended and Restated Loan Agreement, dated December 14, 1999, among Resource Properties XXXII, Inc., Resource Properties XXXVIII, Inc., Resource Properties II, Inc., Resource Properties 51, Inc., Resource Properties, Inc., Resource America and Jefferson Bank 10.13 Revolving Credit Loan and Security Agreement dated July 27, 1999 by and between Resource Properties, Inc., Resource Properties 53, Inc., Resource Properties XXIV, Inc., Resource Properties XL, Inc. and Sovereign Bank 10.13(a) Modification of Revolving Credit Loan and Security Agreement dated March 30, 2000 85 10.14 Revolving Credit Loan Agreement dated July 27, 1999 be and between Resource America, Inc. and Sovereign Bank 12 Computation of ratios 21 List of subsidiaries 23 Consent of Wright & Company, Inc. 27 Financial data schedule 86 EX-2.1(A) 2 0002.txt EXHIBIT 2.1(A) AMENDMENT TO STOCK PURCHASE AGREEMENT This Amendment (this "Amendment") to the Stock Purchase Agreement dated May 17, 2000 (the "Agreement") among European American Bank and AEL Leasing Co., Inc. ("Purchasers") and RESOURCE America, Inc. and FLI Holdings, Inc. ("Sellers") for the sale of the outstanding capital stock of Fidelity Leasing, Inc. (the "Company") is made between the Purchasers and the Sellers as of August 1, 2000. WHEREAS, pursuant to Section 14.07 of the Agreement, Purchasers wish to waive certain obligations of Sellers under the Agreement and Sellers wish to waive certain obligations of Purchasers under the Agreement and; pursuant to Section 14.08 of the Agreement the Purchasers and the Sellers wish to amend the Agreement as set out hereto. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements set forth herein and intending to be legally bound hereby, the parties hereto hereby agrees as follows: (1) Definitions. Capitalized terms used and not otherwise defined herein shall have the respective meanings assigned to such terms in the Agreement unless otherwise stated. (2) Waiver by Purchasers. Purchasers hereby waive the requirement set forth in Section 4.01(a), 5.02 and 5.06 of the Agreement that Sellers obtain the consents set forth as items 1, 2, 4, 8, 9, 16 and 17 in Section 2.06 of the Disclosure Schedule (collectively, the "Third Party Consent") and acknowledge and agree that they are responsible for any breaches or defaults under the agreements described by those items as a result of the failure of Sellers to obtain the Third Party Consent. Further, Purchasers hereby waive the requirement set forth in Section 4.01(a), 5.02 and 5.05 that Sellers obtain the consent or approval of the Governmental or Regulatory Authorities set forth in Section 2.07 of the Disclosure Schedule to consummate the transactions contemplated by the Agreement (the "Waived Approvals"). (3) Waiver by Sellers. Sellers hereby waive the requirement set forth in Section 4.14 and 6.02 of the Agreement that Purchasers secure, prior to or at the Closing, the release of the guaranties set forth as items 1, 3, 4, 6 and 7 in Section 4.14 of the Disclosure Schedule (collectively, the "Guaranties"). (4) Reduction of the Purchase Price. The aggregate purchase price for the Shares set out in Section 1.02 of the Agreement shall be reduced to $63,100,000.00 (the "Purchase Price"). (5) Amendment to Section 1.03(i) of the Agreement. Section 1.03(i) of the Agreement is hereby amended and restated as follows. An amount in cash equal to $53,100,000 less the principal amount of the Note referred to in clause (iii) below by wire transfer of immediately available funds to such U.S. dollar account as Sellers may direct by writ notice to Purchasers, such written notice to be provided at least two (2) Business Days before the Closing Date; (6) Amendment to Section 11.02(a) of the Agreement. Section 11.02(a) of the Agreement is hereby amended and restated as follows: Purchasers agree to indemnify each Seller and its officers, directors, employees, agents and Affiliates in respect of, and hold each of them harmless from and against, any and all Losses suffered, incurred or sustained by any of them or to which any of them becomes subject, resulting from, arising out of or relating to (i) any misrepresentation breach of warranty or non-fulfillment of or failure to perform any covenant or agreement on the party of Purchasers contained in this Agreement (determined in all cases as if the terms "material" or "materially" were not included therein) (ii) the failure of Sellers to obtain the Third Party Consent and (iii) the Guaranties. (7) Assignment of Canadian Subsidiaries The Purchasers hereby assign their right to acquire the shares (the "Canada Shares") of Fidelity Leasing Canada Inc. ("Fidelity Canada") to ABN AMRO Bank Canada ("ABN AMRO"). ABN AMRO is required to obtain the consent of the Superintendent of Financial Institutions pursuant to Section 494(4) of the Bank Act (the "Consent") to permit it to acquire the shares of Fidelity Canada. The Sellers are required to obtain a Section 116 Certificate (the "Tax Consent") to permit them to transfer the Canada Shares of Fidelity Canada to ABN AMRO. Purchasers and Sellers agree to use their commercially reasonable best efforts to obtain the Consent and the Tax Consent, respectively, as soon as possible. Purchasers shall reimburse Sellers for all reasonable costs and expenses not to exceed $10,000.00 dollars incurred by them in obtaining the Tax Consent. Neither the Consent nor the Tax Consent can be obtained by the closing date under the Agreement which will be August 1, 2000 (the "Closing"). Prior to Closing, the Company will transfer the Canada Shares to Fidelity Leasing Holdings, Inc. ("Holdings") and immediately prior to such transfer the Company will pay U.S.$300,000 to Fidelity Canada for newly issued common shares of Fidelity Cananda. Fidelity Canada will use the cash from this stock issuance to repay a portion of its intercompany debt to the Company. At Closing, Holdings will transfer the Canada Shares to the Escrow Agent who will hold them under the terms of the Escrow Agreement pending the obtaining of the Consent and the Tax Consent. When the Consent and the Tax Consent are obtained the Canada Shares shall forthwith be released by the Escrow Agent on behalf of the Sellers to ABN AMRO for consideration of $1. During the period from Closing to the transfer of Fidelity Canada to ABN AMRO (the "Transitional Period") the Purchasers agree to procure that ABN AMRO will provide to the Sellers the services necessary for the management control and operations of Fidelity Canada and its subsidiaries and during the Transitional Period to operate Fidelity Canada and its subsidiaries in the ordinary course of business and for the avoidance of doubt from Closing the Purchasers will be responsible for the funding of Fidelity Canada and its subsidiaries. Purchasers agree to indemnify Seller and its officers, directors, employees, agents and Affiliates in respect of, and hold each of them harmless from and against, any and all losses suffered, incurred or sustained by any of them or to which any of them becomes subject, resulting from, arising out of or relating to actions taken by ABN AMRO in the course of operating Fidelity Canada and its subsidiaries during the Transitional Period, except for any losses suffered or incurred in respect of performing the obligations under the Agreement. (8) Amendment to Section 11.01(a) of the Agreement. Section 11.01(a) of the Agreement is hereby amended by the addition of the following: (vii) any of the payments set out in Schedule 11.01(a) which are not received by the Company by August 1, 2003. (9) Amendment to Schedules. Schedule 11.01(a) shall be added to the Agreement. (10) Amendment to Section 8.04 of the Agreement Section 8.04 of the Agreement is hereby amended and restated as follows: Any refunds received by Purchasers, the Company, any of its Subsidiaries or their successors of Taxes of the Company or its Subsidiaries relating to taxable periods or portions thereof ending on or before the Closing Date (except for the tax refunds included in the Note) shall be for the account of Sellers, and Purchasers shall pay over to Sellers any such refund received by Purchasers, the Company, any of its Subsidiaries or their successors within five (5) business days of receipt. Purchasers shall, if Sellers so request and at Sellers' expense, cause the relevant entity to file for and obtain any refunds to which Sellers are entitled under this Section 8.04. Purchasers shall permit Sellers to control (at Sellers' expense) the prosecution of any such refund claimed, and shall cause the relevant entity to authorize by appropriate power-of-attorney such persons as Sellers shall designate to represent such entity with respect to such refund claimed. (11) Deduction for Payments to Employees. All payments made to employees of the Company on or before the Closing Date, including all amounts paid by Sellers pursuant to the contracts described in Section 5.11 of the Agreement and described as the "Initial Bonus" as defined in those contracts, shall be deducted by Sellers (or the Company) on their tax returns for the period including the Closing Date and shall not be deducted by the Purchasers (or by the Company for any period after the Closing Date). (12) Survival. The covenants and agreements of Sellers and Purchasers contained in this Amendments shall survive the Closing. (13) Effect on the Agreement. Except as set forth herein, all terms and provisions of the Agreement shall remain in full force and effect in accordance with the terms thereof. (14) Counterparts. This Amendment may be executed in two or more counterparty, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have cause this Amendment to be executed and delivered by their duly authorized representatives as of the date first written above. EUROPEAN AMERICAN BANK By: _________________________ Name: Title: AEL LEASING CO., INC. By: _________________________ Name: Title: RESOURCE AMERICA, INC. By: _________________________ Name: Title: FLI HOLDINGS, INC. By: _________________________ Name: Title: Schedule 11.01(a) Payment due from SPC I TRUST $575,205.22 Payment due from various vendors $215,457.71 as a result of overpayment EX-10.6(A) 3 0003.txt EXHIBIT 10.6(A) SEPARATION AGREEMENT AND GENERAL RELEASE WHEREAS, Scott F. Schaeffer (the "Employee") had been employed by Resource America, Inc. (the "Employer") until his separation from employment which was effective on September 13, 2000 (the "Separation Date"). WHEREAS, the Employer and the Employee entered into an Employment Agreement dated October 5, 1999 (the "Employment Agreement"), and the Employee is willing to waive any and all payments, benefits and rights under such Employment Agreement and any separation benefits which may otherwise have been applicable to the Employee, in exchange for the payments and benefits described in this Agreement. WHEREAS, the Employer and the Employee have determined that, effective as of the Separation Date, the Employee was separated from employment with the Employer on the terms and conditions set forth in this Agreement. WHEREAS, the parties agree that the Employee shall continue to be a member of the Board of Directors of the Employer (the "Board") as of the Separation Date, and this Agreement shall not be deemed a termination of the Employee's service as a member of the Board. IT IS HEREBY AGREED, by and between the Employee and the Employer, intending to be legally bound hereby, as follows: 1. The Employee, for and in consideration of the commitments of the Employer as set forth in paragraph 3 below, for and on behalf of himself, his successors, beneficiaries, heirs and assigns, does hereby REMISE, RELEASE AND FOREVER DISCHARGE the Employer and each and every one of its affiliated entities, and its and their officers, directors, employees, and agents, and its and their respective successors and assigns, heirs, executors, and administrators, from all causes of action, suits, debts, claims and demands whatsoever in law or in equity, which the Employee ever had, now has, or hereafter may have, or which his heirs, executors, or administrators may have, by reason of any matter, cause or thing whatsoever, from the beginning of his employment to the date of this Agreement, and particularly, but without limitation of the foregoing general terms, any claims arising from or relating in any way to his employment relationship with the Employer, the terms and conditions of that employment relationship, and the termination of that employment relationship, including, but not limited to, any claims arising under Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. ss. 2000e et seq., the Americans with Disabilities Act, 42 U.S.C. ss. 12101 et seq., the Family and Medical Leave Act of 1993 ("FMLA"), 29 U.S.C. ss. 2601 et seq., the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. ss. 1001 et seq., the Pennsylvania Human Relations Act, 43 P.S. ss. 951 et seq., and any other federal or state common law, statutory, or regulatory provision, and any claim for attorneys' fees and costs. The Employer, for and in consideration of the commitments of the Employee as set forth in this Agreement, for and on behalf of itself and each and every one of its subsidiaries, does hereby REMISE, RELEASE AND FOREVER DISCHARGE the Employee and his heirs, executors and administrators, from all causes of action, suits, debts, claims and demands whatsoever in law or in equity, which the Employer ever had, now has, or hereafter may have, or which its subsidiaries may have, by reason of any matter, cause or thing whatsoever, from the beginning of the Employee's employment to the date of this Agreement, arising from or relating in any way to his employment relationship with the Employer, the terms and conditions of that employment relationship, and the termination of that employment relationship if other than that (i) finally determined by a court of competent jurisdiction to be a criminal act, unless 2 undertaken at the direction or authorization of the Employer's Board of Directors or (ii) an action reasonably determined by the Employer to be outside of the scope of his employment by the Employer or outside the scope of the other activities contemplated by Section 2 of the Employment Agreement. In granting the releases contained in this Section 1, the parties are not releasing their rights under this Agreement, and the Employee is not releasing his indemnification rights under Section 9 of the Employment Agreement or his rights to indemnification or contribution under the Employer's by-laws or certificate of incorporation, or his right to compensation as a non-employee director or his right to vested benefits accrued under the terms of any section 401(k) plan, employee stock ownership plan or other employee pension benefit plan governed by the Employee Retirement Income Security Act of 1974, as amended. 2. The Employee further agrees and recognizes that he has permanently and irrevocably severed his employment relationship as an employee of the Employer and that the Employer has no obligation to employ him in the future. 3. In consideration of the Employee's promises contained herein, and in satisfaction of all liabilities and obligations of the Employer to the Employee, except as otherwise specifically provided in this Agreement, including without limitation obligations under the Employment Agreement and other obligations with respect to salary, bonus, severance, notice pay and all other benefits, the Employer agrees to provide the Employee with the following payments and benefits: a. A cash payment (less all applicable tax withholding and other deductions required by law), by wire transfer or other method of payment acceptable to the Employee, on or before the third business day following the execution of this Agreement, equal to $1,452,602.00. The parties acknowledge 3 that the cash payments described in this paragraph compensate the Employee for relinquishing his negotiated contract rights under the Employment Agreement, and, thus, does not constitute wages for Federal income tax withholding or Federal employment tax withholding purposes. b. A cash payment (less all applicable tax withholding and other deductions required by law), by wire transfer or other method of payment acceptable to the Employee, on or before the third business day following execution of this Agreement equal to $23,026.78 in lieu of the Employee's health coverage. The parties acknowledge that the Employee may elect COBRA coverage under the Employer's health benefit plans as required by applicable law. c. The Employee acknowledges that the payments, benefits and rights described in this paragraph 3 are adequate consideration for his release of claims. 4. The Employee has exercised his outstanding stock options granted under the Employer's 1989 Key Employee Stock Option Plan with respect to 16,854 shares of Employer stock, at an exercise price of approximately $2.73 per share (total purchase price of $46,000.00). The Employee agrees that all outstanding stock options to purchase Employer stock granted to the Employee pursuant to the Employer's 1999 Key Employee Stock Option Plan (an aggregate of 100,000 shares) shall terminate as of the Separation Date. 5. The Employee's outstanding stock options with respect to an aggregate of 90,000 shares of Employer stock, which were granted pursuant to the 1997 Key Employee Stock Plan (the "1997 Plan") shall be fully vested and exercisable as of the Separation Date. These stock options granted under the 1997 Plan shall continue in effect until the first to occur of (i) the date the Employee ceases to be a member of the Board or (ii) the end of the applicable option term. The Employee and the Employer acknowledge that, as a result of Internal Revenue Code requirements, the Employee's stock options under the 1997 Plan will be taxed as nonqualified stock options beginning 90 days after the Employee's separation from employment. 4 6. The Employee agrees that his relationship with the Employer is one of confidence and trust. The Employee also recognizes that his position with the Employer gave him substantial access to Confidential Information (as that term is defined below), the disclosure of which to competitors of the Employer could cause the Employer to suffer substantial and irreparable damage. The Employee recognizes, therefore, that it is in the Employer's legitimate business interest to limit any potential appropriation of Confidential Information by him for the benefit of the Employer's competitors and to the detriment of the Employer. Accordingly, the Employee agrees as follows: a. For a period of thirty-six months following the date of this Agreement, as shown below, the Employee will not disclose to any other person or company, nor use for his own personal benefit (unless the Employee reasonably believed that the information used was not, or no longer was, Confidential Information or the information is used in connection with the Employee's services rendered to RAIT Investment Trust) any Confidential Information disclosed to the Employee or of which the Employee becomes or became aware by reason of his employment or association with the Employer. b. The term "Confidential Information" means any and all data and information relating to the business of the Employer (whether or not it constitutes a trade secret), which is or has been disclosed to the Employee or of which the Employee becomes or became aware as a consequence of his employment or relationship with the Employer, and which has value to the Employer and is not generally known by its competitors, including but not limited to information relating to experimental and research work of the Employer, the Employer's 5 methods, processes, tools, machinery, formulas, drawings or appliances, and the financial or business affairs of the Employer relating to services, customers, customer lists, employees or employees' compensation, projections, plans, development, accounting and marketing studies or analyses. Confidential Information shall not include any data or information that has been disclosed voluntarily to the public by the Employer (except where such public disclosure has been made by the Employee or some other person without authorization), or that has been independently developed and disclosed by others, or that otherwise enters the public domain through lawful and legitimate means. c. The Employee agrees that he will not take with him or retain without written authorization any documents, files or other property of the Employer, and the Employee will return promptly to the Employer any such documents, files or property in his possession or custody. In connection with this Agreement, the Employee recognizes that all documents, files and property which the Employee has received and will receive from the Employer, including but not limited to customer lists, handbooks, memoranda, policy manuals, product specifications, and other materials (with the exception of documents relating to benefits to which the Employee is entitled), are for the exclusive use of the Employer and employees who are discharging their responsibilities on behalf of the Employer, and that the Employee has no claim or right to the continued use, possession or custody of such documents, files or property after the Separation Date. d. The Employee acknowledges and agrees that if he should breach any of the covenants, restrictions and agreements contained in this Section 6, irreparable loss and injury would result to the Employer, and that damages arising out of such a breach may be difficult to ascertain. The Employee therefore agrees that, in addition to all other remedies provided at law or at 6 equity, the Employer may petition and obtain from a court of law or equity all necessary temporary, preliminary and permanent injunctive relief to prevent a breach by the Employee of any covenant contained in this Agreement. The Employee agrees further that if it is finally determined by a court that the Employee has breached the terms of this Agreement, the Employer shall be entitled to recover from the Employee all reasonable costs and attorneys' fees incurred as a result of its attempts to redress such a breach or to enforce its rights and protect its legitimate interests. 7. The Employee agrees and acknowledges that this agreement by the Employer, described herein, is not and shall not be construed to be an admission of any violation of any federal, state or local statute or regulation, or of any duty owed by the Employer and that this Agreement is made voluntarily to provide an amicable conclusion of his employment relationship with the Employer. 8. The Employee certifies and acknowledges as follows: a. That he has read the terms of this Agreement, and that he understands its terms and effects, including the fact that, subject to the terms of this Agreement, he has agreed to RELEASE AND FOREVER DISCHARGE the Employer and each and every one of its affiliated entities from any legal action arising out of his employment relationship with the Employer and the termination of that employment relationship; and b. That he has signed this Agreement voluntarily and knowingly in exchange for the consideration described herein, which he acknowledges is adequate and satisfactory to him and which he acknowledges is in addition to any other benefits to which he is otherwise entitled; and 7 c. That he does not waive rights or claims that may arise after the date this Agreement is executed; and d. That the Employer has provided him with a reasonable period of time within which to consider this Agreement and that the Employee has signed on the date indicated below after concluding that this Agreement is satisfactory to him. 9. The Employee and the Employer acknowledge and agree that this Agreement supersedes any and all prior agreements or understandings between the parties, and that, except as set forth expressly herein, no promises or representations have been made in connection with the termination of the Employee's employment, his compensation thereafter or the terms of this Agreement. 10. If any portion or section of this Agreement is deemed by a court of competent jurisdiction to be unenforceable, the remaining portions of the Agreement shall remain in full force and effect. 11. Notwithstanding Section 10, if the Employee contests or otherwise fails to honor the release contained in Section 1, the Employee shall repay all amounts paid to him under this Agreement to the Employer. 12. The Employer shall pay the Employee up to $7,500 as reimbursement for the legal fees paid by the Employee in connection with the negotiation of this Agreement, including the meaning and effect of the release given by the Employee under Section 1 and the Confidential Information covenant given by the Employee under Section 6. The Employer shall maintain directors and officers insurance coverage for the Employee that is at least as extensive as the coverage of any other director who serves as a member of the Board of Directors of the Employer. 8 13. The terms of this Agreement should be interpreted under the laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, and intending to be legally bound hereby, Employee and Employer hereby execute this Agreement as of this 20th day of October, 2000. WITNESS: - --------------------------- ------------------------------ Scott F. Schaeffer ATTEST: RESOURCE AMERICA, INC. - --------------------------- By: ---------------------------- Title: ------------------------- 9 EX-10.7(A) 4 0004.txt EXHIBIT 10.7(A) SEPARATION AGREEMENT AND GENERAL RELEASE WHEREAS, Daniel Cohen (the "Employee") had been employed by Resource America, Inc. (the "Employer") until his separation from employment which was effective on September 13, 2000 (the "Separation Date"). WHEREAS, the Employer and the Employee entered into an Employment Agreement dated October 5, 1999 (the "Employment Agreement"), which superceded the Employee's previous employment agreement from 1997 to which the Employer was a party, and the Employee is willing to waive any and all payments, benefits and rights under such Employment Agreement and any separation benefits which may otherwise have been applicable to the Employee, in exchange for the payments and benefits described in this Agreement. WHEREAS, the Employer and the Employee have determined that, effective as of the Separation Date, the Employee was separated from employment with the Employer on the terms and conditions set forth in this Agreement. WHEREAS, the parties agree that the Employee shall continue to be a member of the Board of Directors of the Employer (the "Board") as of the Separation Date, and this Agreement shall not be deemed a termination of the Employee's service as a member of the Board. IT IS HEREBY AGREED, by and between the Employee and the Employer, intending to be legally bound hereby, as follows: 1. The Employee, for and in consideration of the commitments of the Employer as set forth in paragraph 3 below, for and on behalf of himself, his successors, beneficiaries, heirs and assigns, does hereby REMISE, RELEASE AND FOREVER DISCHARGE the Employer and each and every one of its affiliated entities, and its and their officers, directors, employees, and agents, and its and their respective successors and assigns, heirs, executors, and administrators, from all causes of action, suits, debts, claims and demands whatsoever in law or in equity, which the Employee ever had, now has, or hereafter may have, or which his heirs, executors, or administrators may have, by reason of any matter, cause or thing whatsoever, from the beginning of his employment to the date of this Agreement, and particularly, but without limitation of the foregoing general terms, any claims arising from or relating in any way to his employment relationship with the Employer, the terms and conditions of that employment relationship, and the termination of that employment relationship, including, but not limited to, any claims arising under Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. ss. 2000e et seq., the Americans with Disabilities Act, 42 U.S.C. ss. 12101 et seq., the Family and Medical Leave Act of 1993 ("FMLA"), 29 U.S.C. ss. 2601 et seq., the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. ss. 1001 et seq., the Pennsylvania Human Relations Act, 43 P.S. ss. 951 et seq., and any other federal or state common law, statutory, or regulatory provision, and any claim for attorneys' fees and costs. The Employer, for and in consideration of the commitments of the Employee as set forth in this Agreement, for and on behalf of itself and each and every one of its subsidiaries, does hereby REMISE, RELEASE AND FOREVER DISCHARGE the Employee and his heirs, executors and administrators, from all causes of action, suits, debts, claims and demands whatsoever in law or in equity, which the Employer ever had, now has, or hereafter may have, or which its subsidiaries may have, by reason of any matter, cause or thing whatsoever, from the beginning of the Employee's employment to the date of this Agreement, arising from or relating in any way to his employment relationship with the Employer, the terms and conditions of that employment relationship, and the termination of that employment relationship if other than that (i) finally 2 determined by a court of competent jurisdiction to be a criminal act or (ii) an action reasonably determined by the Employer to be outside of the scope of his employment by the Employer or outside the scope of the other activities contemplated by Section 2 of the Employment Agreement. In granting the releases contained in this Section 1, the parties are not releasing their rights under this Agreement, and the Employee is not releasing his indemnification rights under Section 9 of the Employment Agreement or his rights to indemnification or contribution under the Employer's by-laws or certificate of incorporation, or his right to compensation as a non-employee director or his right to vested benefits accrued under the terms of any section 401(k) plan, employee stock ownership plan or other employee pension benefit plan governed by the Employee Retirement Income Security Act of 1974, as amended. 2. The Employee further agrees and recognizes that he has permanently and irrevocably severed his employment relationship as an employee of the Employer and that the Employer has no obligation to employ him in the future. 3. In consideration of the Employee's promises contained herein, and in satisfaction of all liabilities and obligations of the Employer to the Employee, except as otherwise specifically provided in this Agreement, including without limitation obligations under the Employment Agreement and other obligations with respect to salary, bonus, severance, notice pay and all other benefits, the Employer agrees to provide the Employee with the following payments and benefits: a. A cash payment (less all applicable tax withholding and other deductions required by law), by wire transfer or other method of payment acceptable to the Employee, on or before the third business day following the execution of this Agreement, equal to $1.5 million and an additional cash 3 payment (less all applicable tax withholding and other deductions required by law) on January 5, 2001 equal to $730,635. The parties acknowledge that the cash payments described in this paragraph compensate the Employee for relinquishing his negotiated contract rights under the Employment Agreement, and, thus, does not constitute wages for Federal income tax withholding or Federal employment tax withholding purposes. b. A cash payment (less all applicable tax withholding and other deductions required by law), by wire transfer or other method of payment acceptable to the Employee, on or before the third business day following the execution of this Agreement equal to $32,742 in lieu of the Employee's health coverage. The parties acknowledge that the Employee may elect COBRA coverage under the Employer's health benefit plans as required by applicable law. c. The Employee acknowledges that the payments, benefits and rights described in this paragraph 3 are adequate consideration for his release of claims. 4. The Employee has exercised his outstanding stock options granted under the Employer's 1989 Key Employee Stock Option Plan with respect to 8,454 shares of Employer stock, at an exercise price of approximately $2.73 per share (total purchase price of $23,073.69). The Employee agrees that all outstanding stock options to purchase Employer stock granted to the Employee pursuant to the Employer's 1999 Key Employee Stock Option Plan (an aggregate of 100,000 shares) shall terminate as of the Separation Date. 5. The Employee's outstanding stock options with respect to an aggregate of 216,615 shares of Employer stock, which were granted pursuant to the 1997 Key Employee Stock Plan (the "1997 Plan") shall be fully vested and exercisable as of the Separation Date. These stock options granted under the 1997 Plan shall continue in effect until the first to occur of (i) the date the Employee ceases to be a member of the Board or (ii) the end of the applicable 4 option term. The Employee and the Employer acknowledge that, as a result of Internal Revenue Code requirements, the Employee's stock options under the 1997 Plan will be taxed as nonqualified stock options beginning 90 days after the Employee's separation from employment. 6. The Employee agrees that his relationship with the Employer is one of confidence and trust. The Employee also recognizes that his position with the Employer gave him substantial access to Confidential Information (as that term is defined below), the disclosure of which to competitors of the Employer could cause the Employer to suffer substantial and irreparable damage. The Employee recognizes, therefore, that it is in the Employer's legitimate business interest to limit any potential appropriation of Confidential Information by him for the benefit of the Employer's competitors and to the detriment of the Employer. Accordingly, the Employee agrees as follows: a. For a period of thirty-six months following the date of this Agreement, as shown below, the Employee will not disclose to any other person or company, nor use for his own personal benefit (unless the Employee reasonably believed that the information used was not, or no longer was, Confidential Information) any Confidential Information disclosed to the Employee, or of which the Employee becomes or became aware, by reason of his employment or association with the Employer. b. The term "Confidential Information" means any and all data and information relating to the business of the Employer (whether or not it constitutes a trade secret), which is or has been disclosed to the Employee or of which the Employee becomes or became aware as a consequence of his employment or relationship with the Employer, and which has value to the Employer and is not generally known by its competitors, including but not limited to information relating to experimental and research work of the Employer, the Employer's 5 methods, processes, tools, machinery, formulas, drawings or appliances, and the financial or business affairs of the Employer relating to services, customers, customer lists, employees or employees' compensation, projections, plans, development, accounting and marketing studies or analyses. Confidential Information shall not include any data or information that has been disclosed voluntarily to the public by the Employer (except where such public disclosure has been made by the Employee or some other person without authorization), or that has been independently developed and disclosed by others, or that otherwise enters the public domain through lawful and legitimate means. c. The Employee agrees that he will not take with him or retain without written authorization any documents, files or other property of the Employer, and the Employee will return promptly to the Employer any such documents, files or property in his possession or custody. In connection with this Agreement, the Employee recognizes that all documents, files and property which the Employee has received and will receive from the Employer, including but not limited to customer lists, handbooks, memoranda, policy manuals, product specifications, and other materials (with the exception of documents relating to benefits to which the Employee is entitled), are for the exclusive use of the Employer and employees who are discharging their responsibilities on behalf of the Employer, and that the Employee has no claim or right to the continued use, possession or custody of such documents, files or property after the Separation Date. d. The Employee acknowledges and agrees that if he should breach any of the covenants, restrictions and agreements contained in this Section 6, irreparable loss and injury would result to the Employer, and that damages arising out of such a breach may be difficult to ascertain. The Employee therefore agrees that, in addition to all other remedies provided at law or at 6 equity, the Employer may petition and obtain from a court of law or equity all necessary temporary, preliminary and permanent injunctive relief to prevent a breach by the Employee of any covenant contained in this Agreement. The Employee agrees further that if it is finally determined by a court that the Employee has breached the terms of this Agreement, the Employer shall be entitled to recover from the Employee all reasonable costs and attorneys' fees incurred as a result of its attempts to redress such a breach or to enforce its rights and protect its legitimate interests. 7. The Employee agrees and acknowledges that this agreement by the Employer, described herein, is not and shall not be construed to be an admission of any violation of any federal, state or local statute or regulation, or of any duty owed by the Employer and that this Agreement is made voluntarily to provide an amicable conclusion of his employment relationship with the Employer. 8. The Employee certifies and acknowledges as follows: a. That he has read the terms of this Agreement, and that he understands its terms and effects, including the fact that, subject to the terms of this Agreement, he has agreed to RELEASE AND FOREVER DISCHARGE the Employer and each and every one of its affiliated entities from any legal action arising out of his employment relationship with the Employer and the termination of that employment relationship; and b. That he has signed this Agreement voluntarily and knowingly in exchange for the consideration described herein, which he acknowledges is adequate and satisfactory to him and which he acknowledges is in addition to any other benefits to which he is otherwise entitled; and 7 c. That he does not waive rights or claims that may arise after the date this Agreement is executed; and d. That the Employer has provided him with a reasonable period of time within which to consider this Agreement and that the Employee has signed on the date indicated below after concluding that this Agreement is satisfactory to him. 9. The Employee and the Employer acknowledge and agree that this Agreement supersedes any and all prior agreements or understandings between the parties, and that, except as set forth expressly herein, no promises or representations have been made in connection with the termination of the Employee's employment, his compensation thereafter or the terms of this Agreement. 10. If any portion or section of this Agreement is deemed by a court of competent jurisdiction to be unenforceable, the remaining portions of the Agreement shall remain in full force and effect. 11. Notwithstanding Section 10, if the Employee contests or otherwise fails to honor the release contained in Section 1, the Employee shall repay all amounts paid to him under this Agreement to the Employer. 12. The Employer shall pay the Employee up to $7,500 as reimbursement for the legal fees paid by the Employee in connection with the negotiation of this Agreement, including the meaning and effect of the release given by the Employee under Section 1 and the Confidential Information covenant given by the Employee under Section 6. The Employer shall maintain directors and officers insurance coverage for the Employee that is at least as extensive as the coverage of any other director who serves as a member of the Board of Directors of the Employer. 8 13. The terms of this Agreement should be interpreted under the laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, and intending to be legally bound hereby, Employee and Employer hereby execute this Agreement as of this 20th day of October, 2000. WITNESS: - --------------------------- --------------------------- Daniel Cohen ATTEST: RESOURCE AMERICA, INC. - --------------------------- By: ------------------------- Title: ---------------------- 9 EX-10.10 5 0005.txt EXHIBIT 10.10 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is executed on this 5th day of October, 1999 by and between RESOURCE AMERICA, INC., a Delaware corporation having its principal place of business at 1521 Locust Street, Philadelphia, Pennsylvania 19102 ("RAI") and JONATHAN Z. COHEN ("Cohen"). BACKGROUND A. Since 1998, Cohen has been an officer of RAI and currently he serves as Senior Vice President of RAI. B. Cohen and RAI desire to formally set forth the terms, conditions and agreements regarding Cohen's employment as Senior Vice President of RAI. TERMS NOW, THEREFORE, in consideration of the mutual promises set forth herein, and intending to be legally bound hereby, RAI and Cohen agree as follows: 1. Employment. During the term of this Agreement, Cohen shall be employed as Senior Vice President of RAI. 2. Duties. Cohen shall report to and accept direction from the Chairman of the Board of Directors of RAI and from the Board. Cohen shall serve RAI diligently and to the best of his abilities, but Cohen shall be required to devote only so much of his time and attention to the business of RAI as may be required to fulfill his duties. It is recognized that Cohen in the past has participated, and it is agreed that Cohen in the future may participate in business endeavors separate and apart from RAI. 3. Term. Cohen's employment hereunder shall continue in full force and effect for a period of three (3) years, unless sooner terminated in accordance with the provisions hereof. Such term shall automatically extend so that on any day that this Agreement is in effect, it shall have a then current term of three (3) years. Such automatic extensions shall cease upon RAI's written notice to Cohen of its election to terminate this Agreement at the end of the three (3) year period then in effect. 4. Compensation. (a) Base Compensation. During the period of employment, RAI shall pay to Cohen "Base Compensation" to be established by the Board, initially in an amount equal to Two Hundred Thousand Dollars ($200,000.00) per annum base compensation which Cohen, under existing arrangements approved by the Board, is to receive during calendar 1999 (the "Initial Level"). The Base Compensation will be payable in accordance with the general payroll practices by which RAI pays its executive officers, and the historical practice of RAI's compensation of Cohen. It is understood that RAI, through the compensation committee of the Board, will review Cohen's performance on an annual basis and increase or decrease (but in no event below the Initial Level) such Base Compensation, based upon Cohen's performance. (b) Incentive Compensation. During the period of employment Cohen may receive incentive compensation in the form of cash bonus payments, stock option grants and other forms of incentive compensation, based upon Cohen's performance. (c) Reimbursement of Expenses. RAI shall reimburse Cohen for all reasonable expenses incurred by Cohen in the performance of his duties, including (without limitation) expenses incurred during business-related travel. 5. Benefits. Cohen shall be entitled to receive the following benefits from RAI independent of any other benefits which Cohen may receive from RAI or otherwise: (a) Participation in Benefit Plans. Cohen will participate in all employee benefit plans in effect during the term of Cohen's employment hereunder. (b) Temporary Disability. During any period that Cohen fails to perform his duties hereunder as a result of incapacity due to physical or mental illness Cohen shall continue to receive his full compensation at the rate then in effect for such period until his employment is terminated pursuant to paragraph 6(b) hereof. 6. Termination. Cohen's employment hereunder shall terminate as follows: (a) Death. Cohen's employment shall terminate automatically upon the death of Cohen. 2 (b) Disability. RAI may terminate this Agreement if Cohen becomes disabled by reason of any physical or mental disability whatsoever for more than two hundred forty (240) days in the aggregate during any calendar year and the Board determines, that Cohen, by reason of such physical or mental disability, is rendered unable to perform his duties and services hereunder (a "Disability"); (c) Termination by Cohen for Cause. Cohen may terminate his employment for cause upon thirty (30) days' prior written notice to RAI, with opportunity to cure any condition reasonably susceptible of cure. For the purposes of this paragraph 6(c), cause shall be deemed to exist if any of the following shall occur: (i) without the written consent of Cohen, a substantial change in the services or duties required of Cohen hereunder or the imposition of any services or duties substantially inconsistent with, or in diminution of Cohen's current position, services or duties, or status with RAI; (ii) failure to continue Cohen's coverage under any RAI benefit plan as required under paragraph 5(a) except pursuant to a change to a benefit plan that applies to senior executives of RAI generally or is required by law or regulation; or (iii) any material breach by RAI of any provision of this Agreement; (d) Termination by Cohen Without Cause. Cohen may terminate this Agreement without cause upon one hundred eighty (180) days prior written notice to RAI. (e) Change of Control. Cohen may, in his discretion, terminate his employment upon a Change in Control or Potential Change in Control by sending a Notice of Termination. (f) Termination by RAI. In accordance with paragraph 3 hereof, RAI may terminate this Agreement at the end of the then current three (3) year term. 7. Effect of Termination. (a) Death. Upon the termination of Cohen's employment pursuant to paragraph 6(a) hereof due to Cohen's death, a death benefit shall be paid to Cohen's estate equal to the total amount payable to Cohen under this Agreement until expiration of the term then in effect, assuming that Cohen's total compensation for each year would be equal to the Average Compensation. The death benefit shall be paid in thirty-six (36) equal, consecutive monthly installments, beginning the first month following the month in which Cohen shall have died. 3 (b) Disability. Upon the termination of Cohen's employment pursuant to paragraph 6(b) hereof due to Cohen's disability, Cohen shall be entitled to receive a monthly disability benefit equal to one twelfth (1/12) of the product of (i) the Average Compensation, multiplied by (ii) seventy-five percent (75%). The disability benefit described above shall be paid to Cohen, beginning the first month following the termination pursuant to paragraph 6(b). Cohen's disability benefit shall cease if he resumes his employment with RAI on the terms provided in this Agreement. Disability payments made under this paragraph shall not be reduced by any payments made directly to Cohen by an insurance company. (c) For Cause; Change of Control. Upon the termination of this Agreement either (i) by Cohen for cause pursuant to paragraph 6(c) hereof, (ii) by Cohen pursuant to paragraph 6(e) after a Change in Control or Potential Change of Control or (iii) by RAI pursuant to section 6(f) hereof, then RAI shall provide to Cohen the benefits described in Section 7(c)(1) and 7(c)(2) below (the "Severance Benefits"). (1) Lump-Sum Severance Payment. In lieu of any further compensation payments to Cohen for periods subsequent to the Date of Termination, RAI shall pay to Cohen a lump sum severance payment, in cash, without discount, equal to the sum of the total amount payable to Cohen under this Agreement until expiration of the term then in effect, assuming that Cohen's total compensation for each year would be equal to the Average Compensation. (2) Continued Benefits. For a thirty-six (36) month period after the Date of Termination (the "Benefits Period"), RAI shall provide Cohen with group term life insurance, health insurance, accident and long-term disability insurance benefits (collectively, "Welfare Benefits") substantially similar in all respects to those that Cohen was receiving immediately prior to the Date of Termination (without giving effect to any reduction in such benefits subsequent to a Change in Control). During the Benefits Period, Cohen shall be entitled to elect to change his level of coverage and/or his choice of coverage options with respect to the Welfare Benefits to be provided by RAI to Cohen to the same extent that actively employed senior executives of RAI are permitted to make such changes. (3) Vesting of Options. Upon any termination of this Agreement, the vesting of all options to purchase securities of RAI granted to Cohen during his employment with RAI shall be accelerated to the later of the effective date of termination of this Agreement, or six months after the date such option was granted, and any provision contained in the agreements under which such options were granted that is inconsistent with such acceleration is hereby modified to the extent necessary to provide for such acceleration; such acceleration shall not apply to any option that by its terms would vest prior to the date provided for in this paragraph 7(d). 4 8. Gross-Up Payment. (a) In the event that (i) Cohen becomes entitled to any benefits or payments in connection with the termination of Cohen's employment, whether pursuant to the terms of this Agreement or otherwise, including without limitation the Severance Benefits (collectively, the "Total Benefits"), and (ii) any of the Total Benefits will be subject to the Excise Tax, RAI shall pay to Cohen an additional amount (the "Gross-Up Payment") such that the net amount retained by Cohen, after deduction of any Excise Tax on the Total Benefits and any federal, state and local income taxes, Excise Tax, and FICA and Medicare withholding taxes upon the payment provided for by this paragraph 8(a), shall be equal to the Total Benefits. For purposes of determining whether any of the Total Benefits will be subject to the Excise Tax and the amount of such Excise Tax, the amount of the Total Benefits that shall be treated as subject to the Excise Tax shall be equal to the amount of the Total Benefits reduced by the amount of such Total Benefits that, in the opinion of tax counsel selected by Cohen, at RAI's expense and reasonably acceptable to RAI ("Tax Counsel"), are not excess parachute payments (within the meaning of Section 28OG(b)(1) of the Code). (b) For purposes of this Section 8, Cohen shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Excise Tax is (or would be) payable and state and local income taxes at the highest marginal rate of taxation in the state and locality of Cohen's residence on the Date of Termination, net of the reduction in federal income taxes which could be obtained from deduction of such state and local taxes (calculated by assuming that any reduction under Section 68 of the Code in the amount of itemized deductions allowable to Cohen applies first to reduce the amount of such state and local income taxes that would otherwise be deductible by Cohen). Except as otherwise provided herein, all determinations required to be made under this Section 8 shall be made by Tax Counsel. (c) In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Cohen's employment, Cohen shall repay to RAI, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax, federal, state and local income taxes and FICA and Medicare withholding taxes imposed on the Gross-Up Payment being 5 repaid by Cohen to the extent that such repayment results in a reduction in Excise Tax, FICA and Medicare withholding taxes and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Cohen's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), RAI shall make an additional Gross-Up Payment to Cohen in respect of such excess (plus any interest, penalties or additions payable by Cohen with respect to such excess) at the time that the amount of such excess is finally determined. 9. Indemnification. (a) If Cohen is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (herein a "proceeding"), by reason of the fact that he is or was an employee (which term includes officer, director, agent and any other capacity) of RAI or is or was serving at the request of RAI as an employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as an employee or agent or in any other capacity while serving as an employee or agent, Cohen shall be indemnified and held harmless by RAI to the fullest extent authorized by applicable law, against all expense, liability and loss (including, but not limited to, attorneys' fees, judgments, fines, ERISA excise taxes and penalties and amounts paid or to be paid in settlement) incurred or suffered by Cohen in connection therewith and such indemnification shall continue as to Cohen after he has ceased to be a director, officer, employee or agent and shall inure to the benefit of Cohen's heir, executors, and administrators; provided, however, that RAI shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by Cohen (other than a proceeding to enforce this paragraph 9) only if such proceeding (or part thereof) was authorized directly or indirectly by the Board of RAI. The right to indemnification conferred in this paragraph shall be a contract right and shall include the right to be, promptly upon request, paid by RAI the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that if the Business Corporation Law of the Commonwealth of Pennsylvania requires the payment of such expenses incurred by an employee in his capacity as an employee (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, payment shall be made only upon delivery to RAI of an undertaking, by or on behalf of Cohen, to repay all amounts so advanced if it shall ultimately be determined that such employee is not entitled to be indemnified under this paragraph or otherwise. 6 (b) The indemnification provided by this paragraph shall not be limited or exclude any rights, indemnities or limitations of liability to which Cohen may be entitled, whether as a matter of law, under the Certificate of Incorporation, By-laws of RAI, by agreement, vote of the stockholders or disinterested directors of RAI or otherwise. (c) Cohen, in seeking indemnification under this Agreement (an "Indemnitee"), shall give the other party or parties (the "Indemnitor") prompt written notice of any claim, suit or demand that the Indemnitee believes will give rise to indemnification under this Agreement; provided, however, that the failure to give such notice shall not affect the liability of the Indemnitor under this Agreement unless the failure to give such notice materially and adversely affects the ability of the Indemnitor to defend itself against or to cure or mitigate the damages. Except as hereinafter provided, the Indemnitor shall have the right (without prejudice to the right of the Indemnitee to participate at its expense through counsel of its own choosing) to defend and to direct the defense against any such claim, suit or demand, at the Indemnitor's expense and with counsel chosen jointly by Indemnitor and Indemnitee, and the right to settle or compromise any such claim, suit or demand; provided, however, that the Indemnitor shall not, without the Indemnitee's written consent, which shall not be unreasonably withheld, settle or compromise any claim or consent to any entry of judgment. The Indemnitee shall, at the Indemnitor's expense, cooperate in the defense of any such claim, suit or demand. If the Indemnitor, within a reasonable time after notice of a claim fails to defend the Indemnitee, the Indemnitee shall be entitled to undertake the defense, compromise or settlement of such claim at the expense of and for the account and risk of the Indemnitor. (d) Cohen will be covered during the entire term of this Agreement by Officer and Director liability insurance in amounts and on terms similar to that afforded to other executives and/or directors of RAI or its affiliates, which such insurance shall be paid by RAI. 10. Definitions. Any terms not otherwise defined herein shall have the following meaning: (a) "Average Compensation" means the average of the three highest amounts of annual total compensation received by Cohen during any of the then current calendar year (on an annualized basis) and the then preceding eight (8) calendar years. 7 (b) "Board" means the Board of Directors of RAI. (c) A "Change in Control" means the occurrence of any of the following events: (1) RAI's shareholders approve (or, in the event no approval of RAI's shareholders is required, RAI consummates) a merger, consolidation, share exchange, division or other reorganization or transaction of RAI (a "Fundamental Transaction") with any other corporation, other than a Fundamental Transaction which would result in the voting securities of RAI outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least sixty percent (60%) of the combined voting power immediately after such Fundamental Transaction of (i) RAI's outstanding securities, (ii) the surviving entity's outstanding securities, or (iii) in the case of a division, the outstanding securities of each entity resulting from the division; (2) the shareholders of RAI approve a plan of complete, liquidation or winding-up of RAI or an agreement for the sale or disposition (in one transaction or a series of transactions) of all or substantially all of RAI's assets; or (3) during any period of twenty-four consecutive months, individuals who at the beginning of such period constituted the Board (including for this purpose any new director whose election or nomination for election by RAI's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (e) "Control Effort" means any acting together or undertaking efforts to act together by any Person or Persons, excluding employee benefit plans of RAI, who are, or seek in any direct or indirect manner to become, the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act or any successor provisions thereto), directly or indirectly, of securities of RAI representing twenty-five percent (25%) or more of the combined voting power of RAI's then outstanding securities. (f) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. 8 (g) "Excise Tax" means any excise tax imposed under Section 4999 of the Code or a similar provision that may later be enacted. (h) "Notice of Termination" After a Potential Change in Control or a Change in Control, Cohen may terminate this Agreement by sending a written notice to RAI that shall (i) specify the date of termination (the "Date of Termination") which shall not be more than sixty (60) days from the date such Notice of Termination is given, (ii) indicate the specific provisions of this Agreement that will apply upon such termination and (iii) set forth in reasonable detail the facts and circumstances for the application of the provisions indicated. (i) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act and shall also include any syndicate or group deemed to be a "person" under Section 13(d)(3) of the Exchange Act. (j) "Potential Change in Control" means the occurrence of any of the following: (1) the Board approves a transaction described in Subsection (2) of the definition of Change in Control contained in paragraph 10(c) hereof; (2) the commencement of a proxy or other contest or effort to effectuate a Change in Control; or (3) a Control Effort. (k) "RAI" means Resource America, Inc., a Delaware corporation and any direct or indirect subsidiary of RAI by which Cohen is employed. References to payments, benefits, privileges or other rights to be provided by RAI or such subsidiary by which Cohen is employed, as the case may be, will correspond to the corporate entity obligated to make payments or provide benefits, privileges or other rights pursuant to employee benefit plans affected by the provisions hereof, and in the absence of any such existing plans or provisions, such reference shall be deemed to be to RAI. RAI shall also mean any successor by merger or other business combination to more than one-half of the assets or ownership of RAI. 9 11. Miscellaneous. (a) Severability. In case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal, or unenforceable in any respect such validity, illegality or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision(s) had never been contained herein, provided that such invalid, illegal or unenforceable provision(s) shall first be curtailed, limited or eliminated only to the extent necessary to remove such invalidity, illegality or unenforceability with respect to the applicable law as it shall then be applied. (b) Modification of Agreement. This Agreement shall not be modified by any oral agreement, either expressed or implied, and all modifications thereof shall be in writing and signed by the parties hereto. (c) Waiver. The waiver of any right under this Agreement by any of the parties hereto shall not be construed as a waiver of the same right at a future time or as a waiver of any other rights under this Agreement. (d) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware, without giving affect to the principles of conflicts of laws. (e) Notices. Any notice to be given pursuant to this Agreement shall be sufficient if in writing and mailed by certified or registered mail, postage-prepaid, to the addresses listed below, or to such other address as either party may notify the other of in accordance with this section. If to RAI: Resource America, Inc. 1521 Locust Street Suite 400 Philadelphia, PA 19102 If to Cohen: Jonathan Z. Cohen 1521 Locust Street; Ste. 400 Philadelphia, PA 19102 10 (f) Duplicate Originals and Counterparts. This Agreement may be executed in any number of duplicate originals or counterparts or facsimile counterparts, each of such duplicate original or counterpart or facsimile counterpart shall be deemed to be an original and all taken together shall constitute but one and the same instrument. [INTENTIONALLY LEFT BLANK] 11 IN WITNESS WHEREOF, the parties hereto have executed or caused to be executed this Agreement on the date first above written. RESOURCE AMERICA, INC. By: ----------------------------- JONATHAN Z. COHEN -------------------------------- STATE OF PENNSYLVANIA : : COUNTY OF PHILADELPHIA : On this ___ day of October, 1999, before me, the undersigned, a Notary Public in and for said state personally appeared Edward E. Cohen and Jonathan Z. Cohen, on behalf of Resource America, Inc., a Delaware corporation, known to me or proved to me to be the persons who executed the within instrument of behalf of said corporation and acknowledged to me that they executed the same for the purposes therein stated. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal, the day and year last above written. ------------------------------ Notary Public My Commission Expires: EX-10.11(A) 6 0006.txt EXHIBIT 10.11(A) FIRST AMENDMENT TO LOAN AGREEMENT Among ATLAS AMERICA, INC. RESOURCE ENERGY, INC. VIKING RESOURCES CORPORATION as the Borrowers PNC BANK, NATIONAL ASSOCIATION as the Agent and the Issuing Bank FIRST UNION NATIONAL BANK as the Syndication Agent and THE BANKS PARTY HERETO Dated as of January 24, 2000 FIRST AMENDMENT TO LOAN AGREEMENT THIS FIRST AMENDMENT TO LOAN AGREEMENT (the "First Amendment") made as of January 24, 2000, to that certain Loan Agreement dated as of September 28, 1999 (the Loan Agreement, together with the exhibits and schedules thereto, the "Existing Agreement") among ATLAS AMERICA, INC., a Pennsylvania corporation ("Atlas"), RESOURCE ENERGY, INC., a Delaware corporation ("REI") and VIKING RESOURCES CORPORATION, a Pennsylvania corporation ("Viking"; Atlas, REI and Viking, each, individually a "Borrower" and collectively the "Borrowers"), the financial institutions listed on the signature pages thereto (collectively, the "Banks", and each individually, a "Bank"), PNC BANK, NATIONAL ASSOCIATION as the issuer of the Letters of Credit (in such capacity, the "Issuing Bank") and PNC BANK, NATIONAL ASSOCIATION, in its capacity as Agent for the Banks (in such capacity, the "Agent") and FIRST UNION NATIONAL BANK, in its capacity as Syndication Agent. WITNESSETH: WHEREAS, the Borrowers, the Banks, and the Agent entered into the Existing Agreement pursuant to which the Banks made certain financial accommodations available to the Borrowers, including a revolving credit facility in an aggregate principal amount not to exceed $45,000,000, with a subfacility for the issuance of letters of credit in an aggregate principal amount not to exceed $14,000,000, subject to certain individual and aggregate borrowing limitations as more specifically described therein; and WHEREAS, to induce the Banks to enter into the Existing Agreement and to make available to the Borrowers the credit accommodations thereunder, the Borrowers executed and delivered (or caused certain direct or indirect Subsidiaries of the Borrowers to execute and deliver) to the Agent (for the benefit of the Banks) certain mortgages, security agreements and other Security Documents; and WHEREAS, the Borrowers and certain of their direct and indirect subsidiaries intend to enter into various agreements and to execute a number of actions designed to convey certain of their natural gas gathering system assets (as more fully defined below, the "Pipeline Assets") to a limited partnership (as more fully defined below, the "Atlas Pipeline LP") in consideration of (i) the issuance and transfer of certain ownership interests in the general partner of the Atlas Pipeline LP, (ii) the assumption and repayment of certain indebtedness of the Borrowers to the Banks, and (iii) the payment of certain amounts to the Borrowers (all of the foregoing, the "MLP Transactions"); and WHEREAS, the Borrowers have requested that the Banks consent to the MLP Transactions, and to (i) waive certain provisions of the Existing Agreement, (ii) amend certain provisions of the Existing Agreement, and (iii) agree to release the Liens on the Pipeline Assets granted to or created in favor of the Agent (for the benefit of the Banks) pursuant to the Security Documents, all as more particularly set forth below. NOW THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, and with the intent to be legally bound hereby, the parties hereto agree as follows: ARTICLE I AMENDMENTS TO EXISTING AGREEMENT -------------------------------- Section 1.1 Amended Definitions. On and after the First Amendment Effective Date, Section 1.1 of the Existing Agreement is hereby amended such that the following definitions shall be amended and restated in their entirety: "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 Issuing Bank in accordance with Section 2.9 hereof, the Existing Letters of Credit and the MLP Letter of Credit. "Partnership" and "Partnerships" shall have the meaning ascribed to each term in Section 2.3, and shall specifically exclude Atlas Pipeline LP and Atlas Pipeline Operating Partnership, L.P. "Termination Date" shall mean June 1, 2003, or, if such day is not a Business Day, the Business Day next preceding such date. Section 1.2 Additional Definitions. On and after the First Amendment Effective Date, Section 1.1 of the Existing Agreement is hereby amended such that the following definitions shall be added thereto in the appropriate alphabetical order: "Atlas Pipeline LP" shall mean Atlas Pipeline Partners, L.P., a Delaware limited partnership. "Construction Financing Commitment" shall mean the commitments of Atlas and REI pursuant to the Omnibus Agreement to provide construction financing to Atlas Pipeline LP through the purchase from time to time of its common units, in an amount not to exceed $1,500,000 in the aggregate during each 12 month period commencing on the date of the Omnibus Agreement and on each of the first four anniversaries of such date. "Distribution Agreement" shall mean that certain Distribution Support Agreement to be entered into by and among Atlas Pipeline LP and Atlas Pipeline Partners GP, LLC, in substantially the form attached to the Form S-1 Registration Statement No. 333-85193, as amended, filed with respect to the public offering of the common units of Atlas Pipeline LP, as such agreement may be amended, extended, renewed or replaced from time to time. "First Amendment Effective Date" shall mean January 24, 2000. "Master Natural Gas Agreement" shall mean that certain Master Natural Gas Gathering Agreement to be entered into by and among the Borrowers and certain Restricted Subsidiaries, Atlas Pipeline LP and Atlas Pipeline Operating Partnership, L.P. relating to the transportation of gas and oil produced by the Borrowers and the -2- Restricted Subsidiaries and in substantially the form attached to the Form S-1 Registration Statement No. 333-85193, as amended, filed with respect to the public offering of the common units of Atlas Pipeline LP, as such agreement may be amended, extended, renewed or replaced from time to time. "MLP Letter of Credit" shall mean that certain standby letter of credit issued by the Issuing Bank for the account of Atlas Pipeline Partners GP, LLC and for the benefit of Atlas Pipeline LP in an initial stated amount not to exceed $8,694,000, and having an expiration date of June 1, 2003, together with all extensions, renewals and amendments thereto and thereof. "MLP Transactions" shall mean, collectively (i) the formation, mergers, divisions, contributions and other transfers of interests in certain corporations, limited liability companies and partnerships, (ii) the conveyances of Pipeline Assets, (iii) the sale to the public of common units in Atlas Pipeline LP, (iv) the disposition of the proceeds of such sale, and (v) certain other actions, all as more fully described on Schedule 1 to the First Amendment. "Omnibus Agreement" shall mean that certain Omnibus Agreement to be entered into by and among the Borrowers, Atlas Pipeline LP and Atlas Pipeline Operating Partnership, L.P., in substantially the form attached to the Form S-1 Registration Statement No. 333-85193, as amended, filed with respect to the public offering of the common units of Atlas Pipeline LP, as such agreement may be amended, extended, renewed or replaced from time to time. "Pipeline Assets" shall mean those assets comprising the natural gas gathering system to be conveyed by the Borrowers and certain Restricted Subsidiaries to Atlas Pipeline LP through Atlas Pipeline Operating Partnership, L.P. as such assets are further described on Schedule 2 to the First Amendment. Section 1.3 Deleted Definition. On and after the First Amendment Effective Date, Section 1.1 of the Existing Agreement is amended by deleting the following defined term: Individual Collateral Value Reduction Amount Section 1.4 Amendments to Section 2.2. On and after the First Amendment Effective Date, Section 2.2 of the Existing Agreement is amended as follows: (i) Section 2.2 of the Existing Agreement is hereby amended to delete therefrom each reference to the "Individual Collateral Value Reduction Amounts". (ii) Section 2.2 of the Existing Agreement is hereby amended to delete therefrom clause (iii) of Subsection 2.2(d). Section 1.5 Amendments to Section 2.9 . On and after the First Amendment Effective Date, Section 2.9 of the Existing Agreement is amended as follows: (i) Clause (i) of Subsection 2.9(a) of the Existing Agreement is hereby amended and restated to read as follows: -3- (i) With the exception of the MLP Letter of Credit, no Letter of Credit shall be issued hereunder which has an expiry date later than the earlier of (x) one (1) year from the date of issuance thereof or (y) 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. The MLP Letter of Credit shall not have an expiry date later than the Termination Date. (ii) Clause (iii) of Subsection 2.9(a) of the Existing Agreement is hereby amended to delete therefrom the reference to "Fourteen Million ($14,000,000) Dollars" contained therein, and to substitute therefor a reference to "Ten Million ($10,000,000) Dollars". Section 1.6 Amendment to Section 4.1. On and after the First Amendment Effective Date, Section 4.1 of the Existing Agreement is amended to insert at the end thereof the following new paragraphs F, G and H: F. One or more Pledge Agreements (or amendments thereto) in form and substance satisfactory to the Banks, which shall assign to Agent, and grant to Agent, on behalf of the Banks, a lien on and security interest in, all right, title and interest of the Borrowers and the Restricted Subsidiaries in and to (i) the membership units of Atlas Pipeline Partners GP, LLC, and (ii) the common units of Atlas Pipeline LP, together, with undated stock powers executed in blank. G. One or more collateral assignments of contract rights in form and substance satisfactory to the Banks, which shall collaterally assign to Agent, and grant to Agent on behalf of the Banks, a security interest in and to all right, title, interest of the Borrowers and the Restricted Subsidiaries pursuant to the Master Natural Gas Agreement, together with the written consent of Atlas Pipeline LP to such collateral assignment. H. One or more Pledge Agreements in form and substance satisfactory to the Banks, which shall assign to Agent, and grant to Agent, on behalf of the Banks, a lien on and security interest in, all right, title and interest of Atlas Pipeline Partners GP, LLC in and to common units (subordinated or otherwise) of Atlas Pipeline LP, together with undated stock powers executed in blank. Section 1.7 Amendment to Section 5.17. On and after the First Amendment Effective Date, Section 5.17 of the Existing Agreement is amended to amend and restate clause (ii) of the second paragraph thereof, which sets forth the definition of the term "EBITDA", to read as follows: (ii) the term "EBITDA" shall mean the sum (determined in accordance with GAAP) of the Borrowers' Combined net income plus interest expense plus tax expense plus depreciation plus amortization plus other noncash charges to income minus noncash credits to income minus any equity in earnings attributable to Atlas Pipeline LP plus any distributions received by the Borrowers from Atlas Pipeline LP; provided, however, that for the purposes of this Section 5.17 only, any of the foregoing items earned from or expensed with respect to the Pipeline Assets shall be excluded from the calculation of EBITDA. -4- Section 1.8 Amendment to Section 5.18. On and after the First Amendment Effective Date, Section 5.18 of the Existing Agreement is hereby amended and restated to read as follows: 5.18 Fixed Charge Coverage Ratio. The EBITDA of the Borrowers on a Combined basis (calculated for the four most recently completed fiscal quarters) divided by the sum of (i) the interest expense of Borrowers on a Combined basis (calculated for the four most recently completed fiscal quarters) plus (ii) Current Maturities of Long Term Debt of Borrowers on a Combined basis plus (iii) the aggregate amount of cash payments of contingent consideration made by or on behalf of Viking pursuant to Section 3.3c of the Acquisition Agreement during the four most recently completed fiscal quarters plus (iv) any payments made by the Borrowers to purchase common units in Atlas Pipeline LP pursuant to the Construction Financing Commitment, must not be less than the following ratios for the fiscal periods ending on the following dates (inclusive): Fiscal Periods Ending: Minimum Ratio: ---------------------- ------------- 9/30/99 through 6/30/00 1.50 to 1.00 9/30/01 through 12/31/01 2.00 to 1.00 3/31/02 and each fiscal 2.50 to 1.00 period ending thereafter For the purposes of this Section 4.18, the term "Current Maturities of Long Term Debt" 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. Section 1.9 Amendment to Section 5.19. On and after the First Amendment Effective Date, Section 5.19 of the Existing Agreement is hereby amended and restated to read as follows: 5.19 Minimum Combined Tangible Net Worth. The Combined Tangible Net Worth of the Borrowers shall at all times exceed the sum of (i) eighty-five (85%) percent of the Combined Tangible Net Worth of the Borrowers as of December 31, 1999 (provided that the Combined Tangible Net Worth of the Borrowers on such date shall not be less than $27,000,000), plus (ii) an amount equal to fifty percent (50%) of the cumulative positive Combined net income of the Borrowers earned after December 31, 1999, plus (iii) any gain recognized by the Borrowers on the sale of the Pipeline Assets minus (iv) the amount of any permitted distribution made by the Borrowers to Resource America, Inc. from the proceeds of the sale of the Pipeline Assets. Section 1.10 Amendment to Section 6.3. On and after the First Amendment Effective Date, Section 6.3 of the Existing Agreement is amended to insert at the end thereof the following language: "and (v) except for the obligations of Atlas Pipeline Partners GP, LLC to Atlas Pipeline LP under the Distribution Support Agreement." Section 1.11 Amendment to Section 6.4. On and after the First Amendment Effective Date, Section 6.4 of the Existing Agreement is amended to insert at -5- the end thereof the following language: "and (iv) the obligations to make certain payments under the Master Natural Gas Agreement, the Distribution Support Agreement and the Omnibus Agreement, including without limitation the Construction Financing Commitment." Section 1.12 Amendment to Section 6.5. On and after the First Amendment Effective Date, Section 6.5 of the Existing Agreement is amended to insert at the end thereof the following language: ", (ix) purchases of common units of Atlas Pipeline LP pursuant to the Construction Financing Commitment, provided that such common units be pledged to the Agent (for the benefit of the Banks) in accordance with Section 4.1F hereof, and (x) payments by or on behalf of Atlas Pipeline Partners GP, LLC to Atlas Pipeline LP under the Distribution Support Agreement." Section 1.13 Amendment to Section 6.6(b). On and after the First Amendment Effective Date, Section 6.6(b) of the Existing Agreement is amended to insert at the end thereof the following language: "and perform certain administrative and management services on behalf of Atlas Pipeline LP and Atlas Pipeline Operating Partnership, L.P. pursuant to the Omnibus Agreement." Section 1.14 Amendment to Section 8.2. On and after the First Amendment Effective Date, Section 8.2 of the Existing Agreement is amended to insert at the end of the first sentence thereof the following language: ", (vii) for the purpose of purchasing common units of Atlas Pipeline LP pursuant to the Construction Financing Commitment, provided that at the time of purchase such common units do not constitute margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, and (viii) with respect to the issuance of the MLP Letter of Credit only, to secure the obligations of Atlas Pipeline Partners GP, LLC under the Distribution Support Agreement." Section 1.15 Amendment to Section 9. On and after the First Amendment Effective Date, Section 9 of the Existing Agreement is amended to insert after Paragraph M thereof the following new Paragraphs N and O: N. Any default occurs under the Distribution Agreement, the Master Gas Gathering Agreement or the Omnibus Agreement which gives any party thereto the right to terminate such agreement, or any such agreement is amended, modified or terminated without the prior written consent of the Banks; O. Atlas Pipeline LP or Atlas Pipeline Operating Partnership, L.P. becomes insolvent, becomes the subject of any action in bankruptcy, dissolves or terminates its existence, or Atlas Pipeline Partners GP, LLC withdraws or is removed as the general partner of either such partnership, without the prior written consent of the Banks. Section 1.16 Amendments re: Exhibits, Schedules and Annex. On and after the First Amendment Effective Date, the Existing Agreement is further amended to delete therefrom Schedule 3.2 thereto, and to substitute therefor Schedule 3.2 attached hereto and made a part hereof. Section 1.17 No Other Amendments or Waivers. The amendments to the Existing Agreement set forth in Sections 1.1 through 1.16 inclusive above do not either implicitly or explicitly alter, waive or amend, except as expressly provided in this First Amendment, the provisions of the Existing Agreement. The amendments set forth in Sections 1.1 through 1.16 inclusive hereof do not waive, -6- now or in the future, compliance with any other covenant, term or condition to be performed or complied with nor do they impair any rights or remedies of the Banks or the Agent under the Existing Agreement with respect to any such violation. Nothing in this First Amendment shall be deemed or construed to be a waiver or release of, or a limitation upon, the Agent's or any Bank's exercise of any of its rights and remedies under the Existing Agreement and the other Loan Documents, whether arising as a consequence of any Events of Default which may now exist or otherwise, and all such rights and remedies are hereby expressly reserved. ARTICLE II CERTAIN CONSENTS, WAIVERS AND AGREEMENTS REGARDING THE MLP TRANSACTIONS ----------------------------------------- Section 2.1 Consents and Waivers Regarding the MLP Transactions. Subject to the terms and conditions of this First Amendment, the Banks hereby (i) consent to the consummation and completion of the MLP Transactions, and (ii) waive any violation of Sections 5.7, 6.1, 6.5, 6.7 or 6.8 of the Agreement which would otherwise be caused by the consummation or completion of the MLP Transactions. The foregoing consent and waiver is conditioned upon the completion of the public offering of the common units of Atlas Pipeline LP and the satisfaction of the other conditions precedent to the release of Liens by the Banks in connection therewith set forth in Section 2.2 of this First Amendment within thirty (30) days of the First Amendment Effective Date; in the event that these conditions subsequent to the foregoing consent and waiver is not satisfied, then the Borrowers shall take, or cause to be taken, such actions as the Banks may require, which may include, but shall not be limited to, unwinding (to the extent practicable) the MLP Transactions or delivering, or causing to be delivered, to the Banks additional or amended Security Documents or other further assurances. The assumption by any third party of any portion of the Obligations in connection with or pursuant to the MLP Transactions shall in no way release or relieve the Borrowers or Restricted Subsidiaries from liability to the Banks with respect to such portion of the Obligations. Section 2.2 Conditions Precedent to Release of Liens on Pipeline Assets. Subject to the terms and conditions of this First Amendment, the Banks hereby agree to release their Liens on the Pipeline Assets. Each of the following shall be a condition precedent to the release by the Banks of their Liens upon the Pipeline Assets and to the delivery by the Agent of appropriate documentation to evidence such release, including partial releases of mortgages and Uniform Commercial Code Form UCC-3 Financing Statement partial releases: (i) The conditions precedent to the effectiveness of this First Amendment set forth in Article IV hereof shall be satisfied. (ii) The Agent shall have received (for the ratable benefit of the Banks) a payment in the amount necessary to reduce the then current Aggregate Outstandings (after giving effect to the issuance of the MLP Letter of Credit) to the Aggregate Collateral Value as set forth in Section 2.3 below. (iii) The Banks shall have received satisfactory evidence that the MLP Transactions have been completed, and the Distribution Support Agreement, the Master Gas Gathering Agreement and the Omnibus Agreement have been executed by the respective parties thereto. -7- (iv) The Agent shall have received true and correct copies of the executed Distribution Support Agreement, the Master Gas Gathering Agreement and the Omnibus Agreement. (v) The Agent shall have received a certification from each Borrower that its articles or certificate of incorporation and its respective bylaws which were previously delivered to the Agent continue to remain complete and correct and in full force and have not been further amended, supplemented or otherwise modified (except as set forth in such certificate). (vi) The Banks shall have received satisfactory evidence that the Borrowers and Restricted Subsidiaries shall have received cash from the proceeds of the MLP Transactions in an amount at least equal to $14,000,000, net of transaction costs associated with the MLP Transactions and including any amounts paid to the Agent (for the benefit of the Banks) from the proceeds of the MLP Transaction. (vii) The Agent shall have received duly executed copies of the following documents: (a) A Guaranty Agreement executed by Atlas Pipeline Partners GP, LLC, whereby such entity shall guarantee, and be surety for, the payment and performance of the obligations of the Borrowers to the Banks under and with respect to the MLP Letter of Credit, together with certified copies of its organizational documents and authorizing resolutions, an incumbency certificate and recent good standing or subsistence certificate; (b) One or more Pledge Agreements securing the Indebtedness and executed by the Borrowers and the Restricted Subsidiaries with respect to (x) any common units of Atlas Pipeline LP now owned or hereafter acquired by such entities and (y) any membership units of Atlas Pipeline Partners GP, LLC now owned or hereafter acquired by such entities; (c) A collateral assignment securing the Indebtedness and executed by the Borrowers and the Restricted Subsidiaries which are party to the Master Gas Gathering Agreement with respect to their rights under such agreement, together with a consent to such collateral assignment executed by Atlas Pipeline LP and Atlas Pipeline Operating Partnership, LP; (d) One or more Pledge Agreements securing the Guaranty Agreement referred to in item (a) above and executed by Atlas Pipeline Partners GP, LLC with respect to any common units (subordinated or otherwise) of Atlas Pipeline LP now owned or hereafter acquired by such entity. (viii) The Agent shall have received such assumption agreements, amendments or acknowledgments to Loan Documents as requested by Agent and executed by the entity which is the successor by division to St. Julien III Corporation, and which succeeds to the ownership of St. Julien III Corporation's assets other than Pipeline Assets. -8- The Agent and the Banks hereby agree to deliver to the Borrowers such further release documentation reasonably requested by the Borrowers to give effect to the terms of this Section 2.2, all at the sole cost and expense of the Borrowers. Section 2.3 Reduction of Collateral Values; Designated Borrower Re: MLP Letter of Credit. Notwithstanding any provision of the Agreement to the contrary, effective upon the consummation of the MLP Transactions, (i) the Individual Collateral Values with respect to each Borrower, until such amounts are redetermined pursuant to Section 2.4 of this First Amendment, shall be as follows: (x) the Individual Collateral Value for Atlas shall be $18,000,000, (y) the Individual Collateral Value for Viking shall be $12,000,000, and (z) the Individual Collateral Value for REI shall be $5,000,000, and (ii) therefore, the Aggregate Collateral Value (the sum of the foregoing Individual Collateral Values) shall be $35,000,000. Notwithstanding any provision of the Agreement to the contrary, the Stated Amount of the MLP Letter of Credit at any time during the term thereof shall, unless and until the Borrowers give notice to the Agent to the contrary, be allocated among Viking, REI and Atlas pro rata on the following basis: (x) Viking, 35%; (y) Atlas, 50%, and (z) REI, 15%. Section 2.4 Individual Collateral Value Redetermination. Notwithstanding any provision contained in the Agreement to the contrary, the Borrowers shall, within thirty (30) days of the First Amendment Effective Date, deliver to the Agent such Engineering Reports and other information meeting the requirements of Section 2.3 of the Agreement to permit the Banks to make a special redetermination of the Individual Collateral Values in accordance with Sections 2.2 and 2.3 of the Agreement. This special redetermination is in lieu of the scheduled annual determination which was to have been made on the basis of Engineering Reports to be dated as of September 30, 1999, which annual determination is hereby specifically waived by the Banks. Section 2.5 Consent to Distribution to Resource America, Inc. To the extent that the Borrowers and Restricted Subsidiaries receive payments of proceeds of the MLP Transactions in excess of the amount required in Section 2.2(vi) of this First Amendment, (i) the Banks hereby consent to the Borrowers making a distribution of such excess (in an aggregate amount not to exceed $1,000,000) to Resource America, Inc., and (ii) the Banks hereby waive any violation of Section 6.10 of the Agreement which would otherwise result from the Borrowers making such distribution. Section 2.6 Consent to Sale of Office Buildings. The Borrowers have requested that the Banks consent to (i) the sale by REI of its office building located in Akron, Ohio, and (ii) the sale by Viking of its office building located in Canton, Ohio. The Banks hereby (x) consent to each of these transactions and (y) waive any violation of Section 6.1 of the Agreement which would otherwise be caused by the consummation of such transactions. ARTICLE III BORROWERS' SUPPLEMENTAL REPRESENTATIONS Section 3.1 Incorporation by Reference. As an inducement to the Agent and the Banks to enter into this First Amendment, the Borrowers hereby repeat herein for the benefit of the Agent and the Banks the representations and warranties made by the Borrowers in Sections 3.1 through 3.22, inclusive, of the Existing Agreement, as amended hereby, except that for purposes hereof such representations and warranties shall be deemed to extend to and cover this First Amendment. -9- ARTICLE IV CONDITIONS PRECEDENT Section 4.1 Conditions Precedent. Each of the following shall be a condition precedent to the effectiveness of this First Amendment: (i) The Agent shall have received, on or before the First Amendment Effective Date, duly executed counterpart originals of this First Amendment; and (ii) The following statements shall be true and correct on the First Amendment Effective Date and the Agent shall have received a certificate signed by an authorized officer of each Borrower, dated the First Amendment Effective Date, stating that: (A) except to the extent modified in connection with this First Amendment, the representations and warranties made pursuant to Section 3.1 of this First Amendment and in the other Loan Documents are true and correct in all material respects on and as of the First Amendment Effective Date as though made on and as of such date; (B) no default under Section 9 of the Agreement or event which, with the giving of notice or passage of time or both, would become a default under Section 9 of the Agreement has occurred and is continuing, or would result from the execution of or performance under this First Amendment; and (C) the Borrowers have in all material respects performed all agreements, covenants and conditions required to be performed on or prior to the date hereof under the Existing Agreement and the other Loan Documents. (iii) The Agent shall have received on or before the First Amendment Effective Date copies of board of directors or shareholder action of the Borrowers authorizing the execution and delivery of this First Amendment. (iv) The Agent shall have received on or before the First Amendment Effective Date, a certificate signed by an authorized officer of each Borrower with respect to incumbency and the articles or certificate of incorporation and bylaws of each such entity. -10- ARTICLE V GENERAL PROVISIONS Section 5.1 Ratification of Terms. Except as expressly amended by this First Amendment, the Existing Agreement and each and every representation, warranty, covenant, term and condition contained therein is specifically ratified and confirmed in all material respects. Section 5.2 References. All notices, communications, agreements, certificates, documents or other instruments executed and delivered after the execution and delivery of this First Amendment in connection with the Agreement, any of the other Loan Documents or the transactions contemplated thereby may refer to the Existing Agreement without making specific reference to this First Amendment, but nevertheless all such references shall include this First Amendment unless the context requires otherwise. On and after the First Amendment Effective Date, all references in the Existing Agreement and each of the other Loan Documents to the "Agreement" shall be deemed to be references to the Existing Agreement as amended hereby. Section 5.3 Counterparts. This First Amendment may be executed in different counterparts, each of which when executed by a Borrower, a Bank and the Agent shall be regarded as an original, and all such counterparts shall constitute one First Amendment. Section 5.4 Capitalized Terms. Except for proper nouns and as otherwise defined herein, capitalized terms used herein as defined terms shall have the meanings ascribed to them in the Existing Agreement, as amended hereby. Section 5.5 Governing Law. THIS FIRST AMENDMENT AND THE RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT REGARD TO THE PROVISIONS THEREOF REGARDING CONFLICTS OF LAW. Section 5.6 Headings. The headings of the sections in this First Amendment are for purposes of reference only and shall not be deemed to be a part hereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -11- IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have caused this First Amendment to be duly executed by their proper and duly authorized officers the day first above written. WITNESS: ATLAS AMERICA, INC. By: (SEAL) - ----------------------------------------------------- ------------------------------------------- Name ------------------------------------------------ Title ----------------------------------------------- WITNESS: RESOURCE ENERGY, INC. By: (SEAL) - ----------------------------------------------------- ------------------------------------------- Name ------------------------------------------------ Title ----------------------------------------------- WITNESS: VIKING RESOURCES CORPORATION By: (SEAL) - ----------------------------------------------------- ------------------------------------------- Name ------------------------------------------------ Title ----------------------------------------------- PNC BANK, NATIONAL ASSOCIATION, as a Bank and as Agent By: ------------------------------------------------- Name ------------------------------------------------ Title ----------------------------------------------- FIRST UNION NATIONAL BANK, as a Bank By: ------------------------------------------------- Name ------------------------------------------------ Title ----------------------------------------------- KEYBANK NATIONAL ASSOCIATION, as a Bank By -------------------------------------------------- Name ------------------------------------------------ Title -----------------------------------------------
-12- EX-10.12 7 0007.txt EXHIBIT 10.12 AMENDED AND RESTATED LOAN AGREEMENT THIS AMENDED AND RESTATED LOAN AGREEMENT (the "Agreement") is made this 14th day of December, 1999, by and among RESOURCE PROPERTIES XXXII, INC., a Delaware corporation, RESOURCE PROPERTIES XXXVIII, INC., a Delaware corporation, RESOURCE PROPERTIES II, INC., a Delaware corporation, RESOURCE PROPERTIES 51, INC., a Delaware corporation, RESOURCE PROPERTIES, INC., a Delaware corporation ("RPI"), RESOURCE AMERICA, INC., a Delaware corporation ("RAI") and JEFFERSON BANK (the "Bank"). RECITALS A. On March 12, 1998, the Bank and Resource Properties XXXI, Inc., a Delaware corporation, WS Mortgage Acquisition Corp., a Delaware corporation, Resource Properties XLI, Inc., a Delaware corporation, Resource Properties XLII, Inc., a Delaware corporation (the "Original Released Borrowers"), Resource Properties XXIV, Inc., a Delaware corporation, Resource Properties XXXII, Inc., a Delaware corporation, Resource Properties XXXVIII, Inc., a Delaware corporation (collectively with the Original Released Borrowers, the "Original Borrowers"), RPI and RAI entered into that certain Loan Agreement (the "Original Loan Agreement") wherein the Original Borrowers borrowed and RPI and RAI guaranteed a line of credit loan with the Bank in the amount of EIGHTEEN MILLION DOLLARS ($18,000,000) (the "Loan"). B. On January 29, 1999, Original Borrowers, Resource Properties 53, Inc. ("53 Inc."), Resource Properties XL, Inc. ("XL Inc."), Charles Rennie Financial, Inc., formerly known as Eastern Bancorporation ("CRFI"), RPI, RAI and the Bank entered into that certain Loan Modification Agreement (the "Loan Modification Agreement"), whereby the Original Released Borrowers were released from their respective obligations under the Loan, and RAI, RPI, 53 Inc. and XL Inc. were made additional makers under the Note and additional collateral owned by 53 Inc., XL Inc. and CRFI was added to the security for the Loan (the "Modified Collateral"). C. On May 19, 1999, Resource Properties XXXII, Inc. ("XXXII Inc."), Resource Properties XXXVIII, Inc. ("XXXVIII Inc."), Resource Properties XXIV, Inc. ("XXIV Inc."), 53 Inc., XL Inc., CRFI (collectively, the "Modified Borrowers"), RPI, RAI and the Bank entered into that certain Amendment to Loan Modification Agreement (the "First Amendment") pursuant to which certain terms and definition of the Loan Modification Agreement were clarified. D. On July 28, 1999, the Modified Borrowers repaid to Bank the total outstanding principal amount of the Loan ($18,000,000.00), and in exchange for such payment, XXIV Inc., 53 Inc., XL Inc. and CRFI were released from their respective obligations under the Loan and the Modified Collateral was released from the security for the Loan (the "July Release"). E. On July 30, 1999, the Modified Borrowers, Resource Properties 52, Inc., a Delaware corporation ("52 Inc."), RPI, RAI and the Bank entered into that certain Second Loan Modification Agreement (the "Second Amendment"), pursuant to which the July Release was memorialized, 52 Inc. was made an additional maker under the Note, collateral owned by 52 Inc. (the "Additional Collateral") was added to the security for the Loan and the Bank advanced Ten Million Dollars ($10,000,000). F. On August 17, 1999, XXXII Inc., XXXVIII Inc. and 52 Inc. repaid to Bank the total outstanding principal amount of the Loan ($10,000,000.00), and in exchange for such payment, 52 Inc. was released from its obligations under the Loan and the Additional Collateral was released from the security for the Loan (the "52 Inc. Release"). G. On August 31, 1999, XXXII Inc., XXXVIII Inc., Resource Properties II, Inc. ("RPII Inc."), 52 Inc., RPI, RAI and the Bank entered into that certain Third Amendment to Loan Modification Agreement (the "Third Amendment") pursuant to which the 52 Inc. Release was memorialized, RPII Inc. was made an additional maker under the Note, collateral owned by RPII Inc. was added to the security for the Loan and the Bank advanced to RAI the sum of Seven Million Dollars ($7,000,000). H. The Original Loan Agreement, as modified by the Loan Modification Agreement, the First Amendment, the Second Amendment and the Third Amendment shall be referred to in this Agreement as the "Loan Agreement." I. XXXII Inc., XXXVIII Inc., RPII Inc., Resource Properties 51, Inc. ("RP51 Inc."), RPI, RAI and the Bank now desire to amend and restate the Loan Agreement in order, among other things, to release XXXII Inc. from its obligations under the Loan, to release certain collateral owned by XXXII Inc. as security for the Loan, to add RP51 Inc. as a maker under the Note and to add collateral owned by RP51 Inc. as security for the Loan in accordance with the terms of this Agreement. NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein, and further based upon and in reliance upon the representations, warranties and covenants of Obligors herein set forth, the parties hereto, intending to be legally bound, hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings (all accounting terms not specifically defined herein shall be construed in accordance with GAAP): 1.1 "Affiliate" means any Person: (a) which directly or indirectly controls, or is controlled by, or is under common control with, an Obligor, (b) which directly or indirectly beneficially owns or holds twenty percent (20) or more of any class of voting stock of any Obligor; or (c) twenty percent (20) or more of the voting stock of which is directly or indirectly beneficially owned or held by an Obligor. The term "control" means the possession directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. -2- 1.2 "Agreement" means this Loan Agreement, as amended, supplemented or modified from time to time. 1.3 "Bank" means Jefferson Bank. 1.4 "Borrowers" shall mean XXXVIII Inc., RPII Inc., RP51 Inc., RPI and RAI, except that solely for the purposes of Sections 6.2.4, 6.2.6, 6.2.9, 6.2.10, 6.2.13, 6.2.16, 6.2.17 and 6.2.18 of this Agreement, Borrowers shall not include RAI and RPI which shall be considered solely as Guarantors pursuant to Section 1.16 of this Agreement. 1.5 "Business Day" means any day other than a Saturday or Sunday or a legal holiday on which commercial banks are authorized or required to be closed for business in Pennsylvania. 1.6 "Code" means the Internal Revenue Code of 1986, as amended. 1.6 "Code" means the Internal Revenue Code of 1986, as amended. 1.7 "Collateral" shall have the meaning described in Section 3 below. 1.8 "Consistent Basis" means, in reference to the application that the accounting principles observed in the period to are comparable in all material respects to those in the most recent preceding period. 1.9 "Controlled Group" shall have the meaning set forth in the Code. 1.10 "Environmental Law" means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss.ss. 9601-9657, as amended by the Superfund Amendments and Reauthorization Act of 1985 Pub. L. No 99-499, 100 Stat. 1613 (October 17, 1986), the Resource Conservation and Recovery Act, 42 U.S.C. ss.ss.6901-6901i, as amended by the Superfund Amendments and Reauthorization Act of 1986 as the same may be amended from time to time, and any other presently existing or hereafter enacted or decided federal, state or local statutory o common laws relating to pollution or protection of the environment, including without limitation any common law of nuisance or trespass, and any law or regulation relating to emissions, discharges, releases or threatened release of pollutants, contaminants or chemicals or industrial, toxic or hazardous substances or wastes into the environment (including without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or otherwise relating to the manufacture, processing distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or chemicals, or industrial, toxic or hazardous substances or wastes. 1.11 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereof. 1.12 "ERISA Affiliate" means any trade or business (whether or not incorporated) which together with any of the Obligors would be treated as a single employer under Section 4001 of ERISA. -3- 1.13 "Event of Default" shall have the meaning set forth in Section 7 below. 1.14 "Facility" means the $18,000,000 revolving credit facility. 1.15 "GAAP" means the generally accepted accounting principles set forth in pronouncements of the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, as such principles are from time to time supplemented and amended. 1.16 "Guarantors" means RAI and RPI. 1.17 "Hazardous Materials" means any contaminants, hazardous substances, regulated substances or hazardous wastes which may be the subject of any Environmental Law. 1.18 "Lien" means any mortgage, deed of trust, pledge, security interest, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other) or preference, priority or other security agreement or preferential arrangement, charge or encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the recording of any mortgage or deed of trust or the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction to evidence any o the foregoing). 1.19 "Loan Documents" shall mean this Agreement, the Amended and Restated Note, the documents listed on this Agreement (excluding those documents executed and delivered by the Released Borrowers) as supplemented by the documents set forth on Exhibit 1.19, attached hereto and all exhibits, schedules, certificates, agreements, instruments and other documents delivered, or to be delivered by the Borrowers to the Bank pursuant to or in connection with the Loan Agreement or any of the other Loan Documents. 1.20 "Multiemployer Plan" means a Plan described in Section 4001(a)(3) of ERISA which covers employees of any of the Obligors or any ERISA Affiliate. 1.21 "Note" means the Amended and Restated $18,000,000 Note dated as of the date hereof. 1.22 "Obligations" means all existing and future obligations of Obligors to Bank under the Loan Documents and any renewals or replacements thereof, as well as all other indebtedness of the Obligors to Bank at any time and in any capacity incurred (direct or indirect, joint or several, absolute or contingent, matured or unmatured), and all costs and expenses incurred, including reasonable attorneys' fees, in perfecting, protecting and enforcing the Loan Documents. 1.23 "Obligors" means the Borrowers and the Guarantors. 1.24 "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. -4- 1.25 "Permitted Liens" shall have the meaning set forth in Section 5.8 below. 1.26 "Person" means an individual, partnership, corporation, business trust, limited liability company, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. 1.27 "Plan" means any plan established, maintained or to which contributions have been made by any of the Obligors or any ERISA Affiliate. 1.28 "Prohibited Transaction" means any transaction set forth in Section 406 of ERISA or Section 4975 of the Code. 1.29 "Reportable Event" shall have the meaning set forth in Title IV of ERISA. 1.30 "Released Borrowers" shall mean the Original Released Borrowers, XXXII Inc., 53 Inc., XL Inc., CRF1, 52 Inc. and XXIV Inc. 1.31 "Underlying Borrower" shall mean any borrower or obligor referenced or made a party to the Security Documents listed in Exhibit 3, attached hereto and made a part hereof. 2. THE LOAN. 2.1 General. Subject to the terms and conditions of this Agreement, and in reliance upon the Obligors' representations and warranties contained herein, Bank agrees to lend to Borrowers at any time from time to time between the date hereof and until April 1, 2000 unless this Agreement is sooner terminated as hereinafter provided, such sum or sums of money as may be requested by Borrowers, but subject to the limitations contained in Section 2.1.1 below the aggregate of which at any one time outstanding shall not exceed EIGHTEEN MILLION and NO/100 DOLLARS ($18,000,000) (the "Facility"). Borrowers may borrow, repay and reborrow the amounts outstanding hereunder until April 1, 2000, subject to the terms and conditions contained herein. 2.1.1 Limitations on Advances. Notwithstanding anything contained in the Note or other Loan Documents to the contrary, Bank has previously approved disbursements under the Loan of $7,000,000 and shall have no obligation to lend to Borrowers, and Borrowers shall have no right to borrow, any additional amount in excess of Three Million Five Hundred Thousand Dollars ($3,500,000.00) without the prior written consent of Bank. -5- 2.2 Borrowers' Loan Account. The principal indebtedness of Borrowers to Bank pursuant to the Facility shall be evidenced by the debit balance in an account on the books of Bank (the "Borrowers' Loan Account) in which will be entered: (a) as debits, all borrowings pursuant to this Section 2; (b) as credits, all principal repayments on the Note; and (c) all other appropriate debits and credits as provided by this Agreement. Bank shall render to Borrowers a monthly statement of account for the Borrowers' Loan Account, which statement shall be deemed correct and accepted by Borrowers, and conclusively binding upon Borrowers, unless Borrowers notify Bank to the contrary within forty-five (45) days of the date of the statement. 2.3 Amended and Restated Note. Upon execution of this Agreement Borrowers shall execute and deliver to Bank the Amended and Restated Note. Bank shall apply all payments made under the Note to principal, interest, fees and expenses in such order as Bank shall determine. 2.4 Interest on Facility. Borrowers shall pay interest to Bank on the unpaid principal balance of the Facility outstanding from time to time at a rate per annum equal to the Prime Rate (as defined in the Note), plus three-quarters of one percent (0.75%). 2.5 Payments on Facility. All interest on the Note shall be payable monthly, in arrears, on the first day of each consecutive month commencing January 1, 2000. All interest shall be computed on the basis of actual days elapsed and a year of 360 days. All principal, costs and expenses outstanding under the Facility shall be paid in full on or before April 1, 2000 or at such earlier date as is specified herein. 2.6 Facility Borrowing Requests. Any request for borrowing under the Facility shall be made in accordance with Bank's operating procedures, as the same may change from time to time. If Bank accepts a request for borrowing made by telephone, Bank is hereby absolutely authorized to act in reliance on such telephone request, notwithstanding that such request is not confirmed in writing. Borrowers shall indemnify and defend Bank against any claim or action brought against Bank based upon Bank's reliance on such telephone request. If at any time the amount outstanding under the Facility exceeds $18,000,000, Borrowers will immediately repay any such excess as a reduction under the Note upon demand by Bank. 2.7 Voluntary Repayment and Prepayment. The Note may be repaid, without premium or penalty, in whole or in part at any time. Each payment made shall be applied to principal, interest, fees and expenses in such order as Bank shall determine. 2.8 Set Off. Bank is hereby authorized at any time and from time to time, without notice to Obligors (any such notice being expressly waived by Obligors), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Bank to or for the credit or the account of any of the Obligors against any and all of the Obligations of the Obligors now or hereafter existing, irrespective of whether or not Bank shall have made any demand for payment The rights of Bank under this Section 2.8 are in addition to other rights and remedies including, without limitation, other rights of setoff) which Bank may have. -6- 2.9 Charging of Interest and Fees. Borrowers hereby authorize Bank to charge such accounts as any of the Borrowers may maintain with Bank for all payments due under this Agreement as and when the same become due. 2.10 Default Rate. During the period of time when an Event of Default exists hereunder or if the obligations under any of the Loan Documents are accelerated for any reason whatsoever, then all outstanding Obligations shall thereafter continue to accrue interest at the rate per annum which shall be three percent (3) per annum greater than the rate of interest which would otherwise be applicable, notwithstanding the entry of any judgment with respect to the Obligations. 2.11 Miscellaneous. 2.11.1 All payments to be made by Borrowers under or in connection with the Facility shall be made to Bank in immediately available funds, without set-off, counterclaim, deduction or withholding, at the offices of Bank or at such other place as may be directed by Bank. 2.11.2 Whenever any payment to be made by Borrowers under or in connection with the Facility is stated to be due on a day that is not a Business Day, such payment shall be made on the next day that is a Business Day, and such extension of time shall be involved in the computation of interest due from Borrowers. 2.11.3 If at any time any payment made by Borrowers under or in connection with the Facility is rescinded or must otherwise be returned by Bank for any reason, including but not limited to the insolvency, bankruptcy or reorganization of any of the Borrowers, the security interest and liens granted to Bank and the rights of Bank shall be reinstated as though payment had not been made. 2.11.4 If any payment to be made by Borrowers under or in connection with the Facility is not paid on or before the fifth calendar day after the due date thereof, then in addition to and not in limitation of any other rights or remedies available to Bank, Bank may impose a late charge of the greater of $100.00 or five percent (5%) Of the amount due on the due date. 2.11.5 Bank agrees that by the execution of this Agreement that XXXII Inc. is hereby released from its obligations under the Loan and the other Loan Documents to which it was a party and shall have no further liability under the Note or other documents in connection with the Loan to which it was a party. 2.11.6 XXXII Inc., by execution of this Agreement on behalf of itself, its successors and assigns, does hereby unconditionally and irrevocably release, acquit, and forever discharge Bank, its successors, assigns and its past, present and future shareholders, officers, directors, agents and employees of and from all manner of action, suits, claims, demands or liabilities whether presently known or unknown relating to the Note and other Loan Documents. -7- 3. SECURITY FOR THE OBLIGATIONS. As security for all of the Obligations, Obligors have executed and delivered to Bank the documents described on Exhibit "3" attached hereto (excluding those documents executed and delivered by the Released Borrowers), granting to Bank a first lien and security interest in certain of the Obligors assets, as described therein (the "Collateral"). Obligors hereby agree to execute and deliver such assignments, security agreements, financing statements and other documentation as may be reasonably requested by Bank at any time to assure the protection, perfection and enforcement of the Collateral. The security previously delivered to Bank from XXXII, Inc. is hereby released as collateral for the Loan. 4. CONDITIONS PRECEDENT. The obligation of Bank to make the Facility available to Borrowers is subject to the following conditions precedent: 4.1 Commitment Fee. In consideration of Bank's commitment to make the Facility available and to extend the maturity date of the Facility, Borrower has paid to Bank commitment fees of $180,000 as of March 12, 1998 and $90,000 as of January 29, 1999. In order to compensate Bank for reserving the proceeds of the Facility in the future for use by Borrowers, Borrowers shall pay to Bank on January 1, 2000 an amount equal to .125% of the difference between $18,000,000 and the average daily balance of the principal balance of the Loan outstanding between October 1, 1999 and December 31, 1999; and on April 1, 2000 an amount equal to .125% of the difference between $18,000,000 and the average daily balance of the Loan outstanding between January 1, 2000 and March 31, 2000. 4.1.1 Documents Delivered upon Execution of Agreement. On or before the date hereof, Obligors have delivered or shall execute and deliver to Bank as of the date hereof, or shall cause to be executed and delivered, the documents described on Exhibit "4" attached hereto. 4.2 Requirements for Disbursements. Upon execution of this Agreement, and at the time of each subsequent disbursement: 4.2.1 The representations and warranties made by Obligors in this Agreement and the other Loan Documents shall be true and correct on and as of the date of funding, with the same effect as though made on and as of that date. 4.2.2 No Event of Default shall have occurred and be continuing, and no event shall have occurred and be continuing that, with the giving of notice or passage of time or both, could become such an Event of Default. 4.2.3 Obligors shall have delivered to Bank such additional instruments or documents and such additional approvals as Bank may request under the terms of this Agreement or the other Loan Documents or otherwise. -8- 4.3 Legal Matters. On the date hereof, and on the date of each subsequent disbursement, all legal matters incidental to this Agreement and any disbursement hereunder shall be reasonably satisfactory to counsel for Bank. 5. REPRESENTATIONS AND WARRANTIES. To induce Bank to enter into this Agreement and the Loan Documents, Obligors represent and warrant to Bank as follows: 5.1 Obligors are corporations duly organized, validly existing and in good standing under the laws of the State of Delaware; Obligors have the lawful power to own their assets and to engage in the businesses they conduct, and Obligors are duly qualified and in good standing as foreign corporations in all jurisdictions wherein the nature of the businesses transacted by the Obligors or property owned by the Obligors makes such qualification necessary. 5.2 The execution, delivery and performance by the Obligors of the Loan Documents has been duly authorized by all necessary action and does not and will not: (a) require any consent or approval of the directors or shareholders of any Obligor which has not been obtained; (b) contravene any Obligor's Certificate of Incorporation or By-Laws; (c) violate any provision of any law, rule, regulation (including, without limitation, Regulation U of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to any of the Obligors; (d) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which any Obligor is a party or by which any Obligor or its properties may be bound or affected; (e) result in, or require the creation or imposition of, any Lien upon or with respect to any of the properties now owned or hereafter acquired by any Obligor except as contemplated by this Agreement; or (f) cause any Obligor to be in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, agreement, lease or instrument. 5.3 There does not exist any default or violation by any Obligor of or under any of the terms, conditions or obligations of: (a) such Obligor's organizational documents; (b) any indenture, mortgage, deed of trust, franchise, permit, contract, agreement or other instrument to which such Obligor is a party or by which such Obligor is bound; or (c) any law, regulation, ruling, order injunction, degree, condition or other requirement applicable to or imposed upon such Obligor by any law or by any governmental authority, court or agency. 5.4 Obligors have the power and authority to enter into and perform all actions required to be performed by the Obligors under the Loan Documents and to incur the obligations herein and therein provided for, and has taken all proper and necessary action to authorize the execution, delivery and performance of the Loan Documents. 5.5 The Loan Documents when delivered will be valid, binding and enforceable against the Obligors in accordance with their respective terms. 5.6 There are no material suits, judgments, proceedings or items of litigation pending or, to the knowledge of any of the Obligors, threatened against any of the Obligors. For the purposes of this Section, material litigation shall denote actions seeking judgment for or damages in an amount greater than $2,000. -9- 5.7 Obligors have satisfied all judgments and Obligors are not in default with respect to any judgment, writ, injunction, decree, rule or regulation of any court, arbitrator or federal, state, municipal or other governmental authority, commission, board, bureau, agency or instrumentality, domestic or foreign. 5.8 Borrowers are the owners, free and clear, of all of their assets, real and personal including but not limited to leasehold interests, and there are no Liens, security interests or other encumbrances outstanding against any of these assets except for Permitted Liens. For the purposes hereof, "Permitted Liens" means: 5.8.1 Liens for taxes, assessments or similar charges not yet due and payable or still subject to payment without interest or penalty; 5.8.2 Pledges or deposits-made or letters of credit established to secure payment of workers' compensation, or to participate in any fund in connection with workers' compensation, unemployment insurance old-age pensions or other social security; 5.8.3 Good faith deposits in connection with tenders, contracts or leases, deposits to secure statutory obligations of any kind and deposits to secure or in lieu of surety, penalty or appeal bonds; 5.8.4 Encumbrances consisting of zoning restrictions, easements, restrictions on the use of real property or minor irregularities in the title thereto, none of which materially impairs the use of such property by Borrowers in the operation of their businesses; 5.8.5 The following, if the validity or amount thereof is being contested in good faith and by appropriate and lawful proceedings as long as levy and execution thereon can not be made or have been stayed and continue to be stayed, and they do not in the aggregate materially detract from the aggregate value of the property of Borrowers or materially impair the use thereof in the operation of Borrowers' businesses: (a) claims or liens for taxes, assessments or charges due and payable and subject to interest or penalty; (b) claims, liens and encumbrances upon, and defects of title to, real or personal property; and (c) claims or liens of mechanics, materialmen, warehousemen, carriers or other like liens, or deposits to obtain the release of such liens; 5.8.6 Up to an aggregate of $25,000: (a) statutory landlords' liens (imposed by law) attaching to property of any of the Borrowers located in facilities leased by a Borrower after the date hereof, with respect to which the Borrower has timely requested and is diligently seeking a waiver in form satisfactory to Bank; and (b) purchase money liens; 5.8.7 Liens created pursuant to the terms of the Loan Documents and other liens in favor of Bank created on or before the date hereof; and 5.8.8 Liens in existence on the date hereof as set forth on Schedule "5.8.8" attached hereto. -10- 5.9 Obligors have filed all federal, state and local tax returns and other reports Obligors are required by law to file prior to the date hereof, and have paid all taxes, assessments and other governmental charges that are due and payable prior to the date hereof and have reserved funds or made adequate provision for the payment of such taxes, assessments and the charges accruing but not yet payable. Obligors have no knowledge of any deficiency or additional assessment in a materially important amount in connection with any taxes assessments or charges. 5.10 To the best of their knowledge, Obligors have complied with all applicable statutes and regulations of the United States and all states, counties, municipalities and agencies thereof where non-compliance would have a materially adverse affect on the business of any of the Obligors with respect to: (a) any restrictions, specifications or other requirements pertaining to products which any Obligor sells; (b) the conduct of the Obligors' business operations; or (c) the use, maintenance and operation of the real and personal properties owned or leased by any of the Obligors in the operation of their businesses. 5.11 Obligors acknowledge that Obligors have previously delivered to Bank accurate information regarding the Obligors' authorized capital stock All issued shares are validly issued, fully paid and non-assessable. There are no outstanding options, warrants, commitments or demands of any character relating to the capital stock of the Obligors now outstanding. 5.12 Borrowers have no subsidiaries, and in the five (5) years preceding the date hereof have used no trade names or other fictitious names, except as previously disclosed in writing to Bank and Bank's counsel. 5.13 To the best of the knowledge of the Obligors, no real property owned or leased by any of the Obligors or on which any of the Obligors has a lien or security interest is in violation of any Environmental Laws, no Hazardous Materials are present on said real property and none of the Obligors has been identified in any litigation, administrative proceedings or investigation as a responsible party for any liability under any Environmental Laws. 5.14 No consent, approval or authorization of, or filing, registration or qualification with, any governmental authority or approval of directors or shareholders is required to be obtained by any of the Obligors in connection with the execution and delivery of this Agreement, o the undertaking or performance of the Obligors' obligations hereunder and under the other Loan Documents. 5.15 A schedule of all existing indebtedness for money borrowed by any of the Obligors, whether or not secured by any security agreement or mortgage, is attached hereto as Schedule "5.15". 5.16 All financial statements of Obligors delivered to Bank are true, complete and accurate in all material respects and fairly present the financial condition, assets and liabilities, whether accrued, absolute, contingent or otherwise, and the results of the Obligors' operations for the periods specified therein. The Obligors' financial statements have been prepared in accordance with GAAP applied on a Consistent Basis from period to period subject in the case of interim statements to normal year end adjustments. Since the date of the latest financial statements provided to Bank, none of the Obligors has suffered any damage, destruction or loss, and no event or condition has occurred or exists, which has resulted or could result in a material adverse change in its business, assets, operations, financial condition or results of operation. -11- 5.17 Obligors own or are licensed to use all patents, patent rights, trademarks, trade names, service marks, copyrights, intellectual property, technology, know-how and processes necessary for the conduct of their businesses as currently conducted that are material to the condition (financial or otherwise), business or operations of any of the Obligors. 5.18 No part of the proceeds of the Facility will be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time in effect or for any purpose which violates the provisions of the Regulations of such Board of Governors. 5.19 As of the date hereof and after giving effect to the transactions contemplated by the Loan Documents: (a) the aggregate value of each Obligor's assets will exceed its liabilities (including contingent, subordinated, unmatured and unliquidated liabilities); (b) each Obligor will have sufficient cash flow, as determined in accordance with GAAP, to enable it to pay its debts as they mature; and (c) no Obligor will have unreasonably small capital for the business in which it is engaged. 5.20 None of the Obligors is in default with respect to any of its existing indebtedness nor has any event occurred or condition arisen which upon the lapse of time, giving of notice or both would constitute an event of default under any existing agreement relating to borrowed money. 5.21 Obligors, an to the best of the knowledge and belief of the Obligors, all other parties to all leases, contracts and other commitments to which any of the Obligors is a party, have complied with the provisions of such leases, contracts and other commitments and no party is in default thereunder, except for contract disputes in the ordinary course of business, none of which would individually, or in the aggregate, even if determined in the manner most adverse to the interests of any of the Obligors, result in a material adverse change in the operations, financial condition, property or business of any of the Obligors, or its ability to meet its obligations to Bank. 5.22 To the best of Obligors' knowledge, Obligors possess all licenses, permits, franchises, patents, copyrights, trademarks and tradenames, or rights thereto, to conduct their businesses substantially as now conducted and as presently proposed to be conducted, and Obligors are not in violation of any valid rights of others with respect to any of the foregoing. 5.23 Obligors only places of business are described on Schedule "5.23" attached hereto. 5.24 Obligors are in compliance in all material respects with all applicable provisions of ERISA. Neither a Reportable Event nor a Prohibited Transaction has occurred and is continuing with respect to any Plan; no notice of intent to terminate a Plan has been filed, nor has any Plan been terminated; no circumstances exist which constitute grounds under Section 4042 of ERISA -12- entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administrate a Plan, nor has the PBGC instituted any such proceedings; neither any of the Obligors nor any ERISA Affiliate has completely or partially withdrawn under Sections 4201 or 4204 of ERISA from a Multiemployer Plan; Obligors and each ERISA Affiliate have met their minimum funding requirements under ERISA with respect to all of their Plans and the present fair market value of all Plan assets exceeds the present value of all vested benefits under each Plan, as determined on the most recent valuation date of the Plan and in accordance with the provisions of ERISA and the regulations thereunder for calculating the potential liability of Obligors or any ERISA Affiliate to PBGC or the Plan under Title IV of ERISA; and neither any of the Obligors nor any ERISA Affiliate has incurred any liability to the PBGC under ERISA. 5.25 Obligors are in compliance in all material respects with all applicable provisions of the Occupational Safety Hazard Act, 29 U.S. ss.651 et seq. 5.26 Borrowers are not guarantors or sureties of, or otherwise responsible in any manner with respect to, any undertaking of any other Person. Borrowers are not engaged in any joint venture or partnership with any other Person. 5.27 As of the date hereof, each of the Obligors is in sufficient liquid working capital reserves with which to meet its current obligations and the current portion of its long-term obligations. 5.28 No representation or warranty made by any of the Obligors contained herein or in any certificate or other document furnished by any of the Obligors pursuant hereto contains any untrue statement of material fact or omits to state a material fact necessary to make such representation or warranty not misleading in light of the circumstances under which it was made. 5.29 Obligors represent and warrant as of the date hereof that there are no outstanding or uncured defaults of any Underlying Borrower with respect to any terms or conditions of the Security Documents or any indenture, mortgage, deed of trust, franchise, permit, contract or agreement under which any Underlying Borrower is indebted to the Obligors, nor has any event occurred or condition arisen which upon the lapse of time or giving of notice or both would constitute an event of default under any such document. 5.30 Each Borrower, other than RAI, RPI and RP51 Inc., represents and warrants that: (i) its sole asset is the Collateral, and (ii) it has no material liabilities other than its liabilities to Bank. 5.31 Each Borrower, other than RAI and RPI, represents and warrants that: (i) the pledge of the Collateral to Bank is not for the purpose of defrauding its creditors, (ii) it has no default on any Mortgage, and (iii) it does not commingle its assets with RPI or RAI, conducts business solely in its name and provides, and will continue to provide, for its own expenses and liabilities from its own funds. 5.32 Each Obligor warrants that it is solvent on the date hereof. 5.33 All of the representations and warranties set forth in this Section 5 shall survive until all Obligations of Obligors to Bank are satisfied in full. -13- 6. OBLIGORS' COVENANTS. Obligors hereby covenant and agree with Bank that, as long as any of the Obligations remain unsatisfied, Obligors will comply with the following covenants: 6.1 Affirmative Covenants. 6.1.1 RPI shall furnish Bank, within ninety (90) days after the end of each fiscal year, commencing with the fiscal year ended September 30, 1998 (a) a statement of cash flow for such fiscal year; (b) a profit and loss statement for such fiscal year; (c) a balance sheet as of the end of such fiscal year; all in reasonable detail, including all supporting schedules and comments, and certified by Rip's chief financial officer (as applicable) to have been prepared in accordance with GAAP applied on a Consistent Basis by RPI, except for any inconsistencies explained in such certificate. 6.1.2 Each Borrower shall furnish Bank, within ninety (90) days after the end of each calendar year, commencing with the year ended December 30 1998, a rent roll, profit and loss statement (if available and statement of cash flow for the underlying property securing the obligations of such Borrower to Bank in form and substance satisfactory to Bank. 6.1.3 Except as provided in Section 6.1.4 below, RAI shall furnish to Bank, within forty-five (45) days after the close of each fiscal quarter commencing with the quarter ended December 31, 1999: (a) a statement of cash flow for such fiscal quarter; (b) a profit and loss statement for such fiscal quarter; (c) a balance sheet as of the end of such quarter; all in reasonable detail, including all supporting schedules and comments, and certified by RAI's chief financial officer to have been prepared in accordance with GAAP applied on a Consistent Basis by RAI, except for any inconsistencies explained in such certificate; the statements and balance sheet are to be audited by an independent certified public accounting firm of recognized standing selected by RAI and reasonably acceptable to Bank, and certified by such accountants on an unqualified basis to have been prepared in accordance with GAAP applied on a Consistent Basis, except for any inconsistencies explained in such certificate; and any management letters received by RAI from such accounting firm. 6.1.4 RAI shall furnish to Bank, within ninety (90) days after the close of each fiscal year commencing with the fiscal year ended September 30, 1999: (a) a statement of cash flow for such fiscal year; (b) a profit and loss statement for such fiscal year; (c) a balance sheet as of the end of such fiscal year; all in reasonable detail, including all supporting schedules and comments, and certified by RAI's chief financial officer to have been prepared in accordance with GAAP applied on a Consistent Basis by RAI, except for any inconsistencies explained in such certificate; the statements and balance sheet are to be audited by an independent certified public accounting firm of recognized standing selected by RAI and reasonably acceptable to Bank, and certified by such accountants on an unqualified basis to have been prepared in accordance with GAAP applied on a Consistent Basis, except for any inconsistencies explained in such certificate; and any management letters received by RAI from such accounting firm. Bank shall have the right, from time to time, to discuss the Obligors' affairs directly with the Obligors' independent certified public accountants after notice to the Obligors and opportunity of Obligors to be present at any such discussions. -14- 6.1.5 At such times as may be requested by Bank, Obligors shall furnish to Bank such other financial information as may be reasonably requested, in form and substance reasonably acceptable to Bank. 6.1.6 Obligors shall provide Bank with copies of all tax returns filed by Obligors no later than thirty (30) days after the tax returns are filed. 6.1.7 Obligors shall maintain their inventory, equipment, real estate and other properties in good condition and repair (normal wear and tear excepted), and will pay and discharge or cause to be paid and discharged when due the cost of repairs to or maintenance of the same and will pay or cause to be paid all rental or mortgage payments due on such real estate. Obligors hereby agree that, in the event Obligors fail to pay or cause to be paid any such payment, Bank may do so and any amounts expended by Bank shall be paid by Obligors upon demand, and until paid shall be added to the principal amount of the Note. 6.1.8 Obligors shall maintain, or cause to be maintained, "all risk" insurance, covering all of Obligors' insurable properties, including but not limited to comprehensive general public liability insurance, property insurance, casualty insurance, hazard insurance, worker's compensation insurance, products liability insurance, business interruption insurance, and fire (and flood, if applicable) and extended coverage insurance and vandalism and malicious mischief insurance on all assets owned by Obligors, in an amount not less than the greater of eighty percent (80) of the insurable value of Obligors' assets or the outstanding balance of the Note, and with such insurers and policies as may be reasonably satisfactory to Bank. Bank shall be named as lender loss payee on all insurance policies. Premiums on all insurance policies shall be prepaid for at least three (3) months and renewals made and premiums paid at least thirty (30) days prior to expiration. Such policies shall contain a provision for payment of all losses to Bank as loss payee and further provide that they cannot be canceled or materially changed except after thirty (30) days prior written notice to Bank. Such policies must provide that the insurance, solely as to the interest therein of Bank, shall not be impaired or invalidated by any act or neglect of Obligors. Upon request Obligors will furnish to Bank the original policy or a copy of the endorsement which amends the policy to include Bank as loss payee Obligors will furnish to Bank annual proof of such insurance and such other evidence of insurance as Bank may require Obligors hereby agree that, in the event Obligors fail to pay or cause to be paid the premium on any such insurance, Bank may do so and any amounts expended by Bank shall be paid by Obligors upon demand, and until paid shall be added to the principal amount of the Note. 6.1.9 Obligors shall pay or cause to be paid when due all taxes, assessments and charges or levies imposed upon Obligors or on any of the property of any of the Obligors or which Obligors are required to withhold and pay over, except where contested in good faith by appropriate proceedings with adequate reserves therefor having been set aside on Obligors' books; provided that Obligors shall pay or cause to be paid all such taxes, assessments, charges or levies forthwith whenever foreclosure on any lien that attaches (or security therefor) appears imminent. 6.1.10 Obligors shall keep adequate records and books of account, in which complete entries will be made in accordance with GAAP applied on a Consistent Basis, reflecting all financial transactions of Obligors. -15- 6.1.11 Obligors shall, when requested so to do, make available for inspection by duly authorized representatives of Bank Obligors' books and records, and will furnish Bank any reasonable information regarding Obligors' business affairs and financial condition within a reasonable time after request therefor. Obligors shall pay all reasonable costs and expenses in connection with such review, inspection and audit. Any such amounts expended by Bank shall be paid by Obligors upon demand, and until paid shall be added to the principal amount of the Note. 6.1.12 Obligors shall take all necessary steps to preserve their corporate existence and good standing in Delaware, and qualify and remain qualified as foreign corporations in each jurisdiction in which failure to be so qualified could have a material adverse effect on any of the Obligors, and shall comply with all present and future laws, rules, regulations and orders applicable to Obligors in the operation of their businesses, and all material agreements to which any of the Obligors is subject. 6.1.13 Obligors shall give prompt notice to Bank of: (a) any litigation in which any of the Obligors is a party if an adverse decision therein would require any of the Obligors to pay more than $25,000 or deliver assets the value of which exceeds such sum (unless the claim is covered by insurance); (b) the institution of any other suit or any administrative proceeding involving any of the Obligors that might materially and adversely affect such Obligor's operations, financial condition, property or business; or (c) the entry of any judgment or lien against any Obligor's property. 6.1.14 Obligors shall furnish to Bank promptly after the filing or receiving thereof, copies of all reports, including annual reports, and notices which Obligors file with or receive from the PBGC or the United States Department of Labor under ERISA; and as soon as possible and in any event within five (5) days after any of the Obligors knows that any Reportable Event or Prohibited Transaction has occurred with respect to any Plan or that the PBGC or any of the Obligors has instituted or will institute proceedings under Title I of ERISA to terminate any Plan, Obligors will deliver to Bank a certificate of the chief financial officer of each of the Obligors setting forth details as to such Reportable Event or Prohibited Transaction or Plan termination and the action Obligors propose to take with respect thereto. 6.1.15 Obligors shall maintain and cause each member of any Controlled Group to maintain such bonding as is required by Section 412 of ERISA. 6.1.16 Obligors shall notify Bank immediately if any of the Obligors becomes aware of the occurrence of any Event of Default or of any fact, condition or event that, with the giving of notice or passage of time, or both, could become an Event of Default, or of the failure of Obligors to observe any of their undertakings hereunder. 6.1.17 Obligors shall notify Bank at least thirty (30) days in advance of any change in the location of any of Obligors' places of business or of the establishment of any new, or the discontinuance of any existing, place of business. 6.1.18 Obligors shall pay when due all indebtedness to third Persons for money borrowed, or indebtedness which is secured by any personal or real property of Obligors unless being actively contested in good faith by appropriate proceedings, provided that Obligors shall pay all such indebtedness at any time -16- when there shall exist or come into existence a threat of imminent foreclosure upon, attachment of, levy upon or judgment against any of the Obligors or their assets. If default be made by Obligors in the payment of any interest. or principal (or installment thereof) of any such indebtedness, Bank shall have the right, in its to pay such interest or principal for Obligors' account if Bank reasonably believes failure to pay such interest or principal will result in the acceleration of indebtedness in an amount the payment of which would have a material adverse effect on the operations, financial condition, property or business of Obligors or Obligors' to meet their obligations to Bank. Any amounts expended by Bank shall be paid by Obligors upon demand, and until paid shall be added to the principal amount of the Note. 6.1.19 Obligors shall, as long as there is any amount outstanding from any of the Obligors to Bank, maintain Bank as their primary bank of account. 6.1.20 Borrowers shall give Bank notice promptly upon any of the borrowers opening any new bank accounts with institutions other than Bank. 6.1.21 Within ten (10) business days after the date of this Agreement Borrowers shall provide to Bank title endorsements and "bringdowns" for all properties on which Borrowers hold mortgages, which mortgages have been assigned to Bank as collateral for the Obligations. 6.1.22 Obligors shall notify Bank immediately if any of the Obligors become aware that: (i) any Underlying Borrower: (a) has applied for or consent to the appointment of a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property; (b) is generally unable to pay its debts as such debts become due; (c) has made a general assignment for the benefit of its creditors; (d) has commenced a voluntary case under the Bankruptcy Code (as now or hereafter in effect); (e) has filed a petition seeking to take advantage of any other law providing for the relief of debtors; (f) has failed to controvert in a timely or appropriate manner, or acquiesce in writing to, any petition filed against it in any involuntary case under the Bankruptcy Code; or (g) has taken any corporate action for the purpose of effecting any of the foregoing. (ii) a proceeding or case has been commenced against any of the Underlying Borrowers without the application or consent of the effected Underlying Borrowers in any court of competent jurisdiction, seeking: (a) its liquidation, reorganization, dissolution, winding-up or a composition or readjustment of its debts; (b) the appointment of a trustee, receiver, custodian, liquidator or the like for it or for all or any substantial part of its assets; or (c) similar relief in respect of it under any law providing for the relief of debtors; and such proceeding or case shall continue undismissed or unstayed and in effect for a period of sixty (60) days; or (d) an order for relief against any of the Underlying Borrowers shall be entered in an involuntary case under the Bankruptcy Code. -17- 6.2 Negative Covenants. Obligors agree that Obligors will not take any action (or inaction) or allow the occurrence of any event described in this Section 6.2 without the prior written consent of Bank: 6.2.1 None of the Obligors shall change its name, enter into any merger, consolidation, reorganization or recapitalization, make any substantial investment in or acquire a substantial portion of the capital stock (or an interest therein) of any other corporation o business entity, whether by purchase or contribution of capital as an incorporator or otherwise, or reclassify its capital stock. 6.2.2 None of the Obligors shall make or permit any material change in the nature of its business as carried on as of the date hereof. 6.2.3 None of the Obligors shall, except in the ordinary course of business, sell, transfer, lease or otherwise dispose of, in any fiscal year, any now owned or hereafter acquired assets which have an aggregate book value exceeding $25,000, except in connection with a replacement by liquid assets or by the same or comparable items by purchase or lease. 6.2.4 None of the Borrowers shall incur, create, assume or permit to exist any debts except: (a) the Facility; (b) existing indebtedness cited on Schedule "5.15"; (c) trade indebtedness incurred in the ordinary course of business; or (d) indebtedness for taxes which shall be paid pursuant to Section 6.1.9 above. 6.2.5 Neither of the Guarantors shall incur, create, assume or permit to exist any debts except: (a) the Facility; (b) existing indebtedness cited on Schedule "5.15"; (c) trade indebtedness incurred in the ordinary course of business; or (d) indebtedness for taxes which shall be paid pursuant to Section 6.1.9 above, if such debts are incurred in a transaction which would materially adversely affect the net worth of the Guarantor. 6.2.6 Borrowers shall not, except for Permitted Liens, mortgage, pledge, grant, encumber or permit to exist a mortgage or security interest in or Lien upon any of their assets of any kind, real or personal, tangible or intangible, now owned or hereafter acquired, including but not limited to marketable securities and investments. 6.2.7 Neither of the Guarantors shall, except for Permitted Liens, mortgage, pledge, grant, encumber or permit to exist a mortgage or security interest in or Lien upon any of their assets of any kind, real or personal, tangible or intangible, now owned or hereafter acquired, including but not limited to marketable securities and investments, except in connection with transactions which do not materially adversely affect the net worth of the Guarantor. 6.2.8 Obligors shall not create, incur, assume or suffer to exist any obligation as lessee for the rental or hire of any real or personal property, other than in the ordinary course of business. 6.2.9 Borrowers shall not enter into any lease of real property, or renew or extend the term of any lease of real property, without first delivering to Bank an executed landlord's waiver in form and substance satisfactory to Bank. -18- 6.2.10 Borrowers shall not become liable, directly or indirectly, as guarantor, surety, endorser (other than for collection or deposit in the ordinary course of business) or otherwise for any obligation of any Person, except liability to Bank incurred on or before the date hereof. 6.2.11 Neither of the Guarantors shall become liable, directly or indirectly, as guarantor, surety, endorser (other than for collection or deposit in the ordinary course of business) or otherwise for any obligation of any Person, except for liabilities for debts of entities of which one of the Guarantors has at least ninety percent (90%) control, or liability to Bank incurred on or before the date hereof. 6.2.12 RAI shall not do any of the following: (a) declare or pay any dividends or make any other distributions in respect of its capital stock in excess of fifty percent (50) of the income of RAI in the prior fiscal year; (b) purchase, redeem, retire or otherwise acquire or make any distribution of assets to its shareholders as such whether in cash, assets or obligations of RAI; (c) allocate or otherwise set apart any sum for the payment of any dividend or distribution on, or for the purchase, redemption or retirement of, any shares of its capital stock; or (d) make any other distribution by reduction of capital. 6.2.13 None of the Borrowers shall establish or acquire any subsidiary. 6.2.14 Obligors shall not enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate, except in the ordinary course of and pursuant to the reasonable requirements of Obligors' business and upon fair and reasonable terms no less favorable to Obligors than would obtain in a comparable arm's length transaction with a Person not an Affiliate. 6.2.15 Obligors shall not use, generate, treat, store, dispose of or otherwise introduce any Hazardous Materials into or on any real property owned or leased by any of the Obligors, or cause, suffer, allow or permit anyone else to do so, except in an environmentally safe manner through methods which have been approved by and meet all of the standards of the Federal Environmental Protection Agency and any other federal, state or local agency with authority to enforce Environmental Laws. Obligors irrevocably agree to indemnify, reimburse, defend and hold harmless Bank and its directors, officers, agents and employees for, from and against all demands, liabilities, damages, costs, claims, suits, actions, legal or administrative proceedings, interest, losses, expenses and reasonable attorney's fees (including any such fees and expenses incurred in enforcing this indemnity), whether or not suit is ever instituted, asserted against, imposed on or incurred by Bank or its directors, officers, agents and employees, directly or indirectly, pursuant to or in connection with the application of any Environmental Law to acts or omissions occurring at any time on or in connection with any real estate owned or leased by Obligors or in which any of the Obligors has a lien or security interest, or any business conducted thereon. 6.2.16 Borrowers shall not, except as permitted for prepayments to Bank, prepay any subordinated indebtedness, indebtedness for borrowed money or indebtedness secured by any of the assets any of the Borrowers, or enter into or modify any agreement as a result of which the terms of payment of any of the foregoing indebtedness are waived or modified. -19- 6.2.17 Borrowers shall not make any loan or advance to any Person, or make any investment, except in the ordinary course of business as being conducted on the date hereof. 6.2.18 Borrowers shall-not provide to anyone other than Bank a covenant by which any of the Borrowers agrees not to mortgage, pledge, grant or permit to exist a security interest in or lien upon any of its assets of any kind, real or personal, tangible or intangible now owned or hereafter acquired. 6.2.19 Obligors shall not furnish Bank any certificate or other document that will contain any untrue statement of material fact or a statement of a material fact which is misleading in light of the circumstances under which it was furnished. 6.2.20 Obligors shall not approve, participate in or affirm in any manner, without first obtaining the Bank's prior written consent, such consent to be withheld at the Bank's absolute and sole discretion: (a) any reorganization, liquidation dissolution, winding-up or composition or readjustment of debts of any Underlying Borrower; (b) any appointment of a trustee, receiver, custodian, liquidator or the like for any Underlying Borrower or for all or any substantial part of its assets; or (c) any similar relief in respect of any Underlying Borrower under any law providing for the relief of debtors. 7. DEFAULT. 7.1 Event of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default" hereunder: 7.1.1 Obligors shall fail to pay within five (5) days after notice by Bank to Obligors of nonpayment of any principal, interest or other amount of money payable under the Note or otherwise hereunder or under any of the Loan Documents, however Bank shall only be required to give notice of such nonpayment two (2) times in any twelve (12) month period, after which no notice shall be required, and there shall be an Event of Default if any such payment is not made on the due date therefor. 7.1.2 Any of the Obligors shall fail to observe or perform or abide by any other covenant, warranty, agreement or provision of the Loan Documents, and such failure shall continue for ten (10) days after notice by Bank to Obligors of the failure, or, if such failure can not be cured within such ten (10) day period, a cure has been commenced and is being diligently pursued, but the failure is not cured within twenty (20) days after Bank gives notice to Obligors of its occurrence. 7.1.3 There shall be a default or an event of default (other than a default or an event of default caused by Bank) under any agreement other than the Loan Documents now existing or hereafter executed between any of the Obligors and Bank, subject to any applicable provisions requiring notice or any applicable grace periods. 7.1.4 Any financial statement, representation, warranty, statement or certificate made or furnished by any of the Obligors to Bank in connection with the Loan Documents or as an inducement to Bank to enter into the Loan Documents shall be materially false, incorrect or incomplete when made. -20- 7.1.5 Except as provided in Sections 7.1.1, 7.1.2 and 7.1.3, any of the Obligors shall: (a) fail to pay any indebtedness for borrowed money or any interest or premium thereon, when due or within any applicable grace period (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise); or (b) fail to perform or observe any term, covenant or condition on Obligors' part to be performed or observed under any agreement or instrument relating to any such indebtedness, when required to be performed or observed; if the effect of such failure to perform or observe is to accelerate, or to permit the acceleration after the giving of notice or passage of time, or both, of the maturity of any indebtedness, unless such failure to perform or observe shall be waived by the holder of such indebtedness, or unless the indebtedness is being contested in good faith by appropriate proceedings; or any indebtedness shall be declared to be due and payable, or required to be completely or substantially completely prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof. For purposes of this Section 7.1.5, the term "indebtedness" means indebtedness which exceeds $25,000. 7.1.6 Any of the Obligors shall: (a) applies for or consent to the appointment of a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property; (b) is generally unable to pay its debts as such debts become due; (c) make a general assignment for the benefit of its creditors; (d) commences a voluntary case under the Bankruptcy Code (as now or hereafter in effect); (e) files a petition seeking to take advantage of any other law providing for the relief of debtors; (f) fails to controvert in a timely or appropriate manner, or acquiesce in writing to, any petition filed against it 14 any involuntary case under the Bankruptcy Code; or (g) takes any orate action for the purpose of effecting any of the foregoing. 7.1.7 Proceeding or case shall be commenced against any of the underlying Borrowers without the application or consent of the effected underlying Borrowers in any court of competent jurisdiction, seeking: (a) its liquidation, reorganization, dissolution, winding-up or a composition or readjustment of its debts; (b) the appointment of a trustee, receiver, custodian, liquidator or the like for it or for all or any substantial part of its assets; or (c) similar relief in respect of it under any law providing for the relief of debtors; and such proceeding or case shall continue undismissed or unstayed and in effect for a period of sixty (60) days; or an order for relief against any of the underlying Borrowers shall be entered in an involuntary case under the Bankruptcy Code. 7.1.8 The forfeiture proceeding, execution or attachment against any collateral securing the obligations of any Obligor to Bank, or any of the underlying collateral. 7.1.9 A material adverse change in the operations, financial condition, property or business of any of the Obligors, as determined by Bank in its reasonable discretion, shall occur. 7.1.10 The dissolution, liquidation or other termination of any of the Obligors. 7.1.11 One or more judgments, decrees or orders for the payment of money in excess of $25,000 in the aggregate shall be rendered against any of the Obligors and such judgments, decrees or orders shall continue unsatisfied and in effect for a period of: (a) ten (10) consecutive days without being vacated, discharged, satisfied or stayed or bonded pending appeal, if not covered by insurance; or (b) thirty (30) consecutive days without being vacated, discharged, satisfied or stayed or bonded pending appeal, if covered by insurance. -21- 7.1.12 Any of the following events occur or exist with respect to any of the Obligors or any ERISA Affiliate: (a) any Prohibited Transaction involving any Plan; (b) any Reportable Event with respect to any Plan; (c) the filing under Section 4041 of ERISA of a notice of intent to terminate any Plan or the termination of any Plan; (d) any event or circumstance that might constitute grounds entitling the PBGC to institute proceedings under Section 4042 of ERISA for the termination of, or for the appointment of a trustee to administer, any Plan, or the institution by the PBGC of any such proceedings; (e) complete or partial withdrawal under Section 4201 or 4204 of ERISA from a Multiemployer Plan or the reorganization, insolvency or termination of any Multiemployer Plan, and in each case above, such event or condition, together with all other events or conditions, if any, could in the opinion of Bank subject any of the Obligors to any tax, penalty or other liability to a Plan, a Multiemployer Plan, the PBGC or otherwise (or any combination thereof) which in the reasonable determination of Bank may have a material adverse effect on the financial condition, properties, operations or business of any of the Obligors. 7.1.13 There shall be an occurrence of an event of default under any lease of real property where any of the Obligors is the tenant, and the landlord distrains or levies or liens or exercises other rights with respect to any property of any of the Obligors. 7.1.14 The validity or enforceability of the Loan Documents shall be contested by any of the Obligors or any of the Obligors shall deny that it has any or further liability or obligation thereunder. 7.1.15 Any change in ownership of RPI or any of the Borrowers. 7.1.16 There shall be an event of default as described in Section 10 below. 7.2 Remedies. 7.2.1 Upon the occurrence of any Event of Default, at Bank's option, all obligations on the part of Bank to make the loans to Borrowers under the Facility, or to make any further disbursements hereunder, shall cease and terminate, and the balance of the principal of and all accrued interest upon the Note and all other indebtedness of any of the Obligors to Bank now or hereafter incurred shall become immediately due and payable without demand or presentation of any kind. Thereupon, Bank shall have such additional rights and remedies as are contained in the Loan Documents and otherwise under applicable law, and all such rights and remedies shall be cumulative. 7.2.2 The remedies provided in this Agreement shall be in addition to and not in substitution for the rights and remedies which would otherwise be vested in Bank in law or equity, all of which rights and remedies are specifically reserved by Bank, and the failure of Bank to exercise any remedy herein provided shall not preclude the resort to any other appropriate remedy or remedies herein provided or prevent the subsequent or concurrent resort to any other remedy or remedies which by law or equity shall be vested in Bank for the recovery of damages or otherwise in the event of a breach of any of the undertakings of Obligors hereunder. -22- 7.2.3 Whether or not Bank elects to exercise any of its rights specified in this Section 7, Bank shall also have the right immediately upon the occurrence of any Event of Default to enforce its security interests in all of the Collateral, and to such end and after such Event of Default Obligors hereby grant to Bank a power of attorney to enforce Bank's security Collateral. 8. BANK PERFORMANCE OF OBLIGORS' OBLIGATIONS. Upon Bank's determination in the exercise of reasonable business judgment that any of the Obligors has failed to perform any of its obligations under this Agreement or any other covenants contained in other documents referenced herein or delivered pursuant hereto or thereto, Bank may (but is not obligated to) perform for the account of Obligors any such obligations. All sums so expended by Bank shall be paid by Obligors upon demand, and until paid shall be added to the principal amount of the Note. 9. INDEMNITY. Obligors irrevocably agree to indemnify, reimburse, defend and hold harmless Bank and its directors, officers, agents and employees for, from and against all demands, liabilities, damages, costs, claims, suits, actions, legal or administrative proceedings, interest, losses, expenses and reasonable attorney's fees, whether or not suit is ever instituted (including any such fees and expenses incurred in successfully enforcing this indemnity), asserted against, imposed on or incurred by Bank or its directors, officers, agents and employees, directly or indirectly, at any time incurred by Bank as a consequence of any claims, demands, actions, suits or proceedings against Bank or to which Bank is a party relating directly or indirectly to the Loan Documents or the Facility, including but not limited to Borrowers' use of the proceeds of the Facility This indemnity shall survive the repayment of the Facility. 10. CROSS DEFAULT. It shall be an event of default under each of the Loan Documents in the event there is a default or an event of default under any other Loan Document, subject to any applicable provisions requiring notice or any applicable grace periods. Unless expressly provided to the contrary in documentation for any other loan or loans, it is the express intent of Bank and Obligors that all obligations of Obligors to Bank in any capacity whatsoever, including the Obligations, be cross-collateralized and crossdefaulted, such that collateral securing any obligations of any of the Obligors to Bank shall secure repayment of all obligations of Obligors to Bank, and a default under any obligation of any of the Obligors to Bank shall be a default under all obligations of Obligors to Bank. 11. PAYMENT OF EXPENSES. Obligors shall pay all reasonable costs and expenses, including but not limited to reasonable attorneys' fees, incurred in connection with the preparation, filing, recording, perfection, negotiation, administration, amendment, modification and enforcement of the Loan Documents and the collection of the Note, and all fees for lien searches, appraisals, audits and notary fees, and if Obligors fail to pay such amounts Bank may do so and any amounts expended by Bank shall be paid by Obligors upon demand, and until paid shall be added to the principal amount of the Note. -23- 12. MAXIMUM INTEREST. Notwithstanding anything to the contrary contained herein or in the Note or any other document executed in connection with the Facility, the effective rate of interest on the Facility shall not exceed the maximum effective rate of interest permitted by any applicable law or regulation. Borrowers hereby agree to give Bank prior written notice in the event any interest with respect to the Facility will cause the total interest collected in any one year to be usurious under any applicable law, and Bank hereby agrees not to collect knowingly any interest from Borrowers in the form of fees or otherwise which will render the Facility usurious. In the event that the interest referred to hereunder would be usurious in Bank's opinion, Bank reserves the right to reduce the interest payable by Borrowers. 13. ASSIGNMENTS AND PARTICIPATIONS. At any time Bank may sell, assign, transfer, negotiate, grant participations in, or otherwise dispose of all or any part of Bank's interest in the Facility. Obligors' hereby authorize Bank to provide, without any notice to Obligors, any information concerning Obligors, including information pertaining to Obligors' financial condition, business operations or general creditworthiness, to any person or entity which may succeed to or participate in all or any part of Bank's interest in the Facility. 14. FURTHER ASSURANCES. Obligors hereby agree to execute and deliver to Bank such further instruments and other documentation as may be reasonably requested by Bank at any time and from time to time to carry out the terms of this Agreement, and to be informed as to the status and affairs of Obligors. 15. AMENDMENT AND WAIVER. This Agreement may be amended and any provision hereof waived only in a writing signed by the party against whom an amendment or waiver is sought to be enforced. Bank shall have the right at all times to enforce the provisions of this Agreement in strict accordance with the terms hereof, notwithstanding any conduct or custom on the part of Bank in refraining from so doing at any time or times. The failure of Bank at any time to enforce its rights under such provisions strictly in accordance with the same shall not be construed as having created a custom in any way or manner contrary to specific provisions of this Agreement or as having in any way or manner modified or waived the same, and Bank shall have the right thereafter to insist upon strict performance by the parties hereto of the provisions hereof. All rights and remedies of Bank are cumulative and concurrent and the exercise of one right or remedy shall not be deemed a waiver or release of any other right or remedy. -24- 16. NOTICES. Except as provided herein to the contrary, any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed delivered if sent by certified mail, postage prepaid, return receipt requested, or overnight delivery service, or facsimile, as follows, unless such address is changed by written notice hereunder: If to any of the Obligors: 1521 Locust Street 4th Floor Philadelphia, PA 19102 Attn: Scott Schaeffer fax (215) 546-5388 With a copy to: Ledgewood Law Firm 1521 Locust St. Philadelphia, PA 19102 Attn: Richard J. Abt, Esq. fax (215) 735-2513 If to Bank: Jefferson Bank 1845 Walnut Street 10th Floor Philadelphia, PA 19103 Attn: Michael Beatty fax (215) 861-7921 With a copy to: Jefffrey A. Leonard, Esquire Cozen and O'Connor 1900 Market Street Philadelphia, PA 19103 fax (215) 665-2013 Any notice sent by mail shall be deemed given when delivered. 17. SURVIVAL. All covenants, agreements, representations and warranties made herein and in the other documents and certificates delivered pursuant hereto shall survive the making by Bank of the Facility and the execution and delivery to Bank of the Note and shall continue in full force and effect as long as the Note or the Obligations or any amounts due hereunder are outstanding and unpaid. 18. LIABILITY OF BANK. Obligors agree that Bank shall not have any liability (in tort or otherwise) for any lost profits or other consequential damage sustained by Obligors as a result of any action taken or omitted by Bank or any of Bank's officers, agents or employees in connection with the administration or enforcement of this Agreement or the other Loan Documents, unless such action was taken or omitted as a result of gross negligence or willful misconduct of Bank. -25- 19. JOINT AND SEVERAL LIABILITY. The liability of the Obligors to Bank hereunder shall be their joint and several liability. 20. BINDING EFFECT, ASSIGNMENT AND ENTIRE AGREEMENT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their heirs, executors, administrators, successors and assigns. Obligors shall have no right to assign any of Obligors' rights or obligations hereunder without the prior written consent of Bank. This Agreement, the Loan Documents, the exhibits and schedules attached hereto and the documents executed and delivered pursuant hereto constitute the entire agreement among the parties with-respect to the subject matter contained herein, and supersede all prior and contemporaneous oral and written communications and agreements with respect thereto. 21. SEVERABILITY. If any provision of this Agreement shall be held invalid under any applicable law, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end, the provisions hereof are severable. 22. HEADINGS. Headings of sections shall be deemed to be included for purposes of convenience only and shall not affect the interpretation of this Agreement. 23. INTERPRETATION. As used herein, the singular shall include the plural, and the neutral shall include the masculine and feminine, and vice versa. 24. CONSTRUCTION. This Agreement shall be deemed incorporated into and made part of the other Loan Documents and all agreements between Obligors and Bank referred to herein and therein. All such agreements and this Agreement shall be construed as integrated and complementary of each other, and as augmenting and not restricting Bank's rights, remedies and security If, after applying the foregoing, an inconsistency still exists, the provisions of this Agreement shall constitute an amendment thereto and shall control. 25. WARRANT OF ATTORNEY. OBLIGORS HEREBY AUTHORIZE AND EMPOWER ANY ATTORNEY OF ANY COURT OF RECORD UPON THE OCCURRENCE OF ANY EVENT OF DEFAULT HEREUNDER TO APPEAR FOR AND CONFESS JUDGMENT AGAINST OBLIGORS FOR SUCH SUMS AS SHALL HAVE THEN BECOME DUE UNDER THIS AGREEMENT, THE NOTE AND ALL OTHER OBLIGATIONS OF OBLIGORS TO BANK, IN ANY CASE WITH OR WITHOUT DECLARATION, WITH COSTS OF SUIT AND RELEASE OF ERROR, WITHOUT STAY OF EXECUTION AND WITH FIVE PERCENT (5%) ADDED FOR ATTORNEYS' FEES. -26- OBLIGORS WAIVE THE RIGHT OF INQUISITION ON ANY REAL ESTATE LEVIED ON, VOLUNTARILY CONDEMN THE SAME, AUTHORIZE THE PROTHONOTARY OR CLERK TO ENTER UPON THE WRIT OF EXECUTION SAID VOLUNTARY CONDEMNATION AND AGREE THAT SAID REAL ESTATE MAY BE SOLD ON A WRIT OF EXECUTION. OBLIGORS ALSO WAIVE AND RELEASE ALL RIGHTS OF APPEAL AND ALL RELIEF FROM ANY AND ALL APPRAISEMENT, STAY OR EXEMPTION LAW OF ANY STATE NOW IN FORCE OR HEREAFTER ENACTED. IF A COPY OF THIS AGREEMENT, VERIFIED BY AFFIDAVIT OF BANK OR SOMEONE ON BEHALF OF BANK, SHALL HAVE BEEN FILED IN SUCH ACTION, IT SHALL NOT BE NECESSARY TO FILE THE ORIGINAL AGREEMENT AS A WARRANTY OF ATTORNEY. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST OBLIGORS SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES THEREOF OR BY ANY IMPERFECT EXERCISE THEREOF, AND SHALL NOT BE EXTINGUISHED BY ANY JUDGMENT ENTERED PURSUANT THERETO; THE AUTHORITY AND POWER MAY BE EXERCISED ON ONE OR MORE OCCASIONS, FROM TIME TO TIME, IN THE SAME OR DIFFERENT JURISDICTIONS, AS OFTEN AS BANK SHALL DEEM NECESSARY OR DESIRABLE, FOR ALL OF WHICH THIS AGREEMENT SHALL BE A SUFFICIENT WARRANT. 26. APPLICABLE LAW; CONSENT TO JURISDICTION AND VENUE. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. IN ANY LEGAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER, OBLIGORS HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF THE COMMON PLEAS COURTS OF PENNSYLVANIA AND THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA AND AGREE NOT TO RAISE ANY OBJECTION TO SUCH JURISDICTION OR TO THE LAYING OR MAINTAINING OF THE VENUE OF ANY SUCH PROCEEDING IN SUCH COUNTY. OBLIGORS AGREE THAT SERVICE OF PROCESS IN ANY SUCH PROCEEDING MAY BE DULY EFFECTED UPON OBLIGORS BY MAILING A COPY THEREOF, BY REGISTERED MAIL, POSTAGE PREPAID, TO OBLIGORS. 27. WAIVER OF JURY TRIAL. OBLIGORS AND BANK HEREBY WAIVE TRIAL BY JURY IN ANY LEGAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER. THIS PROVISION IS A MATERIAL INDUCEMENT FOR BANK TO ENTER INTO THIS AGREEMENT. -27- Obligors acknowledge that they have read and understood all the provisions of this Agreement, including the waiver of jury trial and confession of judgment, and have been advised by counsel as necessary or appropriate. 28. Release. Obligors hereby release Bank, its officers, agents and employees from any and all claims, causes of action, liabilities or obligations of any sort or kind, which Obligors ever had, now have or will have or which its successors or assigns can, shall or may have against Bank arising out of or relating to the Loan Documents or the Loan at any time prior to the date hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives, under seal, the day and year first above written. RESOURCE PROPERTIES XXXII, INC. Attest: By: ----------------------------- ------------------------------- Title: Name: Scott F. Schaeffer ------------------------------ Title: President [SEAL] RESOURCE PROPERTIES XXXVIII, INC. Attest: By: ----------------------------- ------------------------------- Title: Name: Scott F. Schaeffer ------------------------------ Title: President [SEAL] RESOURCE PROPERTIES II, INC. Attest: By: ----------------------------- ------------------------------- Title: Name: Scott F. Schaeffer ------------------------------ Title: President [SEAL] RESOURCE PROPERTIES 51, INC. Attest: By: ----------------------------- ------------------------------- Title: Name: Scott F. Schaeffer ------------------------------ Title: President [SEAL] RESOURCE AMERICA, INC. Attest: By: ----------------------------- ------------------------------- Title: Name: Scott F. Schaeffer ------------------------------ Title: Vice Chairman [SEAL] RESOURCE PROPERTIES, INC. Attest: By: ----------------------------- ------------------------------- Title: Name: Scott F. Schaeffer ------------------------------ Title: President [SEAL] JEFFERSON BANK By: ------------------------------- Name: Michael Beatty Title: First Vice President -28- JOINDER OF GUARANTORS The undersigned, as the Guarantors referred to in the foregoing Amended and Restated Loan Agreement, join in the said Agreement and by doing so hereby acknowledge the terms thereof, consent thereto, and agree to be bound by all those covenants, terms, conditions, warranties and representations in said Agreement that are applicable to them, and ratify and confirm the terms of the Guaranty executed and delivered by each of them in connection therewith. RESOURCE PROPERTIES, INC. By: ------------------------------- Name: Scott F. Schaeffer Title: President RESOURCE AMERICA, INC. By: ------------------------------- Name: Scott F. Schaeffer Title: Vice Chairman EX-10.13 8 0008.txt EXHIBIT 10.13 REVOLVING CREDIT LOAN AND SECURITY AGREEMENT By and Between RESOURCE PROPERTIES, INC. RESOURCE PROPERTIES 53, INC. RESOURCE PROPERTIES XXIV, INC. RESOURCE PROPERTIES XL, INC. and SOVEREIGN BANK Dated: July 27, 1999 LOAN AND SECURITY AGREEMENT THIS REVOLVING CREDIT LOAN AND SECURITY AGREEMENT (the "Agreement") is made effective the 27th day of July, 1999, by and between RESOURCE PROPERTIES, INC. ("Resource, Inc."), RESOURCE PROPERTIES 53, INC. ("Resource 53"), RESOURCE PROPERTIES XXIV, INC. ("Resource XXIV") and RESOURCE PROPERTIES XL, INC. ("Resource XL") (collectively, "Borrower") and SOVEREIGN BANK ("Bank"). BACKGROUND A. Borrower has requested that Bank extend a line of credit to Borrower, which Bank is willing to do on the terms set forth herein. B. As evidenced by Borrower's Guaranty and Suretyship Agreement of even date herewith (the "Guaranty"), Borrower has guaranteed and become surety for all obligations of Resource America, Inc. ("Resource America") to Bank arising under or in connection with the $5,000,000 revolving line of credit from Bank to Resource America extended concurrently herewith (the "Resource America Loan") pursuant to the Revolving Credit Loan Agreement of even date herewith between Bank and Resource America. C. Capitalized terms not otherwise defined herein will have the following meanings: "Accounting Terms". As used in this Agreement, or any certificate, report or other document made or delivered pursuant to this Agreement, accounting terms not defined elsewhere in this Agreement shall have the respective meanings given to them under GAAP. "Affiliate", as to any Person, means 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. "Appraisal" means as an appraisal performed by an appraiser approved by Bank and in form and substance satisfactory to Bank. Bank reserves the right to make reasonable adjustments in the assumptions and other variables used in such appraisals in order to conform to the policies of Bank, which adjustments may result in a change in the appraised value. "Appraised Value" the fair market value of each property constituting or proposed to constitute Real Estate as shown by an Appraisal of such property. "Bank Indebtedness" shall mean all, obligations and Indebtedness of Borrower to Bank, whether now or hereafter owing or existing, including, without limitation, all obligations under the Loan Documents, all obligations to reimburse Bank for payments made by Bank pursuant to any letter of credit issued for the account or benefit of Borrower by Bank, all other obligations or undertakings now or hereafter made by or for the benefit of Borrower to or for the benefit of Bank under any other agreement, promissory note or undertaking now existing or hereafter entered into by Borrower with Bank, including, without limitation, all obligations of Borrower to Bank under any guaranty or surety agreement (including without limitation the Guaranty and Suretyship Agreement of even date herewith pursuant to which Borrower guarantees and becomes surety to Bank for all obligations of Resource America, Inc. to Bank arising under or in connection with the Resource America Loan and all obligations of Borrower to immediately pay to Bank the amount of any overdraft on any deposit account maintained with Bank, together with all interest and other sums payable in connection with any of the foregoing. "Bonds" has the meaning given to such term in Section 4.1(f) herein. "Borrowing Base" has the meaning given to such term in Section 1.4 herein. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Pennsylvania are authorized by law to close. "Collateral" has the meaning given to such term in Section 4.1 herein. "Collateral Document Default" has the meaning given to such term in Section 4.4 herein. "Collateral Documents" means as to each property constituting or proposed to constitute Real Estate all of the notes, mortgages, agreements, participation agreements and certificates, and other documents and instruments evidencing, securing and/or otherwise relating to the loans and/or participations secured by or otherwise relating to Real Estate, including without limitation those documents and instruments set forth on Exhibit "A" attached hereto and made a part hereof, as the same may be amended from time to time in accordance with the terms hereof. "Corporation" means a corporation, partnership, trust, unincorporated organization, association or joint stock company. "CRFI" means Charles Rennie Financial, Inc. "Default Rate" has the meaning given to such term in Section 2.2 herein. "Debt Service Coverage Ratio" means the ratio of (i) Borrower's consolidated Net Operating Income, calculated on an annualized basis, to (ii) the annual interest payments due -2- on the Line, calculated as if the full amount of the Line was disbursed and outstanding on such date, at the interest rate in effect on such date. "Deferred Compensation Plan" means any plan described in Section 3(3) of ERISA or any other plan or arrangement under which Borrower or any ERISA Affiliate may become obligated to pay deferred, bonus, incentive, or other compensation or health, life, medical, dental, or other welfare benefits, excluding only any fully insured major medical, hospital, or dental program for which Borrower or such ERISA Affiliate has no obligation other than the payment of premiums. "Deposit Accounts" has the meaning given to such term in Section 5.22 herein. "Depository Agreements" has the meaning given to such term in Section 10.1(i) herein. "Environmental Affiliate" means Borrower and any other Person for whom Borrower at any time has any liability (contingent or otherwise) with respect to any claims arising out of the failure of Borrower or such Person to comply with all applicable Environmental Requirements. "Environmental Cleanup Site" means any location which is listed or proposed for listing on the National Priorities List, on CERCLIS or on any similar state list of sites requiring investigation or cleanup, or which is the subject of any pending or threatened action, suit, proceeding or investigation related to or arising from any alleged violation of any Environmental Requirements. "Environmental Requirements" means any and all applicable federal, state or local laws, statutes, ordinances, regulations or standards, administrative or court orders or decrees, common law doctrines or private agreements, relating to (i) pollution or protection of the environment and natural resources, (ii) exposure of employees or other persons to Special Materials, (iii) protection of the public health and welfare from the effects of Special Materials and their products, by-products, wastes, emissions, discharges or releases, and (iv) regulation, licensing, approval or authorization of the manufacture, generation, use, formulation, packaging, labeling, transporting, distributing, handling, storing or disposing of any Special Materials. "Equity" means Borrower's consolidated equity, as shown on its financial statements submitted to Bank in accordance with Section 8 herein. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and all rules or regulations issued in connection therewith. -3- "ERISA Affiliate" means each trade or business (whether or not incorporated) that, together with Borrower, would be treated as a single employer under Section 4001(b)(1) of ERISA or Section 414(b) or 414(c) of the Internal Revenue Code. "Event of Default" means each of the events specified in Section 12.1. "Expiration Date" has the meaning given to such term in Section 1.1 herein. "GAAP" means generally accepted accounting principles in the United States of America, in effect from time to time, consistently applied and maintained. "Guaranty" has the meaning given to such term in the Background Section hereto. "Indebtedness", as applied to a Person, means: (a) all items (except items of capital stock or of surplus) which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined; (b) to the extent not included in the foregoing, all indebtedness, obligations, and liabilities secured by any mortgage, pledge, lien, conditional sale or other title retention agreement or other security interest to which any property or asset owned or held by such Person is subject, whether or not the indebtedness, obligations or liabilities secured thereby shall have been assumed by such Person; and (c) to the extent not included in the foregoing, all indebtedness, obligations and liabilities of others which such Person has directly or indirectly guaranteed, endorsed (other than for collection or deposit in the ordinary course of business), sold with recourse, or agreed (contingently or otherwise) to purchase or repurchase or otherwise acquire or in respect of which such Person has agreed to supply or advance funds (whether by way of loan, stock purchase, capital contribution or otherwise) or otherwise to become directly or indirectly liable. Notwithstanding the foregoing, the term "Indebtedness" shall not include any amounts which are non-recourse to Borrower (other than usual and customary carveouts). "Leasehold Mortgage" has the meaning given to such term in Section 10.1(j) herein. "Line" has the meaning given to such term in Section 1.1 herein. "Line Note" has the meaning given to such term in Section 1.1 herein. -4- "Line Request" has the meaning given to such term in Section 1.3 herein. "Loan Documents" means this Agreement, the Line Note, the Assignments and other pledge and transfer documents referred to in Section 10.1 hereof, the Leasehold Mortgage and all other documents, executed or delivered by Borrower pursuant to this Agreement, as they may be amended from time to time. "Multiemployer Plan" means a plan described in Section 3(37) or 4001(a)(3) of ERISA or Section 414 of the Internal Revenue Code of 1986, as amended from time to time, which cover employees of Borrower or any ERISA Affiliate. "Net Operating Income" means Borrower's consolidated gross revenues less expenses (excluding depreciation, interest and amortization). "Obligor" means each maker, mortgagor, guarantor, or other obligor under or with respect to any Collateral Document. "Participation Seller" means each seller to Borrower of a participation interest in and to any Collateral Documents. "Payments" has the meaning given to such term in Section 4.1 herein. "Person" means an individual, a Corporation or a government or any agency or subdivision thereof, or any other entity. "Potential Default" means the occurrence of any event which with the giving of notice or passage of time or both, without would constitute an Event of Default. "Prime Rate" means the Wall Street Journal Prime Rate as established from time to time. "Real Estate" means those parcels of real property (i) which relate to the loans and/or participations evidenced by the Collateral Documents, and/or (ii) subject to the Leasehold Mortgage, together with the improvements thereon, including without limitation the real property listed on Exhibit "B" attached hereto, as the same may be amended from time to time in accordance with the provisions hereof. "Resource America Loan" has the meaning given to such term in the Background Section hereto. "Special Materials" means any and all materials which, under Environmental Requirements, require special handling in use, generation, collection, storage, treatment or -5- disposal, or payment of costs associated with responding to the lawful directives of any court or agency of competent jurisdiction. Special Materials shall include, without limitation: (i) any flammable substance, explosive, radioactive material, hazardous material, hazardous waste, toxic substance, solid waste, pollutant, contaminant or any related material, raw material, substance, product or by-product of any substance specified in or regulated or otherwise affected by any Environmental Requirements (including but not limited to any "hazardous substance" as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended or any similar state or local law), (ii) any toxic chemical or other substance from or related to industrial, commercial or institutional activities, and (iii) asbestos, gasoline, diesel fuel, motor oil, waste and used oil, heating oil and other petroleum products or compounds, polychlorinated biphenyls, radon, urea formaldehyde and lead-containing materials. "Subsidiary" means a Corporation (a) which is organized under the laws of the United States or any state thereof, or any other county or jurisdiction, (b) which conducts substantially all of its business and has substantially all of its assets within the United States, and (c) of which more than fifty percent (50%) of its outstanding voting stock of every class (or other voting equity interest) is owned by Borrower or one or more of its Subsidiaries. "Substitute Collateral" means notes, mortgages and other documents and instruments, evidencing and or securing a commercial mortgage loan (or a participation interest therein) of which Resource 53 or Resource XXIV is the owner (all as more fully described in Section 4.1 herein), where Bank shall have received an Appraisal of the real property subject to such loan and such other reports (including environmental reports), surveys, and information relating thereto as Bank may request. Upon the delivery of Substitute Collateral to Bank and the acceptance thereof by Bank, all such documents and instruments shall constitute Collateral Documents (and Exhibit "A" shall be amended accordingly) and the real property to which they relate shall constitute Real Estate (and Exhibit "B" shall be amended accordingly). NOW, THEREFORE, in consideration of the terms and conditions contained herein, and of any extensions of credit now or hereafter made to or for the benefit of Borrower by Bank, the parties hereto, intending to be legally bound hereby, agree as follows: 1. THE LINE: USE OF PROCEEDS. 1.1 Line of Credit. Bank will establish for Borrower for and during the period from the date hereof and until July 27, 2001 (the "Expiration Date"), subject to the terms and conditions hereof (including without limitation the Borrowing Base set forth in Section 1.4 herein), a revolving line of credit (the "Line") pursuant to which Bank will from time to time make loans to Borrower in an aggregate outstanding principal amount not to exceed at any time Fifteen Million Dollars ($15,000,000). Within the limits of the Line, Borrower may borrow, repay and reborrow under the Line. The Line shall be subject to all terms and -6- conditions set forth in all of the Loan Documents which terms and conditions are incorporated herein. Borrower's obligation to repay advances under the Line shall be evidenced by Borrower's promissory note (the "Line Note") in the face amount of Fifteen Million Dollars ($15,000,000), dated the date of this Agreement, payable to the order of Bank, and otherwise in form and substance satisfactory to Bank. 1.2 Use of Proceeds. Borrower agrees to use advances under the Line (i) to acquire commercial real estate or an interest therein, (ii) to fund loans secured by commercial real estate, (iii) to purchase loans secured by commercial real estate, or an interest therein, and (iv) to reduce indebtedness secured by senior liens on property which Borrower owns or holds a loan or an interest in a loan, and for no other purpose (including without limitation, the payment of dividends to Borrower's shareholders, or for working capital). 1.3 Advances of the Line. Borrower shall give Bank not less than 3 Business Days prior written notice of a proposed advance of the Line (each a "Line Request"). Each Line Request shall (i) state the use of the proceeds of the Line being requested (including the real estate project to which such use relates), (ii) contain a description of the economics of such real estate project, and (iii) contain such other information as Bank may request in the exercise of its reasonable discretion. Provided that all of the conditions precedent to Bank making such advance have occurred, and provided further that the making of such advance will not cause Borrower to be in default of the covenants and conditions set forth in this Agreement (including without limitation Sections 7.1 and 7.2 herein), Bank shall make the proceeds of such advance available to Borrower by crediting the amount thereof to Resource, Inc.'s deposit account with Bank. 1.4 Borrowing Base. Notwithstanding anything contained herein to the contrary, but subject to the provisions of Section 4.4(b) herein, the aggregate outstanding principal balance of the Line shall not exceed at any time fifty percent (50%) of the Appraised Value of the Real Estate ("Borrowing Base"). Borrower shall from time to time repay an aggregate amount of principal of the Line Note equal to the amount, if any by which the aggregate then unpaid principal balance of the Line Note exceeds the limits stated in the previous sentence. 2. INTEREST RATE. 2.1 Interest on the Line. Interest on the unpaid outstanding principal balance of the Line will accrue from the date of advance until final payment thereof at a per annum rate equal to the Prime Rate in effect from time to time (such interest rate to change immediately upon any change in the Prime Rate). 2.2 Default Interest. From the maturity of the obligations evidenced by the Line Note, as well as upon the occurrence of an Event of Default, the outstanding principal balance and all other sums due hereunder and under the Line Note shall bear interest at a rate which is -7- four percent (4%) in excess of the non-default rate otherwise set forth herein ("Default Rate"). Notwithstanding the provisions of 42 Pa. C.S. ss. 8101 to the contrary, the Default Rate shall apply to all sums evidenced by the Line Note as set forth above, including after entry of a judgment or judgments against Borrower, and said judgment or judgments shall bear interest at the Default Rate until satisfied in full. 2.3 Calculation. Interest will be computed on the basis of a year of 360 days and paid for the actual number of days elapsed. 2.4 Limitation of Interest to Maximum Lawful Rate. In no event will the rate of interest payable hereunder exceed the maximum rate of interest permitted to be charged by applicable law (including the choice of law rules) and any interest paid in excess of the permitted rate will be refunded to Borrower. Such refund will be made by application of the excessive amount of interest paid against any sums outstanding hereunder and will be applied in such order as Bank may determine. If the excessive amount of interest paid exceeds the sums outstanding, the portion exceeding the sums outstanding will be refunded in cash by Bank. Any such crediting or refunding will not cure or waive any default by Borrower. Borrower agrees, however, that in determining whether or not any interest payable hereunder exceeds the highest rate permitted by law, any non-principal payment, including without limitation prepayment fees and late charges, will be deemed to the extent permitted by law to be an expense, fee, premium or penalty rather than interest. 3. PAYMENTS AND FEES. 3.1 Interest Payments on the Line. Borrower will pay interest on the outstanding principal balance of the Line monthly, on the first day of each calendar month commencing on August 1, 1999. 3.2 Principal Payments on the Line. Borrower will pay the outstanding principal balance of the Line, together with any accrued and unpaid interest thereon, and any other sums due pursuant to the terms hereof, on the Expiration Date. 3.3 Commitment Fee. Borrower shall pay to Bank a commitment fee of One Hundred Fifty Thousand Dollars ($150,000) to be paid upon the execution of this Agreement. 3.4 Late Charge. In the event that Borrower fails to pay any principal, interest or other fees or expenses payable hereunder for a period of at least ten (10) days after the same shall become due, in addition to paying such sums, Borrower will pay to Bank a late charge equal to four percent (4%), of such past due payment as compensation for the expenses incident to such past due payment. -8- 3.5 Payment Method. Borrower irrevocably authorizes Bank to debit all payments required to be made by Borrower hereunder or otherwise under the Line, on the date due, from any deposit account maintained by Borrower with Bank (other than escrow funds owned legally by Borrower but held in escrow for the beneficial interest of another Person). Otherwise, Borrower will be obligated to make such payments directly to Bank. All payments are to be made in immediately available funds. If Bank accepts payment in any other form, such payment shall not be deemed to have been made until the funds comprising such payment have actually been received by or made available to Bank. 3.6 Application of Payments. Prior to the occurrence of an Event of Default, any and all payments on account of the Line will be applied first, to any amounts due to Bank pursuant to the Loan Documents, other than principal and interest on the Line; second, to accrued interest due under the Line; and third, to outstanding principal under the Line. Following the occurrence of an Event of Default, any and all payments on account of the Line will be applied to accrued and unpaid interest, outstanding principal and other sums due hereunder or under the Loan Documents, in such order as Bank, in its discretion, elects. If Borrower makes a payment or payments and such payment or payments, or any part thereof, are subsequently invalidated, declared to be fraudulent or preferential, set aside or are required to be repaid to a trustee, receiver, or any other person under any bankruptcy act, state or federal law, common law or equitable cause, then to the extent of such payment or payments, the obligations or part thereof hereunder intended to be satisfied shall be revived and continued in full force and effect as if said payment or payments had not been made. 3.7 Loan Account. Bank will open and maintain on its books a loan account with respect to advances made, repayments, prepayments, the computation and payment of interest and fees and the computation and final payment of all other amounts due and sums paid to Bank under this Agreement. Except in the case of manifest error in computation, such account will be conclusive and binding on the Borrower as to the amount at any time due to Bank from Borrower under this Agreement or the Note. 3.8 Indemnity: Loss of Margin. Borrower will indemnify Bank against any loss or expense which Bank sustains or incurs as a consequence of an Event of Default, including, without limitation, any failure of Borrower to pay when due (at maturity, by acceleration or otherwise) any principal, interest, fee or any other amount due under this Agreement or the other Loan Documents. If Bank sustains or incurs any such loss or expense it will from time to time notify Borrower in writing of the amount determined in good faith by the Bank to be necessary to indemnify Bank for the loss or expense. Such amount will be due and payable by Borrower to Bank within ten (10) days after presentation by Bank of a statement setting forth a brief explanation of and Bank's calculation of such amount, which statement shall be conclusively deemed correct absent manifest error. Any amount payable to the Bank under this Section will bear interest at the default rate payable under the Line from the due date until paid, both before and after judgment. -9- In the event that any present or future law, rule, regulation, treaty or official directive or the interpretation or application thereof by any central bank, monetary authority or governmental authority, or the compliance with any guideline or request of any central bank, monetary authority or governmental authority (whether or not having the force of law): (a) subjects Bank to any tax with respect to any amounts payable under this Agreement or the other Loan Documents by Borrower or otherwise with respect to the transactions contemplated under this Agreement or the other Loan Documents (except for taxes on the overall net income and/or revenues of Bank imposed by the United States of America, the Commonwealth of Pennsylvania, or any political subdivision of either of them); or (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit, capital maintenance, capital adequacy, or similar requirement against assets held by, or deposits in or for the account of, or loans or advances or commitment to make loans or advances by, the Bank; or (c) imposes upon Bank any other condition with respect to advances or extensions of credit or the commitment to make advances or extensions of credit under this Agreement, and the result of any of the foregoing is to increase the costs of Bank, reduce the income receivable by or return on equity of Bank or impose any expense upon Bank with respect to any advances or extensions of credit or commitments to make advances or extensions of credit under this Agreement, Bank shall so notify Borrower in writing. Borrower agrees to pay Bank the amount of such increase in cost, reduction in income, reduced return on equity or capital, or additional expense within ten (10) days after presentation by Bank of a statement concerning such increase in cost, reduction in income, reduced return on equity or capital, or additional expense. Such statement shall set forth a brief explanation of the amount and Bank's calculation of the amount (in determining such amount the Bank may use any reasonable averaging and attribution methods), which statement shall be conclusively deemed correct absent manifest error. If the amount set forth in such statement is not paid within ten (10) days after such presentation of such statement, interest will be payable on the unpaid amount at the default rate payable under the Line from the due date until paid, both before and after judgment. 3.9 Extension of Expiration Date. On or before August 31 of each year commencing on August 31, 2000, Bank will notify Borrower that (i) it has elected to extend the Expiration Date then in effect by twelve (12) months, or (ii) it will not extend the Expiration Date then in effect. A failure by Bank to send any such notice shall be deemed to be an election by Bank not to extend the Expiration Date then in effect. In the event Bank determines in the exercise of its sole discretion that it will extend the Expiration Date then in effect, Borrower shall, at least five (5) days prior to the then current Expiration Date pay to -10- Bank an extension fee of Seventy Five Thousand Dollars ($75,000). If Borrower shall fail to pay such extension fee to Bank as and when required, Bank's election to extend the Expiration Date shall be deemed to be canceled and shall be null and void and of no further force or effect and the Expiration Date then in effect shall continue as if Bank had not provided any notice of election to extend. 4. COLLATERAL. 4.1 Assignment and Security Interest. As security for the performance of this Agreement and the payment of the Line Note and as security for the performance of the Guaranty and the payment of the Resource America Loan, and all other liabilities of Borrower to Bank (whether absolute or contingent, matured or unmatured, direct or indirect, sole, joint, several or joint and several, similar or dissimilar, related or unrelated, due or to become due or heretofore or hereafter contracted or acquired), Borrower hereby pledges, assigns, transfers and sets over to Bank and grants to Bank a security interest in all of Borrower's right, title and interest and to the following (the "Collateral"): (a) all of Borrower's powers, privileges and other benefits under the Collateral Documents; (b) the immediate right to receive and collect all sums payable to or receivable by Borrower under or pursuant to the provisions of the Collateral Documents, whether as principal, interest, casualty or insurance payments, or otherwise ("Payments"); (c) the right to make all waivers and agreements, to give all notices, consents and releases, and to take all action upon the happening of a Collateral Document Default; (d) the right to do any and all other things whatsoever which Borrower is or may become entitled to do under the Collateral Documents, including without limitation all rights to be substituted as a creditor in any bankruptcy proceeding affecting any Obligor, Collateral Documents, or Real Estate, with full voting rights, the right to receive dividends, and the right to participate in the administration of any plan, whether in liquidation or reorganization, and the right to take any and all actions that Borrower may be entitled to take as a participant under any Collateral Document. In further of the foregoing assignment, Borrower hereby irrevocably authorizes and empowers Bank, in its own name or in the name of its nominee, or in the name of Borrower or as its attorney, to ask, demand, sue for, collect and receive any and all Payments to which Borrower is or may become entitled under any Collateral Documents and to enforce compliance by any Obligor, or any maker, mortgagor, or other party thereto, with all of the terms and provisions thereof; (e) All Deposit Accounts maintained by either Resource 53, Resource XXIV, and/or Resource XL, together with all cash deposited in the same; and -11- (f) The $5,800,000 Downtown Development Authority for the City of Savannah Variable Rate Industrial Development Revenue Bonds (Factor's Walk Partners Project) Series 1985 (the "Bonds") held of record by the Depository Trust Company, as nominee for the beneficial owner, Resource XXIV, together with all proceeds of the foregoing. 4.2 Representations Regarding Collateral. Borrower represents and warrants that: (a) Borrower has full right and title (either as owner of the Collateral Documents or a participation interest in and to the Collateral Documents) to the Collateral Documents, free from any lien, security interest, encumbrance or other right, title and interest of any other person or entity, other than a $875,000 undivided Senior Participation in the Bonds and the Collateral Documents relating to the Real Estate known as Factor's Walk Phase One (as such Collateral Documents are more fully described on Exhibit "A") held by Castine Associates, which Senior Participation is being subordinated to the lien of Bank, all as more fully set forth in the Subordination Agreement referred to in Section 10.1(j) herein. (b) Borrower has not made any currently effective assignment of any interest in the Collateral Documents other than to Bank pursuant to this Agreement. (c) No Obligor or Participation Seller has any set-off, defense or counterclaim to any of its obligations under any Collateral Document (as the same may have been modified by any forbearance agreement relating thereto). (d) Subject to the provisions of any forbearance agreement relating thereto, all Collateral Documents are in full force and effect with respect to the payment obligations arising under them. (e) Except as may be specifically provided in the Collateral Documents, no Payments have been collected, anticipated, waived, released, discounted or otherwise discharged or compromised except in accordance with their regularly scheduled payment dates. (f) There is only one original note evidencing each loan to which the Collateral Documents relate, if applicable, only one original deed-in-lieu of foreclosure relating to any loans to which the Collateral Documents relate, and, if applicable, only one Participation Certificate evidencing participation interests comprising a portion of the Collateral, all of which, to the extent applicable, have been delivered to Bank. -12- (g) Resource XXIV is the record and beneficial owner of, and has legal title to the Bonds. The Bonds are and will remain, free and clear of all pledges, liens, security interests and other encumbrances and restrictions whatsoever. (h) The pledge and assignment to Bank of the Bonds creates a valid first lien on and a first perfected security interest in the Bonds and the proceeds thereof, subject to no prior pledge, lien, mortgage, security interest, or encumbrance or to any agreement purporting to grant to any third party a security interest in the property or assets of Resource XXIV which would include the Bonds. 4.3 Covenants Regarding Collateral. So long as the Line Note remains unpaid or Bank has any commitment under the Line, without the prior written consent of Bank, which consent shall not be unreasonably withheld or delayed: (a) Borrower shall not obtain any other loans or other financing secured by an encumbrance, lien, mortgage, security interest or other interest in any of the Collateral, or assign, sell, transfer (voluntarily or by operation of law), or otherwise dispose of any interest in any of the Collateral or the Real Estate. (b) Borrower shall receive or collect monthly (or otherwise if so provided by the terms of the Collateral Documents) payment of principal and interest pursuant to and in accordance with the terms and conditions of the Collateral Documents. (c) Prior to the occurrence of an Event or Default, Borrower shall not alter, amend, extend, cancel or otherwise change any terms or conditions of the Collateral Documents if as a result thereof there would occur an Event of Default or Potential Default. Following the occurrence of an Event of Default, Borrower shall not alter, amend, cancel or otherwise change any provision of the Collateral Documents. (d) In the event Borrower goes into possession of any of the Real Estate, should Bank thereafter decide to go into possession pursuant to this Agreement, Borrower shall immediately vacate the affected Real Estate and perform whatever acts or execute whatever documents required by Bank, in its sole discretion, to expedite Bank's possession of the affected Real Estate. (e) Borrower shall keep accurate and complete records of Payments and the Collateral Documents and shall furnish Bank with such information as Bank may request, including without limitations, the information required by Section 8 herein. (f) Following the occurrence of an Event of Default Borrower, shall not exercise any right or remedy granted under any of the Collateral Documents without the prior written consent of Bank. -13- (g) Following the occurrence of an Event of Default, Borrower shall not (i) waive, excuse, condone or in any manner release or discharge any obligation, covenant or agreement of any Obligor under any Collateral Document; (ii) cancel, terminate or permit the surrender of any Collateral Document; or (iii) solicit or accept any prepayment of monies under any Collateral Document. (h) Borrower shall not release or terminate any of its interest in, to or under any Collateral Document. (i) Borrower shall not propose or consent to any plan of reorganization or liquidation in any proceeding in the United States Bankruptcy Court with regard to any Collateral Documents, Real Estate, or Obligor. 4.4 Default Under Collateral Documents. (a) Borrower shall give Bank written notice of the occurrence of an event of default or a default under the terms of any Collateral Document ("Collateral Document Default") within five (5) Business Days after becoming aware of a Collateral Document Default, specifying the loan to which such Collateral Document Default relates, the nature of the Collateral Document Default, and such other information as Bank may request. Notwithstanding the provisions of Section 12.1(p) herein, provided that Bank receives evidence satisfactory to it that, notwithstanding a Collateral Document Default, (i) Borrower remains in compliance with the covenants set forth in Sections 7.1 and 7.2 herein, and (ii) Borrower maintains a Debt Service Coverage Ratio of not less than 3.0 to 1, such Collateral Document Default shall not constitute an Event of Default hereunder. (b) Following the occurrence and during the continuation of any Collateral Document Default, (i) Borrower will provide Bank with such information relating thereto and to the Collateral Documents and Real Estate to which such Collateral Document Default relates as Bank may request, and (ii) Bank may at any time declare that the Real Estate to which such Collateral Document Default relates has become ineligible for the purposes of calculating the Borrowing Base and that the fair market value of such Real Estate shall no longer constitute a portion of the Appraised Value for the purposes of calculating the Borrowing Base. In the event of any such declaration by Bank, Borrower shall, within ninety (90) days thereafter, but subject to the immediately following sentence, either (x) repay the outstanding principal amount of the Line in an amount equal to the amount by which the then unpaid principal balance of the Line exceeds the Borrowing Base (after taking into account the exclusion of the Appraised Value of such Real Estate), or (y) in lieu of such repayment, deliver to Bank Substitute Collateral where the Appraised Value of the Real Estate to which such Substitute Collateral relates, when added to the Appraised Value of all other Real Estate then constituting eligible Collateral, will cause the then outstanding principal balance of the Line to be in compliance with the Borrowing Base. Any such delivery of Substitute Collateral -14- shall be accompanied by all such financing statement amendments and other documents and instruments as Bank may require to reflect its security interest in and to the Substitute Collateral (including without limitation appropriate amendments to Exhibits "A" and "B" hereto). Notwithstanding the foregoing to the contrary, if the applicable Obligor cures the Collateral Document Default to the satisfaction of Bank within such ninety (90) - day period, the Appraised Value of the Real Estate to which such Collateral Document Default relates shall once again be included for the purposes of calculating the Borrowing Base and Borrower shall not be required to make any repayment of the Line or to deliver Substitute Collateral to Bank with respect to such Collateral Document Default. 4.5 Release of Collateral. Borrower shall provide Bank with at least ten (10) Business Days prior written notice of any proposed repayment in full of any Collateral Documents in connection with which the Collateral Documents will be released, or of any other requested release of the Collateral Documents, to the extent Borrower shall receive the same and otherwise as much prior written notice as is possible. Provided that Borrower shall either (x) repay the outstanding principal amount of the Line in an amount equal to the amount by which the then unpaid principal balance of the Line exceeds the Borrowing Base (after taking into account the exclusion of the Appraised Value of the Real Estate to which such release will relate), or (y) in lieu of such repayment, deliver to Bank Substitute Collateral where the Appraised Value of the Real Estate to which such Substitute Collateral relates, when added to the Appraised Value of all other Real Estate that will remain following such release, will cause the then outstanding principal balance of the Line to be in compliance with the Borrowing Base, Bank shall, upon receipt of such repayment or Substitute Collateral, release its lien on the applicable Collateral Documents. 4.6 Power of Attorney. Each Borrower does hereby appoint and constitute Bank as such Borrower's true and lawful attorney, irrevocably, such appointment to be coupled with an interest, with full power (in the name of Borrower or otherwise), (a) to ask, require, demand, receive, compound and give acquittance for any and all Payments due and to become due under or arising out of any Collateral Document to which such Borrower is or may be come entitled, (b) to enforce compliance by any Obligor with all of the terms and provisions of any Collateral Document, (c) to endorse any checks or other instruments or orders in connection therewith, and (d) to file any claims or take any action or institute any proceedings which Bank may deem to be necessary or advisable in the premises. 4.7 Collateral Document Remedies. Upon the occurrence of an Event of Default, Bank shall have, but shall not be limited to, the following rights, in addition to the rights accorded by the Uniform Commercial Code, as amended from time to time, and at law or in equity, each of which may be exercised at any time: (a) to declare by written notice to Borrower that Borrower's interest in the Collateral Documents shall terminate and be of no further force or effect, that Bank shall have -15- all right, title and interest in and to the Collateral Documents, and that Bank shall have the sole right to exercise any and all rights and remedies provided in or arising out of the Collateral Documents; (b) to require Borrower to deliver originals and/or copies of all Collateral Documents to Bank, together with all other information relating to the Collateral Documents, the Real Estate, or the loans pertaining thereto, as Borrower shall maintain (including without limitation accounting records). (c) to transfer all or any part of the Collateral Documents into the name of Bank or its nominee; (d) to demand and be entitled to (by notice to the Obligors or any management company or trustee holding and/or collecting the same) all Payments; (e) to release any or all Collateral Documents; (f) to endorse any Collateral Documents or the proceeds thereof in the name of Borrower; (g) to sell all or any part of the Collateral Documents upon any exchange or at public or private sale, at Bank's option, at any time or times, following advertisement in the generally accepted manner for material of the same type as the Collateral, upon five (5) days prior written notice of the time of any private sale or the time and place of any public sale, and, at any such sale, Bank or its nominee shall have the right to become the purchaser thereof; (h) to accept in settlement for any Collateral Document a sum less than the face value without notice to Borrower; (i) to demand and be entitled to all rents under all leases or rental agreements with respect to any Real Estate, to the extent permitted by the Collateral Documents; and/or (j) to do any and all acts, including, but not limited to, executing, signing, acknowledging, sealing and delivering any agreement, contract, modification, rescission, note, deed, check, receipt, conveyancing instrument, release, discharge, or document of any kind whatsoever in the name, place and stead of Borrower, as attorney in fact, in furtherance of the remedies afforded Bank herein, under the Uniform Commercial Code, as amended from time to time, at law or in equity. Borrower agrees that the rights and powers specified above are irrevocable and coupled with an interest. -16- 4.8 Cumulative Remedies. All rights and remedies granted herein or in the Collateral Documents or otherwise available to Bank shall be cumulative and concurrent and may be pursued singly, successively, or together at Bank's sole option, and may be exercised from time to time and as often as occasion therefor shall occur until the Line and all other amounts due hereunder, are paid in full; and the failure to exercise any such right or remedy shall in no event be construed as a waiver or release of same by Bank. Bank may resort to any security it holds in such order and manner as Bank sees fit. 4.8 Nonlimitation of Bank's Rights under Note and Collateral Documents. Nothing contained herein shall prejudice or be construed to prejudice the right of Bank to commence and prosecute, or to prevent Bank from commencing and prosecuting, any action which it may deem advisable or which it may be entitled to commence and prosecute for the foreclosure of the Note and the Collateral Documents and any of them, or to prejudice any other rights of Bank. 4.9 Nonassumption of Liability by Bank. Bank does not by the execution and acceptance of this Agreement or by making demand or collecting monies under the Note, the Collateral Documents or any lease or rental agreement with respect to any of the Real Estate, assume any liability or become liable in any manner whatsoever for the performance of any of the terms and conditions thereof, unless and until Bank shall expressly assume such obligations by a writing to the Obligors instructing them to make Payments directly to Bank, it being understood and agreed that notice to such Obligors to make Payments to a lockbox shall not be deemed to be such an express assumption; nor shall Bank be liable for any act, offsets or defenses which Borrower or any such Obligor may have against each other. Nothing contained in this Section 4.9 shall be deemed to relieve Bank from any obligations arising out of its gross negligence or willful misconduct. 4.10 Bank's Discretion. The Collateral Documents shall be dealt with and enforced by Bank in its sole discretion. In the course of its administration of the Collateral Documents, Bank may, without notice to Borrower, use its discretion with respect to the exercising, or refraining from, any rights or actions which may be vested in it or which it may be entitled to take or assert under law or by agreement with Borrower or otherwise. 4.11 Release. Bank shall not be liable to Borrower for any action taken or omitted or for errors in judgment. Bank does not assume or warrant and shall have no responsibility or liability (express or implied) for the collectability, enforceability, genuineness or validity of the Collateral Documents; or the financial condition or legal status of any Obligor. 4.12 General. The above-described security interests, assignments, and liens shall not be rendered void by the fact that no Bank Indebtedness exists as of any particular date, but shall continue in full force and effect until the Bank Indebtedness has been repaid, Bank has no agreement or commitment outstanding pursuant to which Bank may extend credit to or on -17- behalf of Borrower and Bank has executed termination statements or releases with respect thereto. IT IS THE EXPRESS INTENT OF THE BORROWER THAT ALL OF THE COLLATERAL SHALL SECURE NOT ONLY THE OBLIGATIONS UNDER THE LOAN DOCUMENTS, BUT ALSO ALL OTHER PRESENT AND FUTURE OBLIGATIONS OF BORROWER TO BANK, INCLUDING WITHOUT LIMITATION THE GUARANTY. 4.13 Additional Documents and Future Actions. Borrower will, at its sole cost, take such actions and provide Bank from time to time with such agreements, financing statements and additional instruments, documents or information as the Bank may in its reasonable discretion deem necessary or advisable to perfect, protect, maintain or enforce the security interests in the Collateral, to permit Bank to protect or enforce its interest in the Collateral, or to carry out the terms of the Loan Documents. Each Borrower hereby authorizes and appoints Bank as its attorney-in-fact, with full power of substitution, to take such actions as Bank may deem advisable to protect the Collateral and its interests thereon and its rights hereunder, to execute on such Borrower's behalf and file at such Borrower's expense financing statements and assignments, and amendments thereto, in those public offices deemed necessary or appropriate by Bank to establish, maintain and protect a continuously perfected security interest in the Collateral, and to execute on such Borrower's behalf such other documents and notices as Bank may deem advisable to protect the Collateral and its interests therein and its rights hereunder. Such power being coupled with an interest is irrevocable. Each Borrower irrevocably authorizes the filing of a carbon, photographic or other copy of this Agreement, or of a financing statement, as a financing statement and agrees that such filing is sufficient as a financing statement. 5. REPRESENTATIONS AND WARRANTIES. Borrower, each as applicable to it, represents and warrants as follows: 5.1 Valid Organization, Good Standing and Qualification. Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full power and authority to execute, deliver and comply with the Loan Documents, and to carry on its business as it is now being conducted and is duly licensed or qualified as a foreign corporation in good standing under the laws of each jurisdiction in which the character or location of the properties owned by it or the business transacted by it requires such licensing or qualification. 5.2 Licenses. Borrower has all licenses, registrations, approvals and other authority as may be necessary to enable it to own and operate its business and perform all services and business which it has agreed to perform in any state, municipality or other jurisdiction. -18- 5.3 Ownership Interests. The ownership of all stock, debentures, options, warrants, bonds and other securities (debt and equity) of Borrower, and all pledges, proxies, voting trusts, powers of attorney and other agreements affecting the ownership or voting rights of said interests is as set forth on Schedule 5.3 attached hereto. 5.4 Subsidiaries. Except as set forth on Schedule 5.4 attached hereto, Borrower does not own any shares of stock or other equity interests in any Person, directly or indirectly (by any Subsidiary or otherwise). 5.5 Financial Statements. Borrower has furnished to Bank the audited consolidated financial statements of Borrower, certified without qualification by independent public accountants as of September 30, 1998 and all management and comment letters from such accountants in connection therewith, and its internally prepared interim financial statements as of March 31, 1999. Such financial statements of Borrower (together with the related notes and comments), are correct and complete, fairly present the financial condition and the assets and liabilities of Borrower at such date, and have been prepared in accordance with GAAP. With respect to the interim statements, such statements are subject to year-end adjustment and any accompanying footnotes. 5.6 No Material Adverse Change in Financial Condition. There has been no material adverse change in the financial condition of Borrower since September 30, 1998. 5.7 Pending Litigation or Proceedings. Except as set forth on Schedule 5.7 attached hereto, there are no judgments outstanding or actions, suits or proceedings pending or, to the best of Borrower's knowledge, threatened against or affecting Borrower, at law or in equity or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. 5.8 Due Authorization: No Legal Restrictions. The execution and delivery by Borrower of the Loan Documents, the consummation of the transactions contemplated by the Loan Documents and the fulfillment and compliance with the respective terms, conditions and provisions of the Loan Documents: (a) have been duly authorized by all requisite corporate action by Borrower, (b) will not conflict with or result in a breach of, or constitute a default (or might, upon the passage of time or the giving of notice or both, constitute a default) under, any of the terms, conditions or provisions of (i) any applicable statute, law, rule, regulation or ordinance, (ii) Borrower's Certificate of Incorporation or Bylaws, (iii) any indenture, mortgage, loan or credit agreement or instrument to which Borrower is a party or by which it may be bound or affected, or (iv) any judgment or order of any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, and (c) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of Borrower under the terms or provisions of any such agreement or instrument, except liens in favor of Bank. -19- 5.9 Enforceability. The Loan Documents have been duly executed by Borrower and delivered to Bank and constitute legal, valid and binding obligations of Borrower, enforceable in accordance with their terms. 5.10 No Default Under Other Obligations, Orders or Governmental Regulations. Borrower is not in violation of its Certificate of Incorporation or Bylaws or in default in the performance or observance of any of its obligations, covenants or conditions contained in any indenture or other agreement creating, evidencing or securing any Indebtedness or pursuant to which any such Indebtedness is issued, nor is Borrower in violation of or in default under any other agreement or instrument or any judgment, decree, order, statute, rule or governmental regulation, applicable to it or by which its properties may be bound or affected. 5.11 Governmental Consents. No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of Borrower is required in connection with the execution, delivery or performance by Borrower of the Loan Documents or the consummation of the transactions contemplated thereby. 5.12 Taxes. Borrower has filed all tax returns which it is required to file and has paid, or made provision for the payment of, all taxes which have or may have become due pursuant to such returns or pursuant to any assessment received by them. Such tax returns are complete and accurate in all respects. Borrower does not know of any proposed additional assessment or basis for any assessment of additional taxes. 5.13 Addresses. During the past five (5) years, Borrower has not been known by any names (including tradenames) other than those set forth in Schedule 5.13 attached hereto and has been located at any addresses other than those set forth on Schedule 5.13 attached hereto. Borrower's books and records pertaining to the Collateral will at all times be located at the addresses set forth on Schedule 5.13; or such other location determined by Borrower after prior notice to Bank and delivery to Bank of any items requested by Bank to maintain perfection and priority of Bank's security interests and access to Borrower' books and records. Schedule 5.13 identifies the chief executive office of each Borrower. 5.14 Current Compliance. Borrower is currently in compliance with all of the terms and conditions of the Loan Documents. 5.15 Deferred Compensation Plans. Neither Borrower nor any ERISA Affiliate has ever been a participant in or has in any way provided or maintained, any Deferred Compensation Plan for the benefit of Borrower's or any ERISA Affiliate's employees, or has ever contributed to a Multiemployer Plan. 5.16 Leases and Contracts. Borrower has complied with the provisions of all material leases, contracts or commitments of any kind to which it is a party and is not in -20- default thereunder. No other party is in default under any such leases, contracts or other commitments and no event has occurred which, but for the giving of notice or the passage of time or both, would constitute an event of default thereunder. 5.17 Contingent Liabilities. There are no suretyship agreements, guarantees or other contingent liabilities of Borrower which are not disclosed by the financial statements mentioned in Section 5.5 herein. 5.18 Encumbrances. The property and assets of Borrower are not subject to any lien, encumbrance or security interest except as set forth on Exhibit 5.18 attached. 5.19 Securities Act. Borrower has not, directly or through any agent, offered the Line Note or any part thereof or any similar security for sale to, or solicited offers to buy the same from, or otherwise approached or negotiated in respect thereof with, anyone other than Bank so as to bring the issue or sale of the Line Note or any part thereof within the provisions of Section 5 of the Securities Act 1933, as amended. 5.20 Disclosure. Neither this Agreement, nor the schedules attached to this Agreement, nor the financial statements referred to in this Agreement, nor any certificate, statement, report or other document furnished or to be furnished by Borrower to Bank in connection with this Agreement, contain any untrue statement of a material fact, or omit to state any material fact necessary in order to make the statements contained in any of the foregoing not misleading. Borrower has disclosed to Bank in writing every fact that materially and adversely affects the business or financial condition of Borrower or its ability to perform its obligations under this Agreement, the Line Note, or any other documents or instruments required hereby. 5.21 Margin Stock. Borrower is not engaged in, nor does it have as one of its substantial activities, the business of extending or obtaining credit for the purpose of purchasing or carrying "margin stock" (as that term is defined in Regulation U, G, T, or X of the Board of Governors of the Federal Reserve System) and no proceeds of any advance of the Line will be used for such purpose of for the purpose of purchasing or carrying any shares of margin stock. 5.22 Bank Accounts. Other than the bank accounts set forth on Schedule 5.22 attached (the "Deposit Accounts"), Neither Resource 53, Resource XXIV, nor Resource XL maintains any accounts with any bank or other financial institution. 6. GENERAL COVENANTS. So long as the Line Note remains unpaid or Bank has any obligation hereunder with respect to the Line, unless Bank otherwise consents in writing, which consent shall not be unreasonably withheld or delayed: -21- 6.1 Limitation on Indebtedness. Borrower shall not have at any time outstanding to any Person other than Bank, any Indebtedness for borrowed money or any outstanding letters of credit, except: (a) current accounts payable incurred in the ordinary course of Borrower's business, accrued expenses and other current items arising out of transactions (other than borrowings) in the ordinary course of Borrower's business; (b) existing Indebtedness for borrowed money described on Schedule 6.1; and (c) future Indebtedness incurred in connection with individual project financing, and excluding specifically lines of credit or loans relating to a pool of collateral. 6.2 Intentionally Deleted. 6.3 Guaranties. Borrower shall not, directly or indirectly, guarantee, endorse (other than for collection or deposit in the ordinary course of business), discount, sell with recourse or for less than the face value or agree (contingently or otherwise) to purchase or repurchase or otherwise acquire, or otherwise become directly or indirectly liable for, or agree (contingently or otherwise) to supply or advance funds (whether by loan, stock purchase, capital contribution or otherwise) in respect of, any Indebtedness, obligations or liabilities of any Person other than an Affiliate. 6.4 Disposition of Assets. Borrower shall not sell, lease, transfer or otherwise dispose of (i) all or substantially all of its property or assets, or (ii) any material portion of its property or assets unless, in the case of (ii) herein, following any such sale, lease, transfer or other disposition, Borrower shall be in compliance with the covenants contained in Sections 7.1 and 7.2 herein calculated as of the date immediately following such sale, lease, transfer or other disposition. 6.5 Intentionally Deleted. 6.6 Taxes: Claims for Labor and Materials. Borrower will pay or cause to be paid when due all taxes, assessments, governmental charges or levies imposed upon it or its income, profits, payroll or any property belonging to it, including without limitation all withholding taxes, and all claims for labor, materials and supplies which, if unpaid, might become a lien or charge upon any of its properties or assets. 6.7 Liens. Borrower shall not create, incur or permit to exist any mortgage, pledge, encumbrance, lien, security interest or charge of any kind (including liens or charges upon properties acquired or to be acquired under conditional sales agreements or other title retention -22- devices) on its property or assets, whether now owned or hereafter acquired, or upon any income, profits or proceeds therefrom, except: (a) Security interests and other liens held by Bank; (b) Liens incurred or deposits made in the ordinary course of business (i) in connection with worker's compensation, unemployment insurance, social security and other like laws or (ii) to secure the performance of statutory obligations, not incurred in connection with either (A) the borrowing of money or (B) the deferred purchase price of goods or inventory; (c) Encumbrances consisting of zoning restrictions, easements, restrictions on the use of real property or minor irregularities of title thereto, none of which impairs the use of such property by that Obligor in the operation of its business; or (d) Liens and security interests listed on Schedule 6.7 attached hereto. (e) Liens and security interests securing Indebtedness permitted by Section 6.1 herein. Borrower shall not enter into any agreement with any other Person which shall prohibit Borrower from granting, creating or suffering to exist, or otherwise restrict in any way (whether by covenant, by identifying such event as a default under such agreement or otherwise) the ability of Borrower to grant, create or suffer to exist, any lien, security interest or other charge or encumbrance upon or with respect to any of its assets in favor of the Bank. 6.8 Existence: Approvals: Qualification; Business Operations: Compliance with Laws. Borrower (a) will obtain, preserve and keep in full force and effect its separate corporate existence and all rights, licenses, registrations and franchises necessary to the proper conduct of its business or affairs; (b) will qualify and remain qualified as a foreign corporation, in each jurisdiction in which the character or location of the properties owned by it or the business transacted by it requires such qualification; (c) will continue to operate its business as presently operated and will not engage in any new businesses without the prior written consent of Bank; and (d) will comply with the requirements of all applicable laws and all rules, regulations (including environmental regulations) and orders of regulatory agencies and authorities having jurisdiction over it. 6.9 Maintenance of Properties. Borrower will maintain, preserve, protect and keep or cause to be maintained, preserved, protected and kept its real and personal property used or useful in the conduct of its business in good working order and condition, reasonable wear and tear excepted, and will pay and discharge when due the cost of repairs to and maintenance of the same. -23- 6.10 Insurance. Borrower will carry adequate insurance issued by an insurer acceptable to Bank, in amounts acceptable to Bank (at least adequate to comply with any co-insurance provisions) and against all such liability and hazards as are usually carried by entities engaged in the same or a similar business similarly situated or as may be required by Bank, and shall cause Bank to be named as loss payee (with a lender's loss payable endorsement) with respect to all personal property, and additional insured with respect to all liability insurance, as its interests may appear with thirty (30) days' notice to be given Bank by the insurance carrier prior to cancellation or material modification of such insurance coverage. Borrower shall cause to be delivered to Bank the insurance policies therefor or in the alternative, evidence of insurance, and at least thirty (30) business days prior to the expiration of any such insurance, additional policies or duplicates thereof or in the alternative, evidence of insurance evidencing the renewal of such insurance and payment of the premiums therefor. Borrower shall direct all insurers that in the event of any loss thereunder or the cancellation of any insurance policy, the insurers shall make payments for such loss and pay all return or unearned premiums directly to Bank and not to Borrower and Bank jointly. Borrower shall not take out any insurance without having Bank named as loss payee or additional insured thereon. 6.11 Inspections; Examinations. Borrower hereby irrevocably authorizes and directs all accountants and auditors employed by Borrower at any time to exhibit and deliver to Bank copies of any and all of Borrower's financial statements, or other accounting records of any sort in the accountant's or auditor's possession and copies of all reports submitted to Borrower by such accountants or auditors, including management letters, "comment" letters and audit reports, and to disclose to Bank any information they may have concerning Borrower's financial status and business operations. Borrower further authorizes all federal, state and municipal authorities to furnish to Bank copies of reports or examinations relating to any Borrower, whether made by Borrower or otherwise. The officers of Bank, or such Persons as any of them may designate, may visit and inspect any of the properties of Borrower, examine (either by Bank's employees or by independent accountants) any of the Collateral or other assets of Borrower, including the books of account of Borrower, and discuss the affairs, finances and accounts of Borrower with its officers and with its independent accountants, at such times as Bank may desire. 6.12 Default Under Other Indebtedness. Borrower shall not permit any of its material Indebtedness to be in default. If any Indebtedness of Borrower is declared or becomes due and payable before its expressed maturity by reason of default or otherwise or to the knowledge of Borrower, the holder of any such Indebtedness shall have the right (or upon the giving of notice or the passage of time, or both, shall have the right) to declare such -24- Indebtedness to be so due and payable, Borrower will immediately give Bank written notice of such declaration, acceleration or right of declaration. 6.13 Deferred Compensation Plans. Neither Borrower nor any ERISA Affiliate shall become a participant in, or in any way provide or maintain, any Deferred Compensation Plan for the benefit of any or Borrower's or any ERISA Affiliates' employees, or shall contribute to any Multiemployer Plan, without giving Bank prior written notice of such action and executing such related amendments to this Agreement as Bank may request. 6.14 Bank Accounts. As additional compensation to Bank, and in consideration of the rate of interest being charged by Bank to Borrower, Borrower will maintain deposit accounts with Bank, including without limitation the Loan Account referred to in Section 3.7 herein. 6.15 Maintenance of Management. Borrower will cause its business to be continuously managed by its present management or such other persons (serving in such management positions) as may be reasonably satisfactory to Bank. 6.16 Transactions with Affiliates. Borrower shall not enter into or conduct any transaction with any Affiliate except on terms that would be usual and customary in a similar transaction between Persons not affiliated with each other and except as disclosed to Bank. Borrower shall not make any loans or extensions of credit to any of its Affiliates, shareholders, directors or officers, except for the existing loans described in Schedule 6.16 attached hereto. Borrower will cause all of its Indebtedness at any time owed to its Affiliates (other than JeffBanks, Inc. and its respective subsidiaries), shareholders, directors and officers to be subordinated in all respects to all present and future Bank Indebtedness and will not make any payments thereon, except as approved by Bank in writing. 6.17 Restriction on Stock Transfer. Resource, Inc. shall not, and shall not permit its sole shareholder to, directly or indirectly, issue, transfer, sell or otherwise dispose of, or part with control of, or permit the transfer of, any shares of the capital stock of Resource, Inc. or of Resource 53, Resource XXIV, or Resource XL as a result of which Resource America, Inc. shall cease to own, legally and beneficially, 100% of all outstanding stock of Resource, Inc., and/or Resource, Inc. shall cease to own, legally and beneficially, 100% of all outstanding stock of any of Resource 53, Resource XXIV, and Resource XL. 6.18 Name or Address Change. Borrower shall not change its name or address except upon thirty (30) days prior written notice to Bank and delivery to Bank of any items requested by Bank to maintain perfection and priority of Bank's security interests and access to Borrower's books and records. -25- 6.19 Notices. Borrower will promptly notify Bank of (a) any action or proceeding brought against Borrower wherein such action or proceeding would, if determined adversely to Borrower result in liability of Borrower in excess of $25,000 individually, or $50,000 in the aggregate, (b) the occurrence of any Event of Default, (c) any fact, condition or event which, with the giving of notice or the passage of time or both, could become an Event of Default, (d) the failure of Borrower to observe any of its undertakings under the Loan Documents, or (e) any material adverse change in the assets, business, operations or financial condition of Borrower. 6.20 Material Adverse Contracts. Borrower shall not become or be a party to any contract or agreement which has a materially adverse impact on Borrower's ability to perform under this Agreement or any other agreement with Bank to which Borrower is a party. 6.21 Appraisals. Bank shall have the right, in the exercise of its reasonable discretion, and/or as required by any applicable governmental authority, at Borrower's cost and expense, to obtain additional or updated Appraisals on any or all of the Real Estate. 6.22 Bank Accounts. (a) Except as otherwise permitted herein, neither Resource 53, Resource XXIV, nor Resource XL shall open or maintain any bank accounts with respect to the Collateral, the Collateral Documents or the Real Estate other than the Deposit Accounts and bank accounts maintained with Bank. Each of Resource 53, Resource XXIV, and Resource XL shall deposit or cause to be deposited into the Deposit Accounts or such other accounts as may be maintained with Bank from time to the time the rentals and other income from the Real Estate and all other Payments. Any income received with respect to the balance from time to time standing to the credit of the Deposit Accounts and any other deposit accounts maintained with Bank, including any interest, shall remain, or be deposited in the Deposit Accounts or such other accounts. (b) All right, title and interest in and to the cash amounts on deposit from time to time in the Deposit Accounts shall vest in Bank, shall constitute part of the Collateral hereunder and shall not constitute payment of the Bank Indebtedness until applied thereto as hereinafter provided. Each of Resource 53, Resource XXIV, and Resource XL shall as promptly as possible deposit the proceeds of any Collateral and all payments received by it into the Deposit Accounts. Until so deposited, all such proceeds shall be held in trust by Resource 53, Resource XXIV, and/or Resource XL for and as the property of Bank and shall not be commingled with any other funds or property of either of them. The balance from time to time standing to the credit of the Deposit Accounts shall, except as set forth in subsection (c) below, be distributed to Resource 53, Resource XXIV, and/or Resource XL in accordance with the provisions of the Depository Agreements. -26- (c) If an Event of Default shall have occurred and Bank shall have given notice to Resource 53, Resource XXIV, and/or Resource XL of its intent to exercise exclusive control over the Deposit Accounts, then (i) Resource 53, Resource XXIV, and/or Resource XL, as applicable, shall instruct all Obligors and other Persons obligated in respect of any Collateral Documents or Real Estate to make all payments in respect of the Collateral Documents, and shall use its best efforts to cause them to do so, directly to the Deposit Accounts, and (ii) neither Resource 53, Resource XXIV, nor Resource XL shall be entitled to receive any distribution from the Deposit Accounts. 7. FINANCIAL COVENANTS. So long as the Line Note remains unpaid or Bank has any obligation hereunder with respect to the Line: 7.1 Equity. Borrower shall maintain Equity of not less than $40,000,000 at September 30, 1999 and at each September 30 thereafter. 7.2 Collateral Debt Service Coverage Ratio. Borrower shall maintain a ratio of (a) Net Operating Income generated by the Real Estate, and calculated on an annualized basis, to (b) the greater of (i) actual interest payments made with respect to the Line for the annual period in question, or (ii) $1,505,592. 7.3 Changes to Financial Covenants. Bank may condition any extension of the Expiration Date upon revision of the foregoing financial covenants, as Bank in its reasonable discretion may require prior to the date that Bank must give Borrower notice of extension. 8. ACCOUNTING RECORDS, REPORTS AND FINANCIAL STATEMENTS. Borrower will maintain books of record and account in which full, correct and current entries in accordance with GAAP will be made of all of its dealings, business and affairs, and Borrower will deliver to Bank the following: 8.1 Annual Statements. As soon as available and in any event within ninety (90) days after the end of each fiscal year of Borrower, the audited consolidated (a) income and retained earnings statements of Borrower for such fiscal year, (b) balance sheet of Borrower as at the end of such fiscal year, and (c) statement of cash flow of Borrower for such fiscal year, all setting forth in comparative form the corresponding figures as at the end of the previous fiscal year, all in reasonable detail, including all supporting schedules and comments. The foregoing statements and balance sheets shall be prepared in accordance with GAAP and shall be audited by independent certified public accountants of recognized standing acceptable to Bank in the reasonable exercise of its discretion with respect to which such accountants shall deliver their unqualified opinion. 8.2 Annual Property Statements. As soon as available and in any event within sixty (60) days after the end of each calendar year, rent rolls and operating statements for each -27- property constituting a portion of the Real Estate, including without limitation a portfolio summary relating to the Real Estate in the form approved by Bank. 8.3 Quarterly Statements. As soon as available and in any event within forty five (45) days after the close of each fiscal quarter of Borrower, (a) the consolidated income and retained earnings statements of Borrower for such quarter, (b) the consolidated balance sheet of Borrower as of the end of such quarter, (c) the consolidated statement of cash flow of Borrower for such quarter, and (d) a portfolio summary of each property constituting the Real Estate, all setting forth in comparative form the corresponding figures as at the end of the corresponding quarter of the previous fiscal year (if applicable) all in reasonable detail, subject to year end adjustments and certified by the chief financial officer of Borrower to be accurate and to have been prepared in accordance with GAAP. 8.4 Quarterly Property Statements. As soon as available and in any event within thirty (30) days after the end of each fiscal quarter of Borrower, rent rolls and operating statements for each property constituting a portion of the Real Estate, including without limitation a portfolio summary relating to the Real Estate in the form approved by Bank. 8.5 Requested Information. With reasonable promptness, all such other data and information in respect of the condition, operation and affairs of Borrower as Bank may reasonably request from time to time. 8.6 Compliance Certificates. Together with the annual statements required by Section 8.1 above, a certificate of the chief financial officer of Borrower: (a) stating that Borrower has observed, performed and complied with each and every undertaking contained herein, (b) setting forth the information and computations (in sufficient detail) required in order to establish whether Borrower was operating in compliance with the financial covenants in Sections 7.1 and 7.2 of this Agreement, and (c) certifying that as of the date of such certification, there does not exist any Event of Default or any occurrence or state of affairs which with the giving of notice, passage of time or both would constitute an Event of Default. 8.7 Accountant's Certificate. Together with the annual statements required by Section 8.1, a report of the independent public accountants who render an opinion with respect to the financial statements referred to therein, stating that they have reviewed the terms of this Agreement and that in making the examinations necessary to their certification mentioned in Section 8.1, they have reviewed the accounts and condition of Borrower during the accounting period covered by their certificate and that such review did not disclose the existence of any condition or event which constitutes an Event of Default or a Potential Default (or that such conditions or events existed, describing them). -28- 9. ENVIRONMENTAL REPRESENTATIONS AND COVENANTS. 9.1 Representations. Borrower, to the best of its knowledge after due investigation, including without limitation a review of environmental reports previously furnished to Bank, represents to Bank as follows: (a) Borrower is in compliance with all Environmental Requirements and Borrower has no knowledge of any circumstances which may prevent or interfere with such compliance in the future; (b) Borrower has all licenses, permits, approvals and authorizations required under applicable Environmental Requirements; (c) there are no pending or threatened claims against any Borrower or any Obligor related to the failure to comply with any Environmental Requirements, or any facts or circumstances which could give rise to such a claim; (d) no facility or property now or previously owned, operated or leased by any Obligor is an Environmental Cleanup Site; (e) there are no liens or claims for cost reimbursement outstanding or threatened against Borrower or any Obligor or any of their assets (including without limitation the Real Estate), or any facts or circumstances which could give rise to such a lien or claim; and (f) there are no facts or circumstances which, under the provisions of any Environmental Requirements, could restrict the use, occupancy or transferability of any of the Collateral or any of the Real Estate. 9.2 Real Property. Borrower represents and warrants to Bank that there are no Special Materials presently located on or, to the best of its knowledge, near any Real Estate except for Special Materials which are and have at all times been treated, stored, transported, handled and disposed of in compliance with all Environmental Requirements. Borrower represents to Bank that the Real Estate is not now being used nor, to the best of its knowledge, has it ever been used in the past for activities involving Special Materials, including but not limited to the use, generation, collection, storage, treatment, or disposal of any Special Materials except for Special Materials which are and have at all times been treated, stored, transported, handled and disposed of in compliance with all Environmental Requirements. 9.3 Covenant Regarding Compliance. Borrower shall take or cause all Obligors to take, at Borrower's and such Obligor's sole expense, such actions as may be necessary to comply with all Environmental Requirements, as hereinafter defined. If Borrower or any such Obligor shall fail to take such action, Bank may make advances or payments towards performance or satisfaction of the same but shall be under no obligation to do so. All sums so advanced or paid, including all sums advanced or paid by Bank in connection with any judicial or administrative investigation or proceeding relating thereto, including, without limitation, attorney's fees, fines, or other penalty payments, shall be at once repayable by Borrower and all sums so advanced or paid shall become a part of the Bank Indebtedness. Borrower shall cause all Obligors to maintain all licenses, permits, approvals and authorizations required under applicable Environmental Requirements. In connection with off-site treatment, storage, handling, transportation or disposal of Special Materials, Borrower shall cause all Obligors to conduct such activities only at facilities and with carriers who -29- operate in compliance with all Environmental Requirements and will obtain certificates of compliance or disposal from all contractors retained in connection with such activities. 9.4 Notices. In the event Borrower becomes aware of any past, present or future facts or circumstances which have given rise or could give rise to a claim against any Borrower or any Obligor related to a failure to comply with any Environmental Requirements, Borrower will promptly give Bank notice thereof, together with a written statement of an officer of Borrower setting forth the details thereof and the action with respect thereto taken or proposed to be taken with respect thereto. 9.5 Indemnity. Borrower agrees to indemnify, defend and hold harmless Bank, its parents, subsidiaries, successors and assigns, and any officer, director, shareholder, employee, Affiliate or agent of Bank, for all loss, liability, damage, cost and expenses, including, without limitation, attorney's fees and disbursements (including the reasonable allocated cost of in-house counsel and staff) arising from or related to (a) the release of any Special Materials at any Real Estate, (b) the release of any Special Materials treated, stored, transported, handled, generated or disposed of by or on behalf of Borrower at any third party owned site, failed to comply with all Environmental Requirements, and (c) the breach by Borrower of any representation or covenant in this Section 9. 9.6 Testing. Bank shall have the right from time to time to designate such persons ("Environmental Consultants") as Bank may select to visit, inspect, examine and test any or all of the Real Estate, for the purpose of investigating compliance with Environmental Requirements, any actual or potential claims related thereto, and any condition which could result in potential liability, cost or expenses to the Bank. Borrower will permit, and will use its best efforts to cause all Obligors to permit, such Environmental Consultants to have access to the Real Estate and all books, records and reports related to compliance by the Environmental Affiliates with all Environmental Requirements. Borrower will supply, and will use its best efforts to cause all Obligors to supply, Bank or the Environmental Consultants with all information, records, correspondence, audits, reviews and materials related to compliance by Borrower and such Obligors with all Environmental Requirements and will make available to Bank or the Environmental Consultants appropriate personnel employed by or consultants retained by Borrower or such Obligors having knowledge of such matters. The cost of such visits, inspections, examination and tests shall be borne by the Borrower. In the event Bank pays such costs, such sums shall be at once repayable by Borrower and all sums so advanced or paid by Bank shall become part of the Bank Indebtedness. Notwithstanding the foregoing, the Bank shall have no obligation to perform any tests, examinations or inspections or to monitor the compliance of the Real Property with all Environmental Requirements. -30- 9.7 Survival. The representations and covenants of Borrower contained in this Section 9, including without limitation the indemnification obligation of Borrower, shall survive the occurrence of any event whatsoever, including the payment of the Bank Indebtedness or any investigation by or knowledge of Bank. 10. CONDITIONS OF CLOSING. The obligation of Bank to make available the Line is subject to the performance by Borrower of all of its agreements to be performed hereunder and to the following further conditions: 10.1 Documents. Bank shall have received on or before the date hereof all of the following, in form and substance satisfactory to Bank: (a) The Line Note. (b) UCC-1 Financing Statements and UCC-3 Financing Statement Assignments to be filed in such offices as may be required by Bank. (c) All original Collateral Documents so marked on Exhibit "A" (d) An Assignment (or other appropriate transfer document) in recordable form, with respect to all Collateral Documents so marked on Exhibit "A". (e) Endorsement Allonges to the Notes so marked on Exhibit "A". (f) An Agreement pursuant to which Resource XXIV pledges the Bonds to Bank. (g) A Notification and Control Agreement relating to the Bonds executed by the Depository Trust Corporation and any other financial intermediary in whose name or for whom the Depository Trust Corporation holds the Bonds as nominee. (h) An Assignment in recordable form with respect to the Collateral Documents more fully set forth on Exhibit "A" relating to the Real Estate known as "Factors Walk-Phase One", from CRFI. (i) An Acknowledgment of Guaranty and Assignment of Loan Documents from CRFI to Bank. (j) An agreement pursuant to which Castine Associates subordinates its $875,000 undivided Senior Participation in the Bonds and the Collateral Documents relating to the Real Estate known as Factor's Walk-Phase One (as such Collateral Documents are more fully described on Exhibit "A"), to Bank's lien and security interest set forth herein and in the other Loan Documents. -31- (k) A Leasehold Mortgage and Security Agreement from Resource XL relating to the Real Estate known as Factors Walk-Phase Two (the "Leasehold Mortgage"). (1) A leasehold mortgagee title insurance policy naming Bank as mortgagee with insurance coverage in the amount of $4,750,000. (m) Endorsement to (i) mortgagee title insurance policy No. B1970495 issued by Title Insurance Company of Minnesota (now known as Old Republic National Title Insurance Company, and (ii) mortgagee title insurance policy No. 401-632213 issued by Commonwealth Land Title Insurance Company, both naming Bank as assignee of the insured mortgages. (n) A Line Request. (o) An Acknowledgment of Confessions of Judgment. (p) All such estoppel certificates and agreements (i) from Obligors regarding the payment of Payments to Bank, and (ii) from the ground lessor and ground sublessor under the Lease and Sublease relating to the Lease which is the subject of the Leasehold Mortgage, as Bank may request. (q) Insurance Certificates evidencing hazard, liability, and such other insurance as Bank may require with respect to (i) Borrower, and (ii) each Obligor and the Real Property, each naming Bank as additional insured or mortgagee, as the case may be, as its interests may appear. (r) Agreements in form and substance satisfactory to Bank (the "Depository Agreements") which shall grant Bank exclusive control over the Deposit Accounts and which shall contain such acknowledgments and waivers from the depository institution as Bank may request. (s) Copies, certified in writing by the secretaries or assistant secretaries of Borrower, of (i) resolutions of its boards of directors evidencing approval of this Agreement, the Line Note, and the other matters contemplated hereby, and (ii) each document evidencing other necessary action and approvals, if any with respect to this Agreement and the Line Note. (t) Written certificates by the secretaries or assistant secretaries of Borrower as to the names and signatures of its officers who are authorized to sign this Agreement, the Line Note, and the other documents or certificates to be executed and delivered by it pursuant hereto. Bank may conclusively rely on such certificates until it receives further certificates by the secretaries or assistant secretaries of Borrower amending the prior certificate. -32- (u) Copies of Borrower's Certificates of Incorporation and Bylaws, including all amendments thereto, accompanied by a written certificate of the secretaries or assistant secretaries of Borrower as to the authenticity and completeness of such copies. (v) Good standing certificates for Borrower from the states of Delaware and Pennsylvania each dated not more than 20 days prior to the date hereof. (w) A favorable opinion of independent counsel for Borrower as to the matters mentioned in Sections 5.1, 5.2, 5.7, 5.8, 5.9, 5.10, and 5.11 herein and as to such other matters as Bank may reasonably request. (x) Such additional documents and instruments as Bank may request. 10.2 Representations and Warranties. All representations and warranties of Borrower set forth in the Loan Documents will be true at and as of the date hereof. 10.3 No Default. No condition or event shall exist or have occurred which would constitute an Event of Default or a Potential Default. 10.4 Environmental Matters. Bank shall have received a report from an environmental consultant or engineer acceptable to Bank, satisfactory in form and substance to Bank as to such environmental matters pertaining to the Real Estate as Bank may require. 10.5 Appraisals. Bank shall have received an appraisal from an appraiser acceptable to Bank, satisfactory in form and substance to Bank at all or such portion of the Real Estate as Bank may require. 10.6 Additional Documents. Copies of record searches (including UCC searches and judgments, suits, tax and other lien searches) confirming that Bank has a first priority security interest in the Collateral, acceptable to Bank, shall have been delivered to Bank. 10.7 No Material Adverse Change. Bank shall have received evidence satisfactory to it that no material adverse change has occurred with respect to Borrower since September 30, 1998. 10.8 Commitment Fee. Borrower shall have paid to Bank in full the commitment fee referred to in Section 3.3 herein. 10.9 Other Documents. Such other documents and instruments as Bank may reasonably request. -33- 11. CERTAIN CONDITIONS TO SUBSEQUENT ADVANCES. Subsequent advances shall be conditioned upon the following conditions and each Line Request shall constitute a representation by Borrower to Bank that each condition has been met or satisfied: 11.1 Representations and Warranties. All representations and warranties of Borrower contained herein or in the Loan Documents shall be true at and as of the date of such advance as if made on such date, and each Line Request shall constitute reaffirmation by Borrower that such representations and warranties are then true. 11.2 No Default. No condition or event shall exist or have occurred at or as of the date of such advance which would constitute an Event of Default hereunder or a Potential Default. 11.3 Other Requirements. Bank shall have received all certificates, authorizations, affidavits, schedules and other documents which are provided for hereunder or under the Loan Documents, or which Bank may reasonably request. 12. DEFAULT AND REMEDIES. 12.1 Events of Default. The occurrence of any one or more of the following events shall constitute an Event or Events of Default hereunder: (a) The failure of Borrower to pay any amount of principal or interest on the Line Note when due, or any fee or other sums payable hereunder and the continuation of such failure for five (5) Business Days following notice thereof from Bank, or the failure to pay any other Bank Indebtedness on the date on which such payment is due, whether on demand, at the stated maturity or due date thereof, or by reason of any requirement for the prepayment thereof, by acceleration or otherwise; (b) The failure of Borrower to duly perform or observe any obligation, covenant or agreement on its part contained herein or in any other Loan Document not otherwise specifically constituting an Event of Default under this Section 12.1 and such failure continues unremedied for a period of thirty (30) days after the earlier of (i) notice from Bank to Borrower of the existence of such failure, or (ii) any officer or principal of Borrower knows or should have known of the existence of such failure, provided that, in the event such failure is incapable of remedy or consists of a default of any of the financial covenants in Sections 7.1 or 7.2 herein, or was willfully caused or permitted by Borrower shall not be entitled to any notice or grace hereunder; (c) The failure of Borrower to pay any Indebtedness for borrowed money due to any third Person or the existence of any other event of default under any loan, security -34- agreement, mortgage or other agreement pertaining thereto binding Borrower after the expiration of any notice and/or grace periods permitted in such documents; (d) The failure of Borrower to pay or perform any other obligation to Bank under any other agreement or note or otherwise arising, whether or not related to this Agreement, after the expiration of any notice and/or grace periods, if any, permitted in such documents; (e) The adjudication of Borrower as a bankrupt or insolvent, or the entry of an Order for Relief for Borrower or the entry of an order appointing a receiver or trustee for Borrower of any of its property or approving a petition seeking reorganization or other similar relief under the bankruptcy or other similar laws of the United States or any state or any other competent jurisdiction; (f) A proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law is filed by or (unless dismissed within 75 days) against Borrower or Borrower makes an assignment for the benefit of creditors, or Borrower takes any action to authorize any of the foregoing; (g) The suspension of the operation of Borrower's present business, or Borrower becoming unable to meet its debts as they mature, or the admission in writing by Borrower to such effect, or Borrower calling any meeting of all or any material portion of its creditors for the purpose of debt restructure; (h) All or any part of the Collateral or the assets of Borrower are attached, seized, subjected to a writ or distress warrant, or levied upon, or come within the possession or control of any receiver, trustee, custodian or assignee for the benefit of creditors; (i) The entry of a final judgment for the payment of money against Borrower which, within ten (10) days after such entry, shall not have been discharged or execution thereof stayed pending appeal or shall not have been discharged within five (5) days after the expiration of any such stay; (j) Any representation or warranty of Borrower in any of the Loan Documents is discovered to be untrue in any material respect or any statement, certificate or data furnished by Borrower pursuant hereto is discovered to be untrue in any material respect as of the date as of which the facts therein set forth are stated or certified; (k) Borrower voluntarily or involuntarily dissolves or is dissolved, terminates or is terminated; -35- (1) Borrower is enjoined, restrained, or in any way prevented by the order of any court or any administrative or regulatory agency, the effect of which order restricts an Obligor from conducting all or any material part of its business; (m) A breach by Borrower occurs under any material agreement, document or instrument, whether heretofore, now or hereafter existing between Borrower and any other Person; (n) A material and adverse change occurs in Borrower's operations, management or financial condition or in the value of the Collateral; (o) The loss, suspension, revocation or failure to renew any license or permit now held or hereafter acquired by Borrower, which loss, suspension, revocation or failure to renew might have a material adverse effect on the business profits, assets or financial condition of Borrower; (p) Subject to Section 4.4 herein, the occurrence of a Collateral Document Default; or (q) The occurrence of an Event of Default under (and as defined in) the Resource America Loan. 12.2 Remedies. At the option of the Bank, upon the occurrence of an Event of Default, or at any time thereafter: (a) The entire unpaid principal of the Line, all other Bank Indebtedness, or any part thereof, all interest accrued thereon, all fees due hereunder and all other obligations of Borrower to Bank hereunder or under any other agreement, note or otherwise arising will become immediately due and payable without any further demand or notice; (b) The Line will immediately terminate and the Borrower will receive no further extensions of credit thereunder; (e) Bank may increase the interest rate on the Line to the Default Rate, without notice; (d) Bank may exercise all of the rights and remedies set forth in Section 4 herein. (e) Bank may enter the premises occupied by Borrower and take possession of the Collateral and any records relating thereto; and/or -36- (f) Bank may exercise each and every right and remedy granted to it under the Loan Documents, under the Uniform Commercial Code and under any other applicable law or at equity. If an Event of Default occurs under Section 12.1(e) or (f), all Bank Indebtedness shall become immediately due and payable. 12.3 Sale or Other Disposition of Collateral. The sale or other disposition of the Collateral, or any part thereof, by Bank after an Event of Default may be for cash, credit or any combination thereof, and Bank may purchase all or any part of the Collateral at public or, if permitted by law, private sale, and in lieu of actual payment of such purchase price, may set-off the amount of such purchase price against the Bank Indebtedness then owing. Any sales of the Collateral may be adjourned from time to time with or without notice. Bank shall have the right to conduct such sales at Borrower's premises, at Borrower's expense, or elsewhere, on such occasion or occasions as Bank may see fit. Any notice required to be given by Bank of a sale or other disposition or other intended action by Bank with respect to any of the Collateral which is deposited in the United States mail, postage prepaid and duly addressed to Borrower at the address specified in Section 13.1 below, at least five (5) business days prior to such proposed action, shall constitute fair and reasonable notice to Borrower of any such action. The net proceeds realized by Bank upon any such sale or other disposition, after deduction for the expenses of holding, preparing for sale, selling or otherwise disposing of the Collateral incurred by Bank in connection therewith and all other costs and expenses related thereto including attorney fees, shall be applied in such order as Bank, in its sole discretion, elects, toward satisfaction of the Bank Indebtedness. Bank shall account to Borrower for any surplus realized upon such sale or other disposition, and Borrower shall remain liable for any deficiency. The commencement of any action, legal or equitable, or the rendering of any judgment or decree for any deficiency shall not affect Bank's security interest in the Collateral. Borrower agrees that Bank has no obligation to preserve rights to the Collateral against any other parties. Bank shall be under no obligation to marshall any assets in favor of Borrower or any other party or against or in payment of any or all of the Bank Indebtedness. 12.4 Set-Off. Without limiting the rights of Bank under applicable law, Bank has and may exercise a right of set-off, a lien against and a security interest in all property of Borrower now or at any time in Bank's possession in any capacity whatsoever, including but not limited to any balance of any deposit, trust or agency account, or any other bank account with Bank, as security for all Bank Indebtedness. At any time and from time to time following the occurrence of an Event of Default or a Potential Default, or Bank may without notice or demand, set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Bank to or for the credit of Borrower against any or all of the Bank Indebtedness and Borrower's obligations under the Loan Documents. -37- If any bank account of Borrower with Bank is attached or otherwise liened or levied upon by any third party, Bank need not await the running of any applicable grace period hereunder, but Bank shall have and be deemed to have the immediate right of set-off and may apply the funds or amount thus set-off against Borrower's obligations to the Bank. 12.5 Delay or Omission Not Waiver. Neither the failure nor any delay on the part of Bank to exercise any right, remedy, power or privilege under the Loan Documents upon the occurrence of any Event of Default or otherwise shall operate as a waiver thereof or impair any such right, remedy, power or privilege. No waiver of any Event of Default shall affect any later Event of Default or shall impair any rights of Bank. No single, partial or full exercise of any rights, remedies, powers and privileges by the Bank shall preclude further or other exercise thereof. No course of dealing between Bank and Borrower shall operate as or be deemed to constitute a waiver of Bank's rights under the Loan Documents or affect the duties or obligations of Borrower. 12.6 Remedies Cumulative; Consents. The rights, remedies, powers and privileges provided for herein shall not be deemed exclusive, but shall be cumulative and shall be in addition to all other rights, remedies, powers and privileges in Bank's favor at law or in equity. Whenever the Bank's consent or approval is required or permitted, such consent or approval shall be at the sole and absolute discretion of Bank. 12.7 Certain Fees, Costs, Expenses and Expenditures. Borrower agrees to pay on demand all costs and expenses of Bank, including without limitation: (a) all costs and expenses in connection with the preparation, review, negotiation, execution, delivery and administration of the Loan Documents, and the other documents to be delivered in connection therewith, or any amendments, extensions and increases to any of the foregoing (including, without limitation, attorney's fees and expenses, and the cost of appraisals and reappraisals of Collateral), and the cost of periodic lien searches and tax clearance certificates, as Bank deems advisable; (b) all losses, costs and expenses in connection with the enforcement, protection and preservation of the Bank's rights or remedies under the Loan Documents, or any other agreement relating to any Bank Indebtedness, or in connection with legal advice relating to the rights or responsibilities of Bank (including without limitation court costs, attorney's fees and expenses of accountants and appraisers); and (c) any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of the Loan Documents, and all liabilities to which Bank may become subject as the result of delay in paying or omission to pay such taxes. -38- In the event Borrower shall fail to pay taxes, insurance, assessments, costs or expenses which it is required to pay hereunder, or fails to keep the Collateral free from security interests or lien (except as expressly permitted herein), or fails to maintain or repair the Collateral as required hereby, or otherwise breaches any obligations under the Loan Documents, Bank in its discretion, may make expenditures for such purposes and the amount so expended (including attorney's fees and expenses, filing fees and other charges) shall be payable by Borrower on demand and shall constitute part of the Bank Indebtedness. With respect to any amount required to be paid by Borrower under this Section, in the event Borrower fails to pay such amount on demand, Borrower shall also pay to Bank interest thereon at the Default Rate. Borrower's obligations under this Section shall survive termination of this Agreement. 12.8 Time is of the Essence. Time is of the essence in Borrower's performance of their obligations under the Loan Documents. 13. COMMUNICATIONS AND NOTICES. 13.1 Communications and Notices. All notices, requests and other communications made or given in connection with the Loan Documents shall be in writing and, unless receipt is stated herein to be required, shall be deemed to have been validly given if delivered personally to the individual or division or department to whose attention notices to a party are to be addressed, or by private carrier, or registered or certified mail, return receipt requested, or by telecopy with the original forwarded by first-class mail, in all cases, with charges prepaid, addressed as follows, until some other address (or individual or division or department for attention) shall have been designated by notice given by one party to the other: To Borrower: Resource Properties, Inc. Resource Properties 53, Inc. Resource Properties XXIV, Inc. Resource Properties XL, Inc. 1845 Walnut Street Philadelphia, PA 19103 Attention: Scott F. Schaeffer Facsimile Number: 215-546-5388 -39- With a copy to: Ledgewood Law Firm 1521 Locust Street Philadelphia, PA 19102-3723 Attention: Jeffrey Brotman, Esquire Facsimile Number: 215-735-2513 To Bank: Sovereign Bank 2000 Market Street Philadelphia, PA 19103 Attention: Richard Narkiewicz Facsimile Number: 215-568-5948 14. WAIVERS. 14.1 Waivers. In connection with any proceedings under the Loan Documents, including without limitation any action by Bank in replevin, foreclosure or other court process or in connection with any other action related to the Loan Documents or the transactions contemplated hereunder, Borrower waives: (a) all errors, defects and imperfections in such proceedings; (b) all benefits under any present or future laws exempting any property, real or personal, or any part of any proceeds thereof from attachment, levy or sale under execution, or providing for any stay of execution to be issued on any judgment recovered under any of the Loan Documents or in any replevin or foreclosure proceeding, or otherwise providing for any valuation, appraisal or exemption; (c) all rights to inquisition on any real estate, which real estate may be levied upon pursuant to a judgment obtained under any of the Loan Documents and sold upon any writ of execution issued thereon in whole or in part, in any order desired by Bank; (d) presentment for payment, demand, notice of demand, notice of non-payment, protest and notice of protest of any of the Loan Documents, including the Line Note; -40- (e) any requirement for bonds, security or sureties required by statute, court rule or otherwise; (f) any demand for possession of Collateral prior to commencement of any suit; and (g) all rights to claim or recover attorney's fees and costs in the event that Borrower is successful in any action to remove, suspend or enforce a judgment entered by confession. 14.2 Forbearance, Bank may release, compromise, forbear with respect to, waive, suspend, extend or renew any of the terms of the Loan Documents, without notice to Borrower. 14.3 Limitation on Liability. Borrower shall be responsible for and Bank is hereby released from any claim or liability in connection with: (a) Safekeeping any Collateral; (b) Any loss or damage to any Collateral; (c) Any diminution in value of the Collateral; or (d) Any act or default of another Person. Bank shall only be liable for any act or omission on its part constituting willful misconduct. In the event that Bank breaches its required standard of conduct, Borrower agrees that Bank's liability shall be only for direct damages suffered and shall not extend to consequential or incidental damages. In the event Borrower brings suit against Bank in connection with the transactions contemplated hereunder and Bank is found not to be liable, Borrower will indemnify and hold Bank harmless from all costs and expenses, including attorney's fees, incurred by Bank in connection with such suit. This Agreement is not intended to obligate Bank to take any action with respect to the Collateral or to incur expenses or perform any obligation or duty of Borrower. 15. SUBMISSION TO JURISDICTION. 15.1 Submission to Jurisdiction. Borrower hereby consents to the exclusive jurisdiction of any state or federal court located within the Commonwealth of Pennsylvania, and irrevocably agrees that, subject to the Bank's election, all actions or proceedings relating to the Loan Documents or the transactions contemplated hereunder shall be litigated in such courts, and Borrower waives any objection which they may have based on lack of personal -41- jurisdiction, improper venue or forum non conveniens to the conduct of any proceeding in any such court and waives personal service of any and all process upon it, and consents that all such service of process be made by mail or messenger directed to it at the address set forth in Section 13.1. Borrower hereby irrevocably appoints any officer, trustee, or partner of either of them as their agent for the purpose of accepting service of any process within the Commonwealth of Pennsylvania. Nothing contained in this Section 15.1 shall affect the right of Bank to serve legal process in any other manner permitted by law or affect the right of Bank to bring any action or proceeding against Borrower or its property in the courts of any other jurisdiction. 16. MISCELLANEOUS. 16.1 Brokers. The transaction contemplated hereunder was brought about and entered into by Bank and Borrower acting as principals and without any brokers, agents or finders being the effective procuring cause hereof. Borrower represents to Bank that Borrower has not committed Bank to the payment of any brokerage fee or commission in connection with this transaction. Whether any such claim is made against Bank by any broker, finder or agent or any other Person, Borrower agrees to indemnify, defend and hold Bank harmless against any such claim, at Borrower's own cost and expense, including Bank's attorneys' fees. Borrower further agrees that until any such claim or demand is adjudicated in Bank's favor, the amount claimed and/or demanded shall be deemed part of the Bank Indebtedness secured by the Collateral. 16.2 No Joint Venture. Nothing contained herein is intended to permit or authorize Borrower to make any contract on behalf of Bank, nor shall this Agreement be construed as creating a partnership, joint venture or making Bank an investor in Borrower. 16.3 Survival. All covenants, agreements, representations and warranties made by Borrower in the Loan Documents or made by or on its behalf in connection with the transactions contemplated here shall be true at all times this Agreement is in effect and shall survive the execution and delivery of the Loan Documents, any investigation at any time made by Bank or on its behalf and the making by Bank of the loans or advances to Borrower. All statements contained in any certificate, statement or other document delivered by or on behalf of Borrower pursuant hereto or in connection with the transactions contemplated hereunder shall be deemed representations and warranties by Borrower. 16.4 No Assignment by Borrower. Borrower may not assign any of its rights hereunder without the prior written consent of Bank, and Bank shall not be required to lend hereunder except to Borrower as it presently exists. 16.5 Assignment or Sale by Bank. Bank may sell, assign or participate all or a portion of its interest in the Loan Documents and in connection therewith may make available -42- to any prospective purchaser, assignee or participant any information relative to Borrower in its possession. 16.6 Binding Effect. This Agreement and all rights and powers granted hereby will bind and inure to the benefit of the parties hereto and their respective permitted successors and assigns. 16.7 Severability. The provisions of this Agreement and all other Loan Documents are deemed to be 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. 16.8 No Third Party Beneficiaries. The rights and benefits of this Agreement and the Loan Documents shall not inure to the benefit of any third party. 16.9 Modifications. No modification of this Agreement or any of the Loan Documents shall be binding or enforceable unless in writing and signed by or on behalf of the party against whom enforcement is sought. 16.10 Holidays. If the day provided herein for the payment of any amount or the taking of any action falls on a Saturday, Sunday or public holiday at the place for payment or action, then the due date for such payment or action will be the next succeeding Business Day. 16.11 Law Governing. This Agreement has been made, executed and delivered in the Commonwealth of Pennsylvania and will be construed in accordance with and governed by the laws of such Commonwealth. 16.12 Integration. The Loan Documents shall be construed as integrated and complementary of each other, and as augmenting and not restricting Bank's rights, powers, remedies and security. The Loan Documents contain the entire understanding of the parties thereto with respect to the matters contained therein and supercede all prior agreements and understandings between the parties with respect to the subject matter thereof and do not require parol or extrinsic evidence in order to reflect the intent of the parties. In the event of any inconsistency between the terms of this Agreement and the terms of the other Loan Documents, the terms of this Agreement shall prevail. 16.13 Exhibits and Schedules. All exhibits and schedules attached hereto are hereby made a part of this Agreement. 16.14 Headings. The headings of the Articles, Sections, paragraphs and clauses of this Agreement are inserted for convenience only and shall not be deemed to constitute a part of this Agreement. -43- 16.15 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. 16.16 Waiver of Right to Trial by Jury. BORROWER AND BANK WAIVE ANY RIGHT TO TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER ANY OF THE LOAN DOCUMENTS OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF BORROWER OR BANK WITH RESPECT TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. BORROWER AND BANK AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF BORROWER AND BANK TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. BORROWER ACKNOWLEDGES THAT IT HAS HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL REGARDING THIS SECTION, THAT IT FULLY UNDERSTANDS ITS TERMS, CONTENT AND EFFECT, AND THAT IT VOLUNTARILY AND KNOWINGLY AGREES TO THE TERMS OF THIS SECTION. [REMAINDER OF PAGE INTENTIONALLY BLANK] -44- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. RESOURCE PROPERTIES, INC. By: /s/ Scott F. Schaeffer ---------------------------------------- Name: Scott F. Schaeffer Title: President RESOURCE PROPERTIES 53, INC By: /s/ Scott F. Schaeffer ---------------------------------------- Name: Scott F. Schaeffer Title: President RESOURCE PROPERTIES XXIV, INC. By: /s/ Scott F. Schaeffer ---------------------------------------- Name: Scott F. Schaeffer Title: President RESOURCE PROPERTIES XL, INC. By: /s/ Scott F. Schaeffer ---------------------------------------- Name: Scott F. Schaeffer Title: President SOVEREIGN BANK By: /s/ Richard J. Narkiewicz ---------------------------------------- Name: Richard J. Narkiewicz Title: Vice President -45- SCHEDULES Schedule 5.3 Ownership Interests, Pledges, etc. of Borrower Schedule 5.4 Stock owned by Borrower Schedule 5.7 Pending or Threatened Litigation or Proceedings Against or Affecting Borrower Schedule 5.13 Names (including tradenames) and Addresses of Borrower, identifying chief executive office Schedule 5.18 Liens and Encumbrances Schedule 5.22 Permitted Bank Accounts (including name and address of depository bank) Schedule 6.1 Permitted Indebtedness for Borrowed Money Schedule 6.7 Permitted Liens and Security Interests Schedule 6.16 Permitted Loans to Affiliates, Shareholders, Officers or Directors -46- o - To be Assigned of Record * - Originals to be Delivered at Closing Exhibit A 1212 South Michigan Avenue * 1. $17,459,600 Mortgage Note dated January 25, 1980 by American National Bank and Trust Company of Chicago, not personally, but as Trustee under Trust Agreement number 42220 to Banco Mortgage Company, as assigned as follows: February 6, 1980: Banco Mortgage Company to Illinois Housing Development Authority September 10, 1982: Illinois Housing Development Authority to Banco Mortgage Company September 10, 1982: Banco Mortgage Company to Government National Mortgage Association January 16, 1987: Government National Mortgage Association to Secretary of Housing and Urban Development June 27, 1996: Secretary of Housing and Urban Development to Multifamily Mortgage Trust 1996-1 August 5, 1996: Multifamily Mortgage Trust 1996-1 to ALI Inc. August 7, 1997: ALI Inc. to Sasco 1997-N1 LLC September 23, 1998: Sasco 1997-Nl LLC to Resource Properties 53, Inc. *o 2. $17,459,600 Mortgage dated January 25, 1980 by American National Bank & Trust Company of Chicago, not personally, but as Trustee under Trust Agreement Number 42220 to Banco Mortgage Company, recorded as document number 25350099 on February 5, 1980 in the office of the Recorder of Deeds of Cook County, Illinois, as modified by modification dated September 1, 1982 and recorded September 9, 1982 as document number 26346078, and as assigned as follows: Assigned to Illinois Housing Development Authority by assignment dated February 6, 1980 and recorded February 6, 1980 as document number 25352586 Assigned to Banco Mortgage Company by assignment dated September 10, 1982 and recorded September 13, 1982 as document number 26349507 Assigned to Government National Mortgage Association by assignment dated September 10, 1982 and recorded September 13, 1982 as document number 26349508 Assigned to Secretary of Housing and Urban Development by assignment dated January 16, 1987 and recorded January 23, 1987 as document number 87046503 Assigned to Multifamily Mortgage Trust 1996-1 by assignment dated June 27, 1996 and recorded July 2, 1996 as document number 96509324 Assigned to ALI, Inc. by assignment dated August 5, 1996 and recorded August 12, 1996 as document number 96615677 Assigned to Sasko 1997-N1 LLC by assignment dated August 7, 1997 and recorded August 22, 1997 as document number 97619411 Assigned to Resource Properties 53, Inc. by assignment dated September 23, 1998 and recorded October 2, 1998 as document number 98884939 *o 3. Security Agreement (Chattel Mortgage) dated January 25, 1980 by American National Bank & Trust Company of Chicago, not personally, but as Trustee under Trust Agreement Number 42220 to Banco Mortgage Company as assigned as follows: Assigned by Banco Mortgage Company to Illinois Housing Development Authority by assignment dated February 6, 1980 Assigned by Illinois Housing Development Authority to Banco Mortgage Company by assignment dated September 10, 1982 Assigned by Banco Mortgage Company to Government National Mortgage Association by assignment dated September 10, 1982 -48- Assigned by Government National Mortgage Association to Secretary of Housing & Urban Development by assignment dated January 16, 1987 Assigned by Secretary of Housing & Urban Development to Multifamily Mortgage Trust 1996-1 by assignment dated June 27, 1996 Assigned by Multifamily Mortgage Trust 1996-1 to ALI, Inc. by assignment dated August 5, 1996 Assigned by ALI, Inc. to Sasko 1997-1 LLC by assignment dated August 7, 1997 Assigned by Sasko 1997-N1 LLC to Resource Properties 53, Inc. by assignment dated September 23, 1998 *o 4. Security Agreement (Chattel Mortgage) dated January 25, 1980 by 1212 South Michigan Partnership to Banco Mortgage Company and assigned as follows: Assigned by Banco Mortgage Company to Illinois Housing Development Authority by assignment dated February 6, 1980 Assigned by Illinois Housing Development Authority to Banco Mortgage Company by assignment dated September 10, 1982 Assigned by Banco Mortgage Company to Government National Mortgage Association by assignment dated September 10, 1982 Assigned by Government National Mortgage Association to Secretary of Housing & Urban Development by assignment dated January 16, 1987 Assigned by Secretary of Housing & Urban Development to Multifamily Mortgage Trust 1996-1 by assignment dated June 27, 1996 Assigned by Multifamily Mortgage Trust 1996-1 to ALI, Inc. by assignment dated August 5, 1996 Assigned by ALI, Inc. to Sasko 1997-1 LLC by assignment dated August 7, 1997 Assigned by Sasko 1997-N1 LLC to Resource Properties 53, Inc. by assignment dated September 23, 1998 -49- 5. Regulatory Agreement for Insured Multifamily Housing Projects between American National Bank & Trust Company of Chicago, not personally, but as Trustee under Trust Number 42220, 1212 South Michigan Partnership and the Secretary of Housing & Urban Development dated January 25, 1980, recorded as document number 25350100 on February 5, 1980 with the Cook County Recorder of Deeds, as amended March 6, 1984 and recorded March 6, 1984 with the Cook County Recorder of Deeds as document number 26994557, and as partially released by a Partial Release of Regulatory Agreement dated February 5, 1980 and recorded July 2, 1996 with the Cook County Recorder of Deeds as document number 96509325. 6. Title Insurance Policy Number 401-632213 issued by Commonwealth Land Title Insurance Company dated February 6, 1980, name of insured: Banco Mortgage Company, an Iowa corporation, and/or the Secretary of Housing and Urban Development of Washington, D.C., and their respective successors or assigns as their interest may appear. 7. Provisional Holding Arrangement dated September 24, 1993 with an effective date of October 1, 1993 between 1212 South Michigan Partnership, American Land Trust, Trustee under Trust Number 42220 and the Secretary for Housing & Urban Development. 8. Non-Performing Loan Purchase Agreement between Sasko 1997-N1 LLC and Resource Properties, Inc. dated July 29, 1998, as assigned by assignment of Non-Performing Loan Purchase Agreement between Resource Properties, Inc. and Resource Properties 53, Inc. dated September 9, 1998. 9. Fidelity National Title Insurance Company Title Policy Number 5412-1177380 dated October 2, 1998 in the amount of $17,250,000 issued by Prairie Title Services, Inc. to Resource Properties 53, Inc., a Delaware corporation, its respective successors and assigns as their interest may appear. 10. Survey prepared by National Survey Service, Inc. prepared March 27, 1970, last revised September 25, 1998. 11. All other documents, agreements, assignments and other instruments executed and delivered in connection with the Loan not otherwise listed herein. -50- o - To be Assigned of Record * - Originals to be Delivered at Closing Factor's Walk Partners A. PHASE ONE 1. Revised commitment dated as of May 17, 1985 between Household Finance Corporation and Factor's Walk Partners. * 2. Promissory Note dated as of August 9, 1985, as amended and restated in its entirety on July 7, 1995 made by Factor's Walk Partners in favor of Household Finance Corporation in the original principal amount of $6,272,000, and assigned on December 30, 1996 to Eastern Bancorporation, Inc. and as modified as follows: a. Modification Agreement dated as of July 7, 1995 b. First Amendment to Modification Agreement dated as of December 30, 1996 *o 3. Deed to Secured Debt, Assignment of Rents and Security Agreement dated as of August 9, 1985 made by Factor's Walk Partners in favor of Household Finance Corporation, recorded August 9, 1985 in Deed Book 127R, page 310 and assigned to Eastern Bancorporation, Inc. pursuant to an Assignment of Note, Deed to Secure Debt and Other Loan Documents dated as of December 30, 1996 and recorded in the office of the Recorder of Deeds of Chatham County, Georgia in Book 183-T, page 150. *o 4. Security Agreement dated as of August 9, 1985 made by Factor's Walk Partners in favor of Household Finance Corporation, as assigned to Eastern Bancorporation, Inc. pursuant to an Assignment of Note, Deed to Secure Debt and Other Loan Documents dated as of December 30, 1996 and recorded February 14, 1997 in the office of the Recorder of Deeds of Chatham County, Georgia in Book 183-T, page 150. *o 5. Assignment of Contracts, Plans and Specifications dated as of August 9, 1985 made by Factor's Walk Partners in favor of Household Finance Corporation, as assigned to Eastern Bancorporation, Inc. pursuant to an Assignment of Note, Deed to Secure Debt and Other Loan Documents dated as of December 30, 1996 and recorded February 14, 1997 in the office of the Recorder of Deeds of Chatham County, Georgia in Book 183-T, page 150. *o 6. Loan and Reimbursement Agreement dated August 9, 1985, as amended July 7, 1995 between and among Factor's Walk Partners, William S. A. Brewer and Household -51- Finance Corporation, as assigned to Eastern Bancorporation, Inc. pursuant to an Assignment of Note, Deed to Secure Debt and Other Loan Documents dated as of December 30, 1996 and recorded February 14, 1997 in the office of the Recorder of Deeds of Chatham County, Georgia in Book 183-T, page 150. *o 7. Pledge and Security Agreement dated as of August 9, 1995 made by Factor's Walk Partners in favor of Household Finance Corporation, as assigned to Eastern Bancorporation, Inc. pursuant to an Assignment of Note, Deed to Secure Debt and Other Loan Documents dated as of December 30, 1996 and recorded February 14, 1997 in the office of the Recorder of Deeds of Chatham County, Georgia in Book 183-T, page 150. *o 8. Escrow Agreement dated as of August 9, 1985 between Factor's Walk Partners, Household Finance Corporation and Mellon Bank, N.A., as assigned to Eastern Bancorporation, Inc. pursuant to an Assignment of Note, Deed to Secure Debt and Other Loan Documents dated as of December 30, 1996 and recorded February 14, 1997 in the office of the Recorder of Deeds of Chatham County, Georgia in Book 183-T, page 150. 9. Title Insurance Policy No. B1970495 issued by Minnesota Title Insurance Company (now known as Old Republic National Title Insurance Company) dated August 9, 1985, named of insured: Household Finance Corporation, a Delaware corporation. *o 10. Assignment of Note, Deed to Secure Debt and Other Loan Documents by and between Household Finance Corporation and Eastern Bancorporation, Inc. recorded with the Recorder of Deeds of Chatham County, Georgia on February 14, 1997 in Book 183-T, page 150. 11. Assignment and Assumption Agreement dated as of December 30, 1996 by and between Household Finance Corporation and Eastern Bancorporation, Inc. 12. Assignment and Assumption of Guaranty Agreement dated December 30, 1996 from Household Finance Corporation to Eastern Bancorporation, Inc. * 13. Guaranty Agreement dated as of August 1, 1985 of Household Finance Corporation to Mellon Bank, N.A. relating to the Bonds, as amended July 7, 1995. * 14. Guaranty from William S.A. Brewer to Household Finance Corporation of the indebtedness of Factor's Walk Partners under the $6,272,700 Mortgage Note. 15. Acknowledgment of Guaranty Agreement and Limitation on Recourse from Resource Properties XXIV, Inc. to Charles Rennie Financial, Inc. (formerly known as Eastern Bancorporation, Inc.). -52- 16. All other documents, agreements and assignments and other instruments executed and delivered in connection with the Loan not otherwise listed herein. B. PHASE TWO: 1. Amended and Restated Lease dated November 1, 1996 between The Callen Trust, as owner, and Durbin Holdings, L.L.C., as tenant, together with a Memorandum of Lease recorded with the Chatham County, Georgia Recorder of Deeds on November 6, 1997 in Book 189B, page 253. 2. Sublease dated November 15, 1995 between Durbin Holdings, L.L.C., as sub-landlord and Factor's Walk Partners, as sub-tenant, together with a Memorandum of Sublease recorded in the Chatham County, Georgia Recorder of Deeds on November 6, 1997 in Book 189B, page 255. 3. Assignment of Sublease from Factor's Walk Partners to Brown Savannah Group (Limited), L.P. dated September 23, 1997 and recorded with the Chatham County, Georgia Recorder of Deeds on November 6, 1997 in Book 189-B, at page 259. 4. Assignment made as of March 5, 1999 by Brown Savannah Group (Limited), L.P. to Resource Properties XL, Inc. and recorded ______ with the Chatham County, Georgia Recorder of Deeds in Book ____, at page ______. 5. Tri-Party Agreement dated June 19, 1997 among The Callen Trust, Durbin Holdings, L.L.C., and Factor's Walk Partners together with a Memorandum of Tri-Party Agreement recorded with the Chatham County, Georgia Recorder of Deeds on November 6, 1997 in Book 189B, page 256. 6. Agreement dated March ____, 1999 among The Callen Trust, Resource Properties XL, Inc. and Factor's Walk Partners. 7. All other documents, agreements, assignments and other instruments executed and delivered in connection with the Loan not otherwise listed herein. -53- EXHIBIT "B" REAL ESTATE 1 1212 South Michigan Avenue, Chicago, Illinois Obligor: American National Bank & Trust Company of Chicago, as Trustee under Trust No. 42220 Beneficial Owner: 1212 South Michigan Partnership 2. 114 East Bay Street, Savannah, Georgia Obligor: Factor's Walk Partners 3. 102-110 East bay Street, Savannah, Georgia Obligor: Resource Properties XL, Inc. -54- SCHEDULE 5.3 Ownership Interests of Borrower The Borrower is the sole owner of Downtown Development Authority For The City of Savannah Variable Rate Industrial Development Revenue Bonds. -55- SCHEDULE 5.4 Stock owned by Borrower 100% of all issued and outstanding stock of: 1. Resource Properties II, Inc. through Resource Properties 53, Inc. 2. W.S. Mortgage Acquisition, Inc. 3. RAI Financial, Inc. 4. Resource Commercial Mortgages, Inc. 5. Rancho Investments, Inc. -56- SCHEDULE 5.7 Pending Litigation or Proceedings Against Borrower NONE -57- SCHEDULE 5.13 Names and Addresses of Borrower Resource Properties, Inc. Resource Properties XXIV, Inc. Resource Properties XL, Inc. Resource Properties 53, Inc. 1521 Locust Street Suite 400 Philadelphia, PA 19102 -58- SCHEDULE 5.18 Liens and Encumbrances The property and assets of the Borrower are subject to an $875,000 loan made by Castine Associates. -59- SCHEDULE 5.22 Permitted Bank Accounts Jefferson Bank 1607 Walnut Street Philadelphia, PA 19103 1. Resource Properties, Inc. 5159-00590 2. Resource Properties, Inc. 43-79934 3. Resource Properties XXIV, Inc. 7500-66150 4. Resource Properties XL, Inc. 42-73834 5. Resource Properties 53, Inc. 43-08638 -60- SCHEDULE 6.1 Permitted Indebtedness Borrower's existing indebtedness is as follows: Resource Properties XXIV, Inc. $875,000 loan from Castine Associates -61- SCHEDULE 6.7 Permitted Liens and Security Interests Borrower's liens and security interests are as follows: Resource Properties XXIV, Inc. $875,000 loan from Castine Associates -62- SCHEDULE 6.16 Transactions with Affiliates Borrower's indebtedness with affiliates consists of an $875,000 loan from Castine Associates. -63- EX-10.13(A) 9 0009.txt EXHIBIT 10.13(A) MODIFICATION OF REVOLVING CREDIT LOAN AND SECURITY AGREEMENT MODIFICATION made as of March 30, 2000 by and between RESOURCE PROPERTIES, INC., RESOURCE PROPERTIES 53, INC., RESOURCE PROPERTIES XXIV, INC., and RESOURCE PROPERTIES XL, INC. (collectively, "Borrower") and SOVEREIGN BANK ("Bank"). BACKGROUND A. Pursuant to a Revolving Credit Loan and Security Agreement dated July 27, 1999 between Borrower and Bank (the "Loan Agreement"), Bank has extended a revolving line of credit to Borrower in an amount not to exceed $15,000,000 outstanding at any time (the "Line"), all on the terms and conditions more fully set forth therein. B. Borrower's obligation to repay the Line is evidenced by Borrower's $15,000,000 Line Note dated July 27, 1999 (the "Line Note") and is secured by those assignments of notes and mortgages and other collateral documents referred to on Exhibit "A" attached hereto ("Assignment Documents"), all as more fully set forth in the Loan Agreement. C. Borrower has now requested that Bank increase the amount of the Line to $18,000,000 and make certain other amendments to the Loan Agreement which Bank has agreed to do, all on the terms and conditions set forth herein. D. All capitalized terms used but not defined herein shall have the meaning given to such terms in the Loan Agreement. AGREEMENTS NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Amendments to Loan Agreement. Effective as of the date of this Modification: (a) The figure "Fifteen Million Dollars ($15,000,000)" appearing in Section 1.1 of the Loan Agreement is deleted and the figure "Eighteen Million Dollars ($18,000,000)" substituted in its place. (b) The last sentence of Section 1.1 of the Loan Agreement is deleted in its entirety and the following substituted in its place: "Borrower's obligation to repay advances under the Line shall be evidenced by Borrower's promissory note (the "Replacement Note") in the face amount of Eighteen Million Dollars ($18,000,000)." (c) The first sentence of Section 1.4 of the Loan Agreement is deleted in its entirety and the following substituted in its place: "Notwithstanding anything contained herein to the contrary, but subject to the provision of Section 4.4(b) herein, the aggregate outstanding principal balance of the Line shall not exceed at any time the sum of (i) fifty percent (50%) of the Appraised Value of the Real Estate known as "Factor's Walk" (Phases One and Two), plus (ii) sixty percent (60%) of the Appraised Value of the Real Estate known as 1212 South Michigan Avenue, Chicago, Illinois ("Borrowing Base"). (d) The figure "$40,000,000" appearing in Section 7.1 of the Loan Agreement is deleted and the figure "$60,000,000" is substituted in its place. (e) Section 7.2 of the Loan Agreement is deleted in its entirety and the following substituted in its place: "Borrower shall maintain a ratio of consolidated Net Operating Income, calculated on an annualized basis, to the greater of (i) actual interest paid or payable on the Line during the period of calculation or (ii) $2,022,721, of not less than 1.35 to 1.0. 2. Amendments to All Documents. All references in any of the Loan Agreement, the Assignment Documents, or any other document or instrument executed and delivered in connection with the Line (collectively, the "Loan Documents") to the "Line Note" shall be deemed to be references to the "Replacement Note" and all references to the "Line" shall be deemed to be references to the Line, as amended and increased hereby. 3. Conditions Precedent. The obligation of Bank to effect the modifications and agreements set forth herein is subject to the conditions precedent that: (a) There has been no material adverse change in the Collateral or in the financial or operating condition of Borrower since July 27, 1999. (b) Bank shall have received payment of its $15,000 commitment fee. (c) Bank shall have received all of the following documents, each of which shall be in form and substance satisfactory to Bank: -2- (i) A Promissory Note in the principal amount of the Line, as amended and increased hereby, payable to the order of Bank, dated the date of this Modification (the "Replacement Note"). The Replacement Note shall be the Replacement Note referred to in the Loan Agreement, as amended hereby, and shall supercede and replace, but not extinguish Borrower's liability under or create a novation of, the Line Note. (ii) Copies, certified in writing by the secretaries or assistant secretaries of Borrower, of (x) resolutions of its boards of directors evidencing approval of this Modification, the Replacement Note and the other matters contemplated hereby, and (ii) each document evidencing other necessary action and approvals, if any, with respect to this Modification and the Replacement Note. (ii) Written certificates by the secretaries or assistant secretaries of Borrower as to the names and signatures of its officers who are authorized to sign this Modification, the Replacement Note, and the other documents or certificates to be executed and delivered by it pursuant hereto. (iii) Evidence satisfactory to Bank that Borrower's Certificates of Incorporation and Bylaws delivered to Bank on July 27, 1999 have not been amended in any way (or if they have been amended, the nature of such amendment) and are in full force and effect. (iv) Good standing certificates for Borrower from the states of Delaware and Pennsylvania each dated not more than 20 days prior to the date hereof. (v) A favorable opinion of independent counsel for Borrower as to the matters mentioned in Paragraphs 4 (a), (b), and (c) herein and as to such other matters as Bank may reasonably request. (vi) Such other documents and instruments as Bank may request under the terms of this Modification or otherwise. 4. Representations and Warranties. (a) The execution and delivery by Borrower of this Modification and the Replacement Note, the consummation of the transactions contemplated by this Modification and the Replacement Note and the fulfillment and compliance with the respective terms, conditions and provisions of this Modification and the Replacement Note: (x) have been duly authorized by all requisite corporate action by Borrower, (y) will not conflict with or result in a breach of, or constitute a default (or might, upon the passage of time or the giving of notice or both, constitute a default) under, any of the terms, conditions or provisions of (i) any applicable statute, law, rule, regulation or ordinance, (ii) Borrower's Certificate of Incorporation or Bylaws, -3- (iii) any indenture, mortgage, loan or credit agreement or instrument to which Borrower is a party or by which it may be bound or affected, or (iv) any judgment or order of any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, and (z) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of Borrower under the terms or provisions of any such agreement or instrument, except liens in favor of Bank. (b) This Modification and the Replacement Note have been duly executed by Borrower and delivered to Bank and constitute legal, valid and binding obligations of Borrower, enforceable in accordance with their terms. (c) No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of Borrower is required in connection with the execution, delivery or performance by Borrower of this Modification or the Replacement Note or the consummation of the transactions contemplated thereby. (d) On and as of the date of this Modification, there has occurred no Event of Default or any event which with notice or lapse of time or both would, if unremedied, be an Event of Default. (e) The representations and warranties made by Borrower to Bank in the Loan Documents are true and correct as though made on and as of the date of this Modification. (f) The Loan Documents are in full force and effect. The principal amount due under the Line Note is $15,000,000 and all interest under the Line Note has been paid in fu1l through March 15, 2000. Borrow has no defense, set-off, or counterclaim to its performance under any Loan Document. 5. Miscellaneous. (a) Except as expressly set forth herein, the terms and conditions of the Loan Documents (INCLUDING WITHOUT LIMITATION THE CONFESSIONS OF JUDGMENT CONTAINED THEREIN) are ratified and confirmed, shall remain in full force and effect and shall secure all of Borrower's liabilities to Bank under the Line Note, as amended, increased and replaced by the Replacement Note and this Modification. (b) This Modification shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. (c) Borrower shall pay on demand all costs and expenses of Bank in connection with the preparation, execution, delivery, administration and enforcement of this -4- Modification (including title charges and the fees and out-of-pocket costs of counsel with respect hereto). The agreement set forth in this paragraph 5(c) shall survive the repayment of the Replacement Note. (d) Paragraph headings used in this Modification are for convenience only and shall not affect the construction of this Modification. -5- (e) This Modification may be signed in counterparts, all of which when taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Modification as of the date written above. ATTEST: RESOURCE PROPERTIES, INC. _______________________________ By: /s/Scott F. Schaeffer ------------------------------- Name: Scott F. Schaeffer Title: President ATTEST: RESOURCE PROPERTIES 53, INC. _______________________________ By: /s/Scott F. Schaeffer ------------------------------- Name: Scott F. Schaeffer Title: President ATTEST: RESOURCE PROPERTIES XXIV, INC. _______________________________ By: /s/Scott F. Schaeffer ------------------------------- Name: Scott F. Schaeffer Title: President ATTEST: RESOURCE PROPERTIES XL, INC. _______________________________ By: /s/Scott F. Schaeffer ------------------------------- Name: Scott F. Schaeffer Title: President SOVEREIGN BANK By: /s/Richard J. Narkiewicz ------------------------------- Name: Richard J. Narkiewicz Title: Vice President -6- EXHIBIT A ASSIGNMENT DOCUMENTS 1. Assignment of Note, Deed to Secured Debt and Other Loan Documents dated July 27, 1999 from Charles Rennie Financial, Inc. to Sovereign Bank. 2. Acknowledgment of Guaranty Agreement and Assignment of Documents dated July 27, 1999 between Charles Rennie Financial, Inc. and Sovereign Bank. 3. Bond Pledge Agreement dated July 27, 1999 between Resource Properties XXIV, Inc. and Sovereign Bank. 4 . Subordination of Participation Agreement dated July 27, 1999 among Resource Properties XXIV, Inc., Castine Associates, and Sovereign Bank. 5. Deed to Secured Debt (Leasehold) dated July 27, 1999 between Resource Properties XL, Inc. and Sovereign Bank. 6. Assignment of Mortgage Note, Mortgage and Other Loan Documents dated July 27, 1999 from Resource Properties 53, Inc. to Sovereign Bank. 7. All other documents, agreements and assignments and other instruments executed and delivered in connection with the Line not otherwise listed herein. EX-10.14 10 0010.txt EXHIBIT 10.14 REVOLVING CREDIT LOAN AGREEMENT By and Between RESOURCE AMERICA, INC. and SOVEREIGN BANK Dated: July 27, 1999 LOAN AGREEMENT THIS REVOLVING CREDIT LOAN AGREEMENT (the "Agreement") is made as of July 27, 1999, by and between RESOURCE AMERICA, INC. ("Borrower") and SOVEREIGN BANK ("Bank"). BACKGROUND A. Borrower has requested that Bank extend a line of credit to Borrower, which Bank is willing to do on the terms set forth herein. B. Capitalized terms not otherwise defined herein will have the following meanings: "Accounting Terms". As used in this Agreement, or any certificate, report or other document made or delivered pursuant to this Agreement, accounting terms not defined elsewhere in this Agreement shall have the respective meanings given to them under GAAP. "Affiliate", as to any Person, means 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. "Bank Indebtedness" shall mean all obligations and Indebtedness of Borrower to Bank, whether now or hereafter owing or existing, including, without limitation, all obligations under the Loan Documents, all obligations to reimburse Bank for payments made by Bank pursuant to any letter of credit issued for the account or benefit of Borrower by Bank, all other obligations or undertakings now or hereafter made by or for the benefit of Borrower to or for the benefit of Bank under any other agreement, promissory note or undertaking now existing or hereafter entered into by Borrower with Bank, including, without limitation, all obligations of Borrower to Bank under any guaranty or surety agreement and all obligations of Borrower to immediately pay to Bank the amount of any overdraft on any deposit account maintained with Bank, together with all interest and other sums payable in connection with any of the foregoing. "Borrowing Base" has the meaning given to such term in Section 1.4 herein. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Pennsylvania are authorized by law to close. "Collateral" has the meaning given to such term in Section 4.1 herein. "Corporation" means a corporation, partnership, trust, unincorporated organization, association or joint stock company. "Default Rate" has the meaning given to such term in Section 2.2 herein. "Deferred Compensation Plan" means any plan described in Section 3(3) of ERISA or any other plan or arrangement under which Borrower or any ERISA Affiliate may become obligated to pay deferred, bonus, incentive, or other compensation or health, life, medical, dental, or other welfare benefits, excluding only any fully insured major medical, hospital, or dental program for which Borrower or such ERISA Affiliate has no obligation other than the payment of premiums. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and all rules or regulations issued in connection therewith. "ERISA Affiliate" means each trade or business (whether or not incorporated) that, together with Borrower, would be treated as a single employer under Section 4001(b)(1) of ERISA or Section 414(b) or 414(c) of the Internal Revenue Code. "Event of Default" means each of the events specified in Section 12.1. "Expiration Date" has the meaning given to such term in Section 1.1 herein. "GAAP" means generally accepted accounting principles in the United States of America, in effect from time to time, consistently applied and maintained. "Guarantor" means Resource Properties, Inc., Resource Properties 53, Inc., Resource Properties XXIV, Inc., and Resource Properties XL, Inc., collectively. "Indebtedness", as applied to a Person, means: (a) all items (except items of capital stock or of surplus) which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined; (b) to the extent not included in the foregoing, all indebtedness, obligations, and liabilities secured by any mortgage, pledge, lien, conditional sale or other title retention agreement or other security interest to which any property or asset owned or held by such Person is subject, whether or not the indebtedness, obligations or liabilities secured thereby shall have been assumed by such Person; and -2- (c) to the extent not included in the foregoing, all indebtedness, obligations and liabilities of others which such Person has directly or indirectly guaranteed, endorsed (other than for collection or deposit in the ordinary course of business), sold with recourse, or agreed (contingently or otherwise) to purchase or repurchase or otherwise acquire or in respect of which such Person has agreed to supply or advance funds (whether by way of loan, stock purchase, capital contribution or otherwise) or otherwise to become directly or indirectly liable. Notwithstanding the foregoing, the term "Indebtedness" shall not include any amounts which are non-recourse to Borrower (other than usual and customary carveouts). "Line" has the meaning given to such term in Section 1.1 herein. "Line Note" has the meaning given to such term in Section 1.1 herein. "Line Request" has the meaning given to such term in Section 1.3 herein. "Loan Documents" means this Agreement, the Line Note, the Pledge Agreement referred to in Section 10.1(d) hereof, the Surety Agreement, and all other documents, executed or delivered by Borrower pursuant to this Agreement, as they may be amended from time to time. "Market Value" means, on any Business Day, (i) the last reported sale price of the Pledged Shares regular way, or in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case, on the New York Stock Exchange, or (ii) if the Pledged Shares are not listed or admitted to trading on the New York Stock Exchange, the last reported sale price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, on the principal national securities exchange on which the Pledged Shares are listed or admitted to trading, or (iii) if the Pledged Shares are not listed or admitted to trading on any national securities exchange, the last reported sale price of the Pledged Shares on the National Association of Securities Dealers National Market System ("NASDAQ"), or (iv) if the Pledged Shares are not listed or admitted to trading on any national securities exchange or NASDAQ, the closing sale price (or the quoted closing bid price if there were no sales) as reported by the National Association of Securities Dealers Automated Quotation System. If none of the conditions set forth above is met, Market Value shall be the fair market value of the Pledged Shares, as determined by a member firm of the New York Stock Exchange selected by Bank. "Multiemployer Plan" means a plan described in Section 3(37) or 4001(a)(3) of ERISA or Section 414 of the Internal Revenue Code of 1986, as amended from time to time, which cover employees of Borrower or any ERISA Affiliate. -3- "Person" means an individual, a Corporation or a government or any agency or subdivision thereof, or any other entity. "Pledge Agreement" has the meaning given to such term in Section 8.1(c) herein. "Pledged Shares" means Restricted Stock and the Unrestricted Stock. "Potential Default" means the occurrence of any event which with the giving of notice or passage of time or both, would constitute an Event of Default. "Prime Rate" means the Wall Street Journal Prime Rate as established from time to time. "Restricted Stock" means 500,000 shares of Resource Asset Investment Trust, a Maryland business trust, represented by certificate no. RA-0012 or any substitute or replacement thereof. "Subsidiary" means a Corporation (a) which is organized under the laws of the United States or any state thereof, or any other county or jurisdiction, (b) which conducts substantially all of its business and has substantially all of its assets within the United States, and (c) of which more than fifty percent (50%) of its outstanding voting stock of every class (or other voting equity interest) is owned by Borrower or one or more of its Subsidiaries. "Substitute Collateral" means marketable securities or other liquid collateral, in either case, acceptable to Bank in its sole discretion as to form, substance and amount. "Surety Agreement" has the meaning given to such term in Section 4.2 herein. "Unrestricted Stock" means 335,937 shares of Resource Asset Investment Trust, a Maryland business trust, represented by certificate no. RA-0082, or any substitute or replacement thereof. NOW, THEREFORE, in consideration of the terms and conditions contained herein, and of any extensions of credit now or hereafter made to or for the benefit of Borrower by Bank, the parties hereto, intending to be legally bound hereby, agree as follows: 1. THE LINE; USE OF PROCEEDS. 1.1 Line of Credit. Bank will establish for Borrower for and during the period from the date hereof and until July 27, 2001 (the "Expiration Date"), subject to the terms and conditions hereof (including without limitation the Borrowing Base set forth in Section 1.4 herein), a revolving line of credit (the "Line") pursuant to which Bank will from time to time -4- make loans to Borrower in an aggregate outstanding principal amount not to exceed at any time Five Million Dollars ($5,000,000). Within the limits of the Line, Borrower may borrow, repay and reborrow under the Line. The Line shall be subject to all terms and conditions set forth in all of the Loan Documents which terms and conditions are incorporated herein. Borrower's obligation to repay advances under the Line shall be evidenced by Borrower's promissory note (the "Line Note") in the face amount of Five Million Dollars ($5,000,000), dated the date of this Agreement, payable to the order of Bank, and otherwise in form and substance satisfactory to Bank. 1.2 Use of Proceeds. Borrower agrees to use advances under the Line (i) to repay, in part (i.e., $3,000,000) the existing $18,000,000 line of credit from Jefferson Bank to Guarantor being repaid concurrently herewith; (ii) to acquire commercial real estate or an interest therein, (iii) to fund loans secured by commercial real estate, (iv) to purchase loans secured by commercial real estate, or an interest therein, (v) to reduce indebtedness secured by senior liens on property which Borrower owns or holds a loan or an interest in a loan, and (vi) for any other proper corporate purpose (including without limitation working capital). 1.3 Advances of the Line. Borrower shall give Bank not less than 3 Business Days prior written notice of a proposed advance of the Line (each a "Line Request"). Each Line Request shall (i) state the use of the proceeds of the Line being requested (including the real estate project to which such use relates), and (ii) contain such other information as Bank may request in the exercise of its reasonable discretion. Provided that all of the conditions precedent to Bank making such advance have occurred, and provided further that the making of such advance will not cause Borrower to be in default of the covenants and conditions set forth in this Agreement, Bank shall make the proceeds of such advance available to Borrower by crediting the amount thereof to Borrower's deposit account with Bank. 1.4 Borrowing Base. Notwithstanding anything contained herein to the contrary, the aggregate outstanding principal balance of the Line shall not exceed at any time the sum of (i) sixty five percent (65 %) of the Market Value of the Unrestricted Stock, plus (ii) fifty percent (50%) of the Market Value of the Restricted Stock ("Borrowing Base"). In the event the aggregate unpaid principal balance of the Line exceeds the limits stated in the previous sentence, Borrower shall, within five (5) days thereafter, either (x) repay an aggregate amount of principal of the Line equal to the amount of such excess, or (y) in lieu of such repayment, deliver to Bank Substitute Collateral in an amount equal to such excess. Any such delivery of Substitute Collateral shall be accompanied by all such financing statement amendments and other documents and instruments as Bank may require to reflect its security interest in and to the Substitute Collateral (including without limitation appropriate amendments to the Pledge Agreement). Upon the delivery of any Substitute Collateral to Bank, it shall become Collateral hereunder. Bank shall retain the Substitute Collateral until such time as the Market Value of the Pledged Shares has equaled or exceeded for a consecutive 30-day period, the amount that would be necessary to permit borrowings in the full amount of the Line. -5- 2. INTEREST RATE. 2.1 Interest on the Line. Interest on the unpaid outstanding principal balance of the Line will accrue from the date of advance until final payment thereof at a per annum rate equal to the Prime Rate in effect from time to time (such interest rate to change immediately upon any change in the Prime Rate). 2.2 Default Interest. From the maturity of the obligations evidenced by the Line Note, as well as upon the occurrence of an Event of Default, the outstanding principal balance and all other sums due hereunder and under the Line Note shall bear interest at a rate which is four percent (4%) in excess of the non-default rate otherwise set forth herein ("Default Rate"). Notwithstanding the provisions of 42 Pa. C.S. Section 8101 to the contrary, the Default Rate shall apply to all sums evidenced by the Line Note as set forth above, including after entry of a judgment or judgments against Borrower, and said judgment or judgments shall bear interest at the Default Rate until satisfied in full. 2.3 Calculation. Interest will be computed on the basis of a year of 360 days and paid for the actual number of days elapsed. 2.4 Limitation of Interest to Maximum Lawful Rate. In no event will the rate of interest payable hereunder exceed the maximum rate of interest permitted to be charged by applicable law (including the choice of law rules) and any interest paid in excess of the permitted rate will be refunded to Borrower. Such refund will be made by application of the excessive amount of interest paid against any sums outstanding hereunder and will be applied in such order as Bank may determine. If the excessive amount of interest paid exceeds the sums outstanding, the portion exceeding the sums outstanding will be refunded in cash by Bank. Any such crediting or refunding will not cure or waive any default by Borrower. Borrower agrees, however, that in determining whether or not any interest payable hereunder exceeds the highest rate permitted by law, any non-principal payment, including without limitation prepayment fees and late charges, will be deemed to the extent permitted by law to be an expense, fee, premium or penalty rather than interest. 3. PAYMENTS AND FEES. 3.1 Interest Payments on the Line. Borrower will pay interest on the outstanding principal balance of the Line monthly, on the first day of each calendar month commencing on August 1, 1999. 3.2 Principal Payments on the Line. Borrower will pay the outstanding principal balance of the Line, together with any accrued and unpaid interest thereon, and any other sums due pursuant to the terms hereof, on the Expiration Date. -6- 3.3 Commitment Fee. Borrower shall pay to Bank a commitment fee of Fifty Thousand Dollars ($50,000) to be paid upon the execution of this Agreement. 3.4 Late Charge. In the event that Borrower fails to pay any principal, interest or other fees or expenses payable hereunder for a period of at least ten (10) days after the same shall become due, in addition to paying such sums, Borrower will pay to Bank a late charge equal to four percent (4%), of such past due payment as compensation for the expenses incident to such past due payment. 3.5 Payment Method. Borrower irrevocably authorizes Bank to debit all payments required to be made by Borrower hereunder or otherwise under the Line, on the date due, from any deposit account maintained by Borrower with Bank. Otherwise, Borrower will be obligated to make such payments directly to Bank. All payments are to be made in immediately available funds. If Bank accepts payment in any other form, such payment shall not be deemed to have been made until the funds comprising such payment have actually been received by or made available to Bank. 3.6 Application of Payments. Prior to the occurrence of an Event of Default, any and all payments on account of the Line will be applied first, to any amounts due to Bank pursuant to the Loan Documents, other than principal and interest on the Line; second, to accrued interest due under the Line; and third, to outstanding principal under the Line. Following the occurrence of an Event of Default, any and all payments on account of the Line will be applied to accrued and unpaid interest, outstanding principal and other sums due hereunder or under the Loan Documents, in such order as Bank, in its discretion, elects. If Borrower makes a payment or payments and such payment or payments, or any part thereof, are subsequently invalidated, declared to be fraudulent or preferential, set aside or are required to be repaid to a trustee, receiver, or any other person under any bankruptcy act, state or federal law, common law or equitable cause, then to the extent of such payment or payments, the obligations or part thereof hereunder intended to be satisfied shall be revived and continued in full force and effect as if said payment or payments had not been made. 3.7 Loan Account. Bank will open and maintain on its books a loan account with respect to advances made, repayments, prepayments, the computation and payment of interest and fees and the computation and final payment of all other amounts due and sums paid to Bank under this Agreement. Except in the case of manifest error in computation, such account will be conclusive and binding on the Borrower as to the amount at any time due to Bank from Borrower under this Agreement or the Note. 3.8 Indemnity; Loss of Margin. Borrower will indemnify Bank against any loss or expense which Bank sustains or incurs as a consequence of an Event of Default, including, without limitation, any failure of Borrower to pay when due (at maturity, by acceleration or otherwise) any principal, interest, fee or any other amount due under this Agreement or the -7- other Loan Documents. If Bank sustains or incurs any such loss or expense it will from time to time notify Borrower in writing of the amount determined in good faith by the Bank to be necessary to indemnify Bank for the loss or expense. Such amount will be due and payable by Borrower to Bank within ten (10) days after presentation by Bank of a statement setting forth a brief explanation of and Bank's calculation of such amount, which statement shall be conclusively deemed correct absent manifest error. Any amount payable to the Bank under this Section will bear interest at the default rate payable under the Line from the due date until paid, both before and after judgment. In the event that any present or future law, rule, regulation, treaty or official directive or the interpretation or application thereof by any central bank, monetary authority or governmental authority, or the compliance with any guideline or request of any central bank, monetary authority or governmental authority (whether or not having the force of law): (a) subjects Bank to any tax with respect to any amounts payable under this Agreement or the other Loan Documents by Borrower or otherwise with respect to the transactions contemplated under this Agreement or the other Loan Documents (except for taxes on the overall net income and/or revenues of Bank imposed by the United States of America, the Commonwealth of Pennsylvania, or any political subdivision of either of them); or (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit, capital maintenance, capital adequacy, or similar requirement against assets held by, or deposits in or for the account of, or loans or advances or commitment to make loans or advances by, the Bank; or (c) imposes upon Bank any other condition with respect to advances or extensions of credit or the commitment to make advances or extensions of credit under this Agreement, and the result of any of the foregoing is to increase the costs of Bank, reduce the income receivable by or return on equity of Bank or impose any expense upon Bank with respect to any advances or extensions of credit or commitments to make advances or extensions of credit under this Agreement, Bank shall so notify Borrower in writing. Borrower agrees to pay Bank the amount of such increase in cost, reduction in income, reduced return on equity or capital, or additional expense within ten (10) days after presentation by Bank of a statement concerning such increase in cost, reduction in income, reduced return on equity or capital, or additional expense. Such statement shall set forth a brief explanation of the amount and Bank's calculation of the amount (in determining such amount the Bank may use any reasonable averaging and attribution methods), which statement shall be conclusively deemed correct absent manifest error. If the amount set forth in such statement is not paid within ten (10) days after such presentation of such statement, interest will be payable on the unpaid amount at -8- the default rate payable under the Line from the due date until paid, both before and after judgment. 3.9 Extension of Expiration Date. On or before August 31 of each year commencing on August 31, 2000, Bank will notify Borrower that (i) it has elected to extend the Expiration Date then in effect by twelve (12) months, or (ii) it will not extend the Expiration Date then in effect. A failure by Bank to send any such notice shall be deemed to be an election by Bank not to extend the Expiration Date then in effect. In the event Bank determines in the exercise of its sole discretion that it will extend the Expiration Date then in effect, Borrower shall, at least five (5) days prior to the then current Expiration Date pay to Bank an extension fee of Twenty Five Thousand Dollars ($25,000). If Borrower shall fail to pay such extension fee to Bank as and when required, Bank's election to extend the Expiration Date shall be deemed to be canceled and shall be null and void and of no further force or effect and the Expiration Date then in effect shall continue as if Bank had not provided any notice of election to extend. 4. COLLATERAL. 4.1 Security Interest. As security for the performance of this Agreement and the payment of the Line Note and all other liabilities of Borrower to Bank (whether absolute or contingent, matured or unmatured, direct or indirect, sole, joint, several or joint and several, similar or dissimilar, related or unrelated, due or to become due or heretofore or hereafter contracted or acquired), Borrower hereby assigns, transfers and sets over to Bank and grants to Bank a security interest in all of Borrower's right, title and interest in and to the Pledged Shares, together with all proceeds and products thereof (the "Collateral"). 4.2 Surety. As further security for the Bank Indebtedness, Borrower shall cause to be executed and delivered to Bank, the absolute, unconditional, unlimited surety agreement (the "Surety Agreement") of Guarantor in form and content satisfactory to Bank. The obligations of Guarantor under the Surety Agreement shall be secured by a pledge and assignment of all collateral being granted by Guarantor to Bank as collateral for the $15,000.000 Revolving Line of Credit from Bank to Guarantor being extended concurrently herewith. 4.3 General. The above-described security interests, assignments, sureties, and liens shall not be rendered void by the fact that no Bank Indebtedness exists as of any particular date, but shall continue in full force and effect until the Bank Indebtedness has been repaid, Bank has no agreement or commitment outstanding pursuant to which Bank may extend credit to or on behalf of Borrower and Bank has executed termination statements or releases with respect thereto (which Bank shall do as soon as is practical following the occurrence of such other events). IT IS THE EXPRESS INTENT OF THE BORROWER THAT ALL OF THE COLLATERAL SHALL SECURE NOT ONLY THE -9- OBLIGATIONS UNDER THE LOAN DOCUMENTS, BUT ALSO ALL OTHER PRESENT AND FUTURE OBLIGATIONS OF BORROWER TO BANK. 4.4 Additional Documents and Future Actions. Borrower will, at its sole cost, take such actions and provide Bank from time to time with such agreements, financing statements and additional instruments, documents or information as the Bank may in its reasonable discretion deem necessary or advisable to perfect, protect, maintain or enforce the security interests in the Collateral, to permit Bank to protect or enforce its interest in the Collateral, or to carry out the terms of the Loan Documents. Borrower hereby authorizes and appoints Bank as its attorney-in-fact, with full power of substitution, to take such actions as Bank may deem advisable to protect the Collateral and its interests thereon and its rights hereunder, to execute on Borrower's behalf and file at Borrower's expense financing statements and assignments, and amendments thereto, in those public offices deemed necessary or appropriate by Bank to establish, maintain and protect a continuously perfected security interest in the Collateral, and to execute on Borrower's behalf such other documents and notices as Bank may deem advisable to protect the Collateral and its interests therein and its rights hereunder. Such power being coupled with an interest is irrevocable. Borrower irrevocably authorizes the filing of a carbon, photographic or other copy of this Agreement, or of a financing statement, as a financing statement and agrees that such filing is sufficient as a financing statement. 5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as follows: 5.1 Valid Organization, Good Standing and Qualification. Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full power and authority to execute, deliver and comply with the Loan Documents, and to carry on its business as it is now being conducted and is duly licensed or qualified as a foreign corporation in good standing under the laws of each jurisdiction in which the character or location of the properties owned by it or the business transacted by it requires such licensing or qualification. 5.2 Licenses. Borrower has all licenses, registrations, approvals and other authority as may be necessary to enable it to own and operate its business and perform all services and business which it has agreed to perform in any state, municipality or other jurisdiction. 5.3 Financial Statements. Borrower has furnished to Bank the audited consolidated financial statements of Borrower, certified without qualification by independent public accountants as of September 30, 1998 and all management and comment letters from such accountants in connection therewith, and its internally prepared interim financial statements as of March 31, 1999. Such financial statements of Borrower (together with the related notes and comments), are correct and complete, fairly present the financial condition -10- and the assets and liabilities of Borrower at such date, and have been prepared in accordance with GAAP. With respect to the interim statements, such statements are subject to year-end adjustment and any accompanying footnotes. 5.4 No Material Adverse Change in Financial Condition. There has been no material adverse change in the financial condition of Borrower since September 30, 1998. 5.5 Pending Litigation or Proceedings. Except as set forth on Schedule 5.5 attached hereto, there are no judgments outstanding or actions, suits or proceedings pending or, to the best of Borrower's knowledge, threatened against or affecting Borrower, at law or in equity or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. 5.6 Due Authorization; No Legal Restrictions. The execution and delivery by Borrower of the Loan Documents, the consummation of the transactions contemplated by the Loan Documents and the fulfillment and compliance with the respective terms, conditions and provisions of the Loan Documents: (a) have been duly authorized by all requisite corporate action by Borrower, (b) will not conflict with or result in a breach of, or constitute a default (or might, upon the passage of time or the giving of notice or both, constitute a default) under, any of the terms, conditions or provisions of (i) any applicable statute, law, rule, regulation or ordinance, (ii) Borrower's Certificate of Incorporation or Bylaws, (iii) any indenture, mortgage, loan or credit agreement or instrument to which Borrower is a party or by which it may be bound or affected, or (iv) any judgment or order of any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, and (c) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of Borrower under the terms or provisions of any such agreement or instrument, except liens in favor of Bank. 5.7 Enforceability. The Loan Documents have been duly executed by Borrower and delivered to Bank and, when duly executed by Bank, will constitute legal, valid and binding obligations of Borrower, enforceable in accordance with their terms. 5.8 No Default Under Other Obligations, Orders or Governmental Regulations. Borrower is not in violation of its Certificate of Incorporation or Bylaws or in default in the performance or observance of any of its obligations, covenants or conditions contained in any indenture or other agreement creating, evidencing or securing any Indebtedness or pursuant to which any such Indebtedness is issued, nor is Borrower in violation of or in default under any other agreement or instrument or any judgment, decree, order, statute, rule or governmental regulation, applicable to it or by which its properties may be bound or affected. 5.9 Governmental Consents. No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of Borrower is -11- required in connection with the execution, delivery or performance by Borrower of the Loan Documents or the consummation of the transactions contemplated thereby. 5.10 Taxes. Borrower has filed all tax returns which it is required to file and has paid, or made provision for the payment of, all taxes which have or may have become due pursuant to such returns or pursuant to any assessment received by them. Such tax returns are complete and accurate in all respects. Borrower does not know of any proposed additional assessment or basis for any assessment of additional taxes. 5.11 Current Compliance. Borrower is currently in compliance with all of the terms and conditions of the Loan Documents. 5.12 Deferred Compensation Plans. Neither Borrower nor any ERISA Affiliate has ever been a participant in or has in any way provided or maintained, any Deferred Compensation Plan for the benefit of Borrower's or any ERISA Affiliate's employees, or has ever contributed to a Multiemployer Plan. 5.13 Leases and Contract. Borrower has complied with the provisions of all material leases, contracts or commitments of any kind to which it is a party and is not in default thereunder. No other party is in default under any such leases, contracts or other commitments and no event has occurred which, but for the giving of notice or the passage of time or both, would constitute an event of default thereunder. 5.14 Contingent Liabilities. There are no suretyship agreements, guarantees or other contingent liabilities of Borrower which are not disclosed by the financial statements mentioned in Section 5.3 herein. 5.15 Encumbrances. The property and assets of Borrower are not subject to any lien, encumbrance or security interest except as set forth on Exhibit 5.15 attached. 5.16 Securities Act. Borrower has not, directly or through any agent, offered the Line Note or any part thereof or any similar security for sale to, or solicited offers to buy the same from, or otherwise approached or negotiated in respect thereof with, anyone other than Bank so as to bring the issue or sale of the Line Note or any part thereof within the provisions of Section 5 of the Securities Act 1933, as amended. 5.17 Disclosure. Neither this Agreement, nor the schedules attached to this Agreement, nor the financial statements referred to in this Agreement, nor any certificate, statement, report or other document furnished or to be furnished by Borrower to Bank in connection with this Agreement, contain any untrue statement of a material fact, or omit to state any material fact necessary in order to make the statements contained in any of the foregoing not misleading. Borrower has disclosed to Bank in writing every fact that materially -12- and adversely affects the business or financial condition of Borrower or its ability to perform its obligations under this Agreement, the Line Note, or any other documents or instruments required hereby. 5.18 Margin Stock. Borrower is not engaged in, nor does it have as one of its substantial activities, the business of extending or obtaining credit for the purpose of purchasing or carrying "margin stock" (as that term is defined in Regulation U, G, T, or X of the Board of Governors of the Federal Reserve System) and no proceeds of any advance of the Line will be used for such purpose of for the purpose of purchasing or carrying any shares of margin stock. 6. GENERAL COVENANTS. So long as the Line Note remains unpaid or Bank has any obligation hereunder with respect to the Line, unless Bank otherwise consents in writing, which consent shall not be unreasonably withheld or delayed: 6.1 Taxes; Claims for Labor and Materials. Borrower will pay or cause to be paid when due all taxes, assessments, governmental charges or levies imposed upon it or its income, profits, payroll or any property belonging to it, including without limitation all withholding taxes, and all claims for labor, materials and supplies which, if unpaid, might become a lien or charge upon any of its properties or assets. 6.2 Existence; Approvals; Qualification; Business Operations; Compliance with Laws. Borrower (a) will obtain, preserve and keep in full force and effect its separate corporate existence and all rights, licenses, registrations and franchises necessary to the proper conduct of its business or affairs; (b) will qualify and remain qualified as a foreign corporation, in each jurisdiction in which the character or location of the properties owned by it or the business transacted by it requires such qualification; (c) will continue to operate its business as presently operated and will not engage in any new businesses without the prior written consent of Bank; and (d) will comply with the requirements of all applicable laws and all rules, regulations (including environmental regulations) and orders of regulatory agencies and authorities having jurisdiction over it. 6.3 Maintenance of Properties. Borrower will maintain, preserve, protect and keep or cause to be maintained, preserved, protected and kept its real and personal property used or useful in the conduct of its business in good working order and condition, reasonable wear and tear excepted, and will pay and discharge when due the cost of repairs to and maintenance of the same. 6.4 Insurance. Borrower will carry adequate insurance issued by an insurer acceptable to Bank, in amounts acceptable to Bank (at least adequate to comply with any co-insurance provisions) and against all such liability and hazards as are usually carried by entities engaged in the same or a similar business similarly situated or as may be required by Bank. -13- 6.5 Inspections; Examinations. Borrower hereby irrevocably authorizes and directs all accountants and auditors employed by Borrower at any time to exhibit and deliver to Bank copies of any and all of Borrower's financial statements, or other accounting records of any sort in the accountant's or auditor's possession and copies of all reports submitted to Borrower by such accountants or auditors, including management letters, "comment" letters and audit reports, and, following the occurrence of an Event of Default, to disclose to Bank any information they may have concerning Borrower's financial status and business operations. Borrower further authorizes all federal, state and municipal authorities to furnish to Bank copies of reports or examinations relating to Borrower, whether made by Borrower or otherwise. The officers of Bank, or such Persons as any of them may designate, may visit and inspect any of the properties of Borrower, examine (either by Bank's employees or by independent accountants) any of the Collateral or other assets of Borrower, including the books of account of Borrower, and discuss the affairs, finances and accounts of Borrower with its officers and with its independent accountants, at such times as Bank may desire. 6.6 Default Under Other Indebtedness. Borrower shall not permit any of its material Indebtedness to be in default. If any Indebtedness of Borrower is declared or becomes due and payable before its expressed maturity by reason of default or otherwise or to the knowledge of Borrower, the holder of any such Indebtedness shall have the right (or upon the giving of notice or the passage of time, or both, shall have the right) to declare such Indebtedness to be so due and payable, Borrower will immediately give Bank written notice of such declaration, acceleration or right of declaration. 6.7 Deferred Compensation Plans. Neither Borrower nor any ERISA Affiliate shall become a participant in, or in any way provide or maintain, any Deferred Compensation Plan for the benefit of any or Borrower's or any ERISA Affiliates' employees, or shall contribute to any Multiemployer Plan, without giving Bank prior written notice of such action and executing such related amendments to this Agreement as Bank may request. 6.8 Bank Accounts. As additional compensation to Bank, and in consideration of the rate of interest being charged by Bank to Borrower, Borrower will, upon the request of Bank, maintain deposit accounts with Bank, including without limitation the Loan Account referred to in Section 3.7 herein. 6.9 Maintenance of Management. Borrower will cause its business to be continuously managed by its present management or such other persons (serving in such management positions) as may be reasonably satisfactory to Bank. 6.10 Transactions with Affiliates. Borrower shall not enter into or conduct any transaction with any Affiliate except on terms that would be usual and customary in a similar -14- transaction between Persons not affiliated with each other and except as disclosed to Bank. Borrower shall not make any loans or extensions of credit to any of its Affiliates, shareholders, directors or officers, except for the existing loans described in Schedule 6.10 attached hereto and except for (i) loans to Affiliates in connection with lease transactions in an aggregate amount not to exceed $50,000 in any fiscal year, and (ii) loans (whether characterized as participations or otherwise) to Resource Asset Investment Trust made in the ordinary course of business. Borrower will cause all of its Indebtedness at any time owed to its Affiliates (other than JeffBanks, Inc. and its respective subsidiaries), shareholders, directors and officers to be subordinated in all respects to all present and future Bank Indebtedness and will not make any payments thereon, except as approved by Bank in writing. 6.11 Name or Address Change. Borrower shall not change its name or address except upon thirty (30) days prior written notice to Bank and delivery to Bank of any items requested by Bank to maintain perfection and priority of Bank's security interests and access to Borrower's books and records. 6.12 Notices. Borrower will promptly notify Bank of (a) any action or proceeding brought against Borrower wherein such action or proceeding would, if determined adversely to Borrower result in liability of Borrower in excess of $25,000 individually, or $50,000 in the aggregate, (b) the occurrence of any Event of Default, (c) any fact, condition or event which, with the giving of notice or the passage of time or both, could become an Event of Default, (d) the failure of Borrower to observe any of its undertakings under the Loan Documents, or (e) any material adverse change in the assets, business, operations or financial condition of Borrower. 6.13 Material Adverse Contracts. Borrower shall not become or be a party to any contract or agreement which has a materially adverse impact on Borrower's or Guarantor's ability to perform under this Agreement or any other agreement with Bank to which Borrower or Guarantor is a party. 7. ACCOUNTING RECORDS, REPORTS AND FINANCIAL STATEMENTS. Borrower will maintain and cause Guarantor to maintain books of record and account in which full, correct and current entries in accordance with GAAP will be made of all of its dealings, business and affairs, and Borrower will deliver and will cause Guarantor to deliver to Bank the following: 7.1 Annual Statements. As soon as available and in any event within ninety (90) days after the end of each fiscal year of Borrower, the form 10K filed with the Securities Exchange Commission. -15- 7.2 Quarterly Statements. As soon as available and in any event within forty five (45) days after the close of each fiscal quarter of Borrower the form 10Q filed with the Securities Exchange Commission. 7.3 Guarantor Statements. At the times required by the Revolving Credit and Security Agreement of even date herewith between Guarantor and Bank pursuant to which Bank has extended a $15,000,000 line of credit to Guarantor, the financial statements set forth therein. The requirement set forth herein shall survive the termination of such Agreement. 7.4 Requested Information. With reasonable promptness, all such other data and information in respect of the condition, operation and affairs of Borrower as Bank may reasonably request from time to time. 8. CONDITIONS OF CLOSING. The obligation of Bank to make available the Line is subject to the performance by Borrower and Guarantor of all of its agreements to be performed hereunder and to the following further conditions: 8.1 Documents. Bank shall have received on or before the date hereof all of the following, in form and substance satisfactory to Bank: (a) The Line Note. (b) UCC-1 Financing Statements to be filed in such offices as may be required by Bank. (c) An Agreement pursuant to which Borrower pledges the Pledged Shares to Bank (the "Pledge Agreement"). (d) The Pledged Shares, together with stock powers executed in blank and proxies relating thereto. (e) A Line Request. (f) The Surety Agreement. (g) An Acknowledgment of Confessions of Judgment. (h) Copies, certified in writing by the secretary or an assistant secretary of Borrower, of (i) resolutions of its board of directors evidencing approval of this Agreement, the Line Note, the Pledge Agreement and the other matters contemplated hereby, and (ii) each document evidencing other necessary action and approvals, if any with respect to this Agreement, the Line Note and the Pledge Agreement. -16- (i) Written certificate by the secretary or an assistant secretary of Borrower as to the names and signatures of its officers who are authorized to sign this Agreement, the Line Note, the Pledge Agreement and the other documents or certificates to be executed and delivered by it pursuant hereto. Bank may conclusively rely on such certificate until it receives a further certificate by the secretary or an assistant secretary of Borrower amending the prior certificate. (j) Copies of Borrower's Certificate of Incorporation and Bylaws, including all amendments thereto, accompanied by a written certificate of the secretary or an assistant secretary of Borrower as to the authenticity and completeness of such copies. (k) Good standing certificate for Borrower from the State of Delaware dated not more than 20 days prior to the date hereof. (l) Copies, certified in writing by the secretary or an assistant secretary of Guarantor, of (i) resolutions of its board of directors evidencing approval of this Agreement, the Surety Agreement and the other matters contemplated hereby, and (ii) each document evidencing other necessary action and approvals, if any with respect to this Agreement and the Surety Agreement. (m) Written certificate by the secretary or an assistant secretary of Guarantor as to the names and signatures of its officers who are authorized to sign this Agreement, the Surety Agreement and the other documents or certificates to be executed and delivered by it pursuant hereto. Bank may conclusively rely on such certificate until it receives a further certificate by the secretary or an assistant secretary of Guarantor amending the prior certificate. (n) Copies of Guarantor's Certificate of Incorporation and Bylaws, including all amendments thereto, accompanied by a written certificate of the secretary or an assistant secretary of Guarantor as to the authenticity and completeness of such copies. (o) Good standing certificate for Guarantor from the State of Delaware dated not more than 20 days prior to the date hereof. (p) A favorable opinion of independent counsel for Borrower and Guarantor as to the matters mentioned in Sections 5.1, 5.2, 5.5, 5.6, 5.7, 5.8, and 5.9 herein and as to such other matters as Bank may reasonably request. (q) Such additional documents and instruments as Bank may request. 8.2 Representations and Warranties. All representations and warranties of Borrower and Guarantor set forth in the Loan Documents will be true at and as of the date hereof. -17- 8.3 No Default. No condition or event shall exist or have occurred which would constitute an Event of Default or a Potential Default. 8.4 Additional Documents. Copies of record searches (including UCC searches and judgments, suits, tax and other lien searches) confirming that Bank has a first priority security interest in the Collateral, acceptable to Bank, shall have been delivered to Bank. 8.5 No Material Adverse Change. Bank shall have received evidence satisfactory to it that no material adverse change has occurred with respect to Borrower since September 30, 1998. 8.6 Commitment Fee. Borrower shall have paid to Bank in full the commitment fee referred to in Section 3.3 herein. 8.7 Other Documents. Such other documents and instruments as Bank may reasonably request. 8.8 Non-Waiver of Rights. By completing the closing hereunder, or by making advances hereunder, Bank does not thereby waive a breach of any warranty or representation made by Borrower or Guarantor hereunder or under any agreement, document or instrument delivered to Bank or otherwise referred to herein, and any claim and rights of Bank resulting from any breach or misrepresentation by Borrower or Guarantor are specifically reserved by Bank. 9. CERTAIN CONDITIONS TO SUBSEQUENT ADVANCES. Subsequent advances shall be conditioned upon the following conditions and each Line Request shall constitute a representation by Borrower to Bank that each condition has been met or satisfied: 9.1 Representations and Warranties. All representations and warranties of Borrower and Guarantor contained herein or in the Loan Documents shall be true at and as of the date of such advance as if made on such date, and each Line Request shall constitute reaffirmation by Borrower that such representations and warranties are then true. 9.2 No Default. No condition or event shall exist or have occurred at or as of the date of such advance which would constitute an Event of Default hereunder or a Potential Default. 9.3 Other Requirements. Bank shall have received all certificates, authorizations, affidavits, schedules and other documents which are provided for hereunder or under the Loan Documents, or which Bank may reasonably request. -18- 10. DEFAULT AND REMEDIES. 10.1 Events of Default. The occurrence of any one or more of the following events shall constitute an Event or Events of Default hereunder: (a) The failure of Borrower to pay any amount of principal or interest on the Line Note when due, or any fee or other sums payable hereunder and the continuation of such failure for five (5) Business Days following notice thereof from Bank, or the failure to pay any other Bank Indebtedness on the date on which such payment is due, whether on demand, at the stated maturity or due date thereof, or by reason of any requirement for the prepayment thereof, by acceleration or otherwise; (b) The failure of Borrower to duly perform or observe any obligation, covenant or agreement on its part contained herein or in any other Loan Document not otherwise specifically constituting an Event of Default under this Section 10.1 and such failure continues unremedied for a period of thirty (30) days after the earlier of (i) notice from Bank to Borrower of the existence of such failure, or (ii) any officer or principal of Borrower knows or should have known of the existence of such failure, provided that, in the event such failure was wilfully caused or permitted by Borrower shall not be entitled to any notice or grace hereunder; (c) The failure of Borrower to pay any Indebtedness for borrowed money due to any third Person or the existence of any other event of default under any loan, security agreement, mortgage or other agreement pertaining thereto binding Borrower after the expiration of any notice and/or grace periods permitted in such documents; (d) The failure of Borrower to pay or perform any other obligation to Bank under any other agreement or note or otherwise arising, whether or not related to this Agreement, after the expiration of any notice and/or grace periods, if any, permitted in such documents; (e) The adjudication of Borrower or any Guarantor as a bankrupt or insolvent, or the entry of an Order for Relief for Borrower or any Guarantor or the entry of an order appointing a receiver or trustee for Borrower or any Guarantor of any of its property or approving a petition seeking reorganization or other similar relief under the bankruptcy or other similar laws of the United States or any state or any other competent jurisdiction; (f) A proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law is filed by or (unless dismissed within 75 days) against Borrower or any Guarantor or Borrower or any Guarantor makes an assignment for the benefit of creditors, or Borrower or any Guarantor takes any action to authorize any of the foregoing; -19- (g) The suspension of the operation of Borrower's or any Guarantor's present business, or Borrower or any Guarantor becoming unable to meet its debts as they mature, or the admission in writing by Borrower or any Guarantor to such effect, or Borrower or any Guarantor calling any meeting of all or any material portion of its creditors for the purpose of debt restructure; (h) All or any part of the Collateral or the assets of Borrower or any Guarantor are attached, seized, subjected to a writ or distress warrant, or levied upon, or come within the possession or control of any receiver, trustee, custodian or assignee for the benefit of creditors; (i) The entry of a final judgment for the payment of money against Borrower or any Guarantor in excess of $50,000 which, within ten (10) days after such entry, shall not have been discharged or execution thereof stayed pending appeal or shall not have been discharged within five (5) days after the expiration of any such stay; (j) Any representation or warranty of Borrower or any Guarantor in any of the Loan Documents is discovered to be untrue in any material respect or any statement, certificate or data furnished by Borrower or any Guarantor pursuant hereto is discovered to be untrue in any material respect as of the date as of which the facts therein set forth are stated or certified; (k) Borrower or any Guarantor voluntarily or involuntarily dissolves or is dissolved, terminates or is terminated; (1) Borrower or any Guarantor is enjoined, restrained, or in any way prevented by the order of any court or any administrative or regulatory agency, the effect of which order restricts Borrower or such Guarantor from conducting all or any material part of its business; (m) A breach by Borrower or any Guarantor occurs under any material agreement, document or instrument, whether heretofore, now or hereafter existing between Borrower or any Guarantor and any other Person; (n) A material and adverse change occurs in Borrower's or any Guarantor's operations, management or financial condition or in the value of the Collateral; or (o) The loss, suspension, revocation or failure to renew any license or permit now held or hereafter acquired by Borrower or any Guarantor, which loss, suspension, revocation or failure to renew might have a material adverse effect on the business profits, assets or financial condition of Borrower or such Guarantor. -20- 10.2 Remedies. At the option of the Bank, upon the occurrence of an Event of Default, or at any time thereafter: (a) The entire unpaid principal of the Line, all other Bank Indebtedness, or any part thereof, all interest accrued thereon, all fees due hereunder and all other obligations of Borrower and Guarantor to Bank hereunder or under any other agreement, note or otherwise arising will become immediately due and payable without any further demand or notice; (b) The Line will immediately terminate and the Borrower will receive no further extensions of credit thereunder; (c) Bank may increase the interest rate on the Line to the Default Rate, without notice; (d) Bank may exercise all of the rights and remedies set forth in the Pledge Agreement; and/or (e) Bank may exercise each and every right and remedy granted to it under the Loan Documents, under the Uniform Commercial Code and under any other applicable law or at equity. If an Event of Default occurs under Section 10.1(e) or (f), all Bank Indebtedness shall become immediately due and payable. 10.3 Set-Off. Without limiting the rights of Bank under applicable law, Bank has and may exercise a right of set-off, a lien against and a security interest in all property of Borrower and Guarantor now or at any time in Bank's possession in any capacity whatsoever, including but not limited to any balance of any deposit, trust or agency account, or any other bank account with Bank, as security for all Bank Indebtedness. At any time and from time to time following the occurrence of an Event of Default or a Potential Default, or Bank may without notice or demand, set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Bank to or for the credit of either Borrower or any Guarantor against any or all of the Bank Indebtedness and Borrower's or such Guarantor's obligations under the Loan Documents. If any bank account of Borrower or any Guarantor with Bank is attached or otherwise liened or levied upon by any third party, Bank need not await the running of any applicable grace period hereunder, but Bank shall have and be deemed to have the immediate right of set-off and may apply the funds or amount thus set-off against Borrower's or such Guarantor's obligations to the Bank. -21- 10.4 Delay or Omission Not Waiver. Neither the failure nor any delay on the part of Bank to exercise any right, remedy, power or privilege under the Loan Documents upon the occurrence of any Event of Default or otherwise shall operate as a waiver thereof or impair any such right, remedy, power or privilege. No waiver of any Event of Default shall affect any later Event of Default or shall impair any rights of Bank. No single, partial or full exercise of any rights, remedies, powers and privileges by the Bank shall preclude further or other exercise thereof. No course of dealing between Bank and Borrower or any Guarantor shall operate as or be deemed to constitute a waiver of Bank's rights under the Loan Documents or affect the duties or obligations of Borrower or any Guarantor. 10.5 Remedies Cumulative; Consents. The rights, remedies, powers and privileges provided for herein shall not be deemed exclusive, but shall be cumulative and shall be in addition to all other rights, remedies, powers and privileges in Bank's favor at law or in equity. Whenever the Bank's consent or approval is required or permitted, such consent or approval shall be at the sole and absolute discretion of Bank, which consent will not be unreasonably withheld or delayed. 10.6 Certain Fees, Costs, Expenses and Expenditures. Borrower agrees to pay on demand all costs and expenses of Bank, including without limitation: (a) all costs and expenses in connection with the preparation, review, negotiation, execution, delivery and administration of the Loan Documents, and the other documents to be delivered in connection therewith, or any amendments, extensions and increases to any of the foregoing (including, without limitation, attorney's fees and expenses, and the cost of appraisals and reappraisals of Collateral), and the cost of periodic lien searches and tax clearance certificates, as Bank deems advisable; (b) all losses, costs and expenses in connection with the enforcement, protection and preservation of the Bank's rights or remedies under the Loan Documents, or any other agreement relating to any Bank Indebtedness, or in connection with legal advice relating to the rights or responsibilities of Bank (including without limitation court costs, attorney's fees and expenses of accountants and appraisers); and (c) any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of the Loan Documents, and all liabilities to which Bank may become subject as the result of delay in paying or omission to pay such taxes. In the event Borrower shall fail to pay taxes, insurance, assessments, costs or expenses which it is required to pay hereunder, or fails to keep the Collateral free from security interests or lien (except as expressly permitted herein), or fails to maintain or repair the Collateral as required hereby, or otherwise breaches any obligations under the Loan Documents, Bank in its discretion, may make expenditures for such purposes and the amount so expended (including -22- attorney's fees and expenses, filing fees and other charges) shall be payable by Borrower on demand and shall constitute part of the Bank Indebtedness. With respect to any amount required to be paid by Borrower under this Section, in the event Borrower fails to pay such amount on demand, Borrower shall also pay to Bank interest thereon at the Default Rate. Borrower's obligations under this Section shall survive termination of this Agreement. 10.7 Time is of the Essence. Time is of the essence in Borrower's and Guarantor's performance of their obligations under the Loan Documents. 11. COMMUNICATIONS AND NOTICES. 11.1 Communications and Notices. All notices, requests and other communications made or given in connection with the Loan Documents shall be in writing and, unless receipt is stated herein to be required, shall be deemed to have been validly given if delivered personally to the individual or division or department to whose attention notices to a party are to be addressed, or by private carrier, or registered or certified mail, return receipt requested, or by telecopy with the original forwarded by first-class mail, in all cases, with charges prepaid, addressed as follows, until some other address (or individual or division or department for attention) shall have been designated by notice given by one party to the other: To Borrower: Resource America, Inc. 1845 Walnut Street Philadelphia, PA 19103 Attention: Scott F. Schaeffer Facsimile Number: 215-546-5388 With a copy to: Ledgewood Law Firm 1521 Locust Street Philadelphia, PA 19102-3723 Attention: Jeffrey Brotman, Esquire Facsimile Number: 215-735-2513 -23- To Bank: Sovereign Bank 2000 Market Street Philadelphia, PA 19103 Attention: Richard Narkiewicz Facsimile Number: 215-568-5948 12. WAIVERS. 12.1 Waivers. In connection with any proceedings under the Loan Documents, including without limitation any action by Bank in replevin, foreclosure or other court process or in connection with any other action related to the Loan Documents or the transactions contemplated hereunder, Borrower and each Guarantor waives: (a) all errors, defects and imperfections in such proceedings; (b) all benefits under any present or future laws exempting any property, real or personal, or any part of any proceeds thereof from attachment, levy or sale under execution, or providing for any stay of execution to be issued on any judgment recovered under any of the Loan Documents or in any replevin or foreclosure proceeding, or otherwise providing for any valuation, appraisal or exemption; (c) all rights to inquisition on any real estate, which real estate may be levied upon pursuant to a judgment obtained under any of the Loan Documents and sold upon any writ of execution issued thereon in whole or in part, in any order desired by Bank; (d) presentment for payment, demand, notice of demand, notice of nonpayment, protest and notice of protest of any of the Loan Documents, including the Line Note; (e) any requirement for bonds, security or sureties required by statute, court rule or otherwise; (f) any demand for possession of Collateral prior to commencement of any suit; and (g) all rights to claim or recover attorney's fees and costs in the event that Borrower or any Guarantor is successful in any action to remove, suspend or enforce a judgment entered by confession. -24- 12.2 Forbearance. Bank may release, compromise, forbear with respect to, waive, suspend, extend or renew any of the terms of the Loan Documents, without notice to Borrower or any Guarantor. 12.3 Limitation on Liability. Borrower and Guarantor shall be responsible for and Bank is hereby released from any claim or liability in connection with: (a) Safekeeping any Collateral; (b) Any loss or damage to any Collateral; (c) Any diminution in value of the Collateral; or (d) Any act or default of another Person. Bank shall only be liable for any act or omission on its part constituting wilful misconduct. In the event that Bank breaches its required standard of conduct, Borrower and Guarantor agree that Bank's liability shall be only for direct damages suffered and shall not extend to consequential or incidental damages. In the event Borrower or any Guarantor brings suit against Bank in connection with the transactions contemplated hereunder and Bank is found not to be liable, Borrower and Guarantor each will indemnify and hold Bank harmless from all costs and expenses, including attorney's fees, incurred by Bank in connection with such suit. This Agreement is not intended to obligate Bank to take any action with respect to the Collateral or to incur expenses or perform any obligation or duty of Borrower or any Guarantor. 13. SUBMISSION TO JURISDICTION. 13.1 Submission to Jurisdiction. Borrower and Guarantor each hereby consent to the exclusive jurisdiction of any state or federal court located within the Commonwealth of Pennsylvania, and irrevocably agrees that, subject to the Bank's election, all actions or proceedings relating to the Loan Documents or the transactions contemplated hereunder shall be litigated in such courts, and Borrower and Guarantor each waive any objection which they may have based on lack of personal jurisdiction, improper venue or forum non conveniens to the conduct of any proceeding in any such court and waives personal service of any and all process upon it, and consents that all such service of process be made by mail or messenger directed to it at the address set forth in Section 11.1. Borrower and Guarantor each hereby irrevocably appoints any of its officers or trustees as its agent for the purpose of accepting service of any process within the Commonwealth of Pennsylvania. Nothing contained in this Section 13.1 shall affect the right of Bank to serve legal process in any other manner permitted by law or affect the right of Bank to bring any action or proceeding against Borrower or any Guarantor or its property in the courts of any other jurisdiction. -25- 14. MISCELLANEOUS. 14.1 Brokers. The transaction contemplated hereunder was brought about and entered into by Bank, Borrower and Guarantor acting as principals and without any brokers, agents or finders being the effective procuring cause hereof. Borrower represents to Bank that Borrower has not committed Bank to the payment of any brokerage fee or commission in connection with this transaction. Whether any such claim is made against Bank by any broker, finder or agent or any other Person, Borrower agrees to indemnify, defend and hold Bank harmless against any such claim, at Borrower's own cost and expense, including Bank's attorneys' fees. Borrower further agrees that until any such claim or demand is adjudicated in Bank's favor, the amount claimed and/or demanded shall be deemed part of the Bank Indebtedness secured by the Collateral. 14.2 No Joint Venture. Nothing contained herein is intended to permit or authorize Borrower to make any contract on behalf of Bank, nor shall this Agreement be construed as creating a partnership, joint venture or making Bank an investor in Borrower. 14.3 Survival. All covenants, agreements, representations and warranties made by Borrower and Guarantor in the Loan Documents or made by or on its behalf in connection with the transactions contemplated here shall be true at all times this Agreement is in effect and shall survive the execution and delivery of the Loan Documents, any investigation at any time made by Bank or on its behalf and the making by Bank of the loans or advances to Borrower. All statements contained in any certificate, statement or other document delivered by or on behalf of Borrower and Guarantor pursuant hereto or in connection with the transactions contemplated hereunder shall be deemed representations and warranties by Borrower or Guarantor as the case may be. 14.4 No Assignment by Borrower. Borrower may not assign any of its rights hereunder without the prior written consent of Bank, and Bank shall not be required to lend hereunder except to Borrower as it presently exists. 14.5 Assignment or Sale by Bank. Bank may sell, assign or participate all or a portion of its interest in the Loan Documents and in connection therewith may make available to any prospective purchaser, assignee or participant any information relative to Borrower and Guarantor in its possession. 14.6 Binding Effect. This Agreement and all rights and powers granted hereby will bind and inure to the benefit of the parties hereto and their respective permitted successors and assigns. -26- 14.7 Severability. The provisions of this Agreement and all other Loan Documents are deemed to be 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. 14.8 No Third Party Beneficiaries. The rights and benefits of this Agreement and the Loan Documents shall not inure to the benefit of any third party. 14.9 Modifications. No modification of this Agreement or any of the Loan Documents shall be binding or enforceable unless in writing and signed by or on behalf of the party against whom enforcement is sought. 14.10 Holidays. If the day provided herein for the payment of any amount or the taking of any action falls on a Saturday, Sunday or public holiday at the place for payment or action, then the due date for such payment or action will be the next succeeding Business Day. 14.11 Law Governing. This Agreement has been made, executed and delivered in the Commonwealth of Pennsylvania and will be construed in accordance with and governed by the laws of such Commonwealth. 14.12 Integration. The Loan Documents shall be construed as integrated and complementary of each other, and as augmenting and not restricting Bank's rights, powers, remedies and security. The Loan Documents contain the entire understanding of the parties thereto with respect to the matters contained therein and supercede all prior agreements and understandings between the parties with respect to the subject matter thereof and do not require parol or extrinsic evidence in order to reflect the intent of the parties. In the event of any inconsistency between the terms of this Agreement and the terms of the other Loan Documents, the terms of this Agreement shall prevail. 14.13 Exhibits and Schedules. All exhibits and schedules attached hereto are hereby made a part of this Agreement. 14.14 Headings. The headings of the Articles, Sections, paragraphs and clauses of this Agreement are inserted for convenience only and shall not be deemed to constitute a part of this Agreement. 14.15 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. 14.16 Waiver of Right to Trial by Jury. BORROWER, GUARANTOR AND BANK WAIVE ANY RIGHT TO TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER ANY OF THE LOAN -27- DOCUMENTS OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF BORROWER, GUARANTOR OR BANK WITH RESPECT TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. BORROWER, GUARANTOR AND BANK AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF BORROWER, GUARANTOR AND BANK TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. BORROWER AND GUARANTOR ACKNOWLEDGE THAT THEY HAVE HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL REGARDING THIS SECTION, THAT THEY FULLY UNDERSTAND ITS TERMS, CONTENT AND EFFECT, AND THAT THEY VOLUNTARILY AND KNOWINGLY AGREE TO THE TERMS OF THIS SECTION. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. RESOURCE AMERICA, INC. By: /s/ Scott F. Schaeffer ----------------------- Name: Scott F. Schaeffer Title: Vice Chairman SOVEREIGN BANK By: /s/ Richard Narkiewicz --------------------------- Name: /s/ Richard Narkiewicz Title: Vice President -28- ACKNOWLEDGMENT AND CONSENT Each of the undersigned, guarantor and surety for all obligations of Borrower to Bank pursuant to its Guaranty and Suretyship Agreement of even date herewith, hereby acknowledges and consents to the foregoing Agreement and agrees that all representations and warranties contained therein with respect to it are true and correct as if set forth at length herein. Each of the undersigned hereby further agrees, with the intent to be legally bound, that all agreements, acknowledgments and waivers set forth in the foregoing Agreement applicable to it shall be binding on the undersigned as if the undersigned were a signatory to such Agreement. IN WITNESS WHEREOF, the undersigned have executed this Acknowledgment and Agreement this 27th day of July, 1999. RESOURCE PROPERTIES, INC. By: /s/ Scott F. Schaeffer ----------------------- Name: Scott F. Schaeffer Title: President RESOURCE PROPERTIES 53, INC. By: /s/ Scott F. Schaeffer ----------------------- Name: Scott F. Schaeffer Title: President RESOURCE PROPERTIES XXIV, INC. By: /s/ Scott F. Schaeffer ----------------------- Name: Scott F. Schaeffer Title: President RESOURCE PROPERTIES XL, INC. By: /s/ Scott F. Schaeffer ----------------------- Name: Scott F. Schaeffer Title: President -29- SCHEDULES --------- Schedule 5.5 Pending or Threatened Litigation or Proceedings Against or Affecting Borrower Schedule 5.15 Liens and Encumbrances Schedule 6.10 Permitted Loans to Affiliates, Shareholders, Officers or Directors -30- Schedule 5.5 ------------ Pending Litigation Matters involving Resource America, Inc: 1. Birnbaum v. Resource America, Inc. et al. (in re Resource America Securites Litigation), U.S. District Court for the Eastern District of Pennsylvania, No. 98-CV5446 2. GHMC. Inc. v. Brandywine Construction & Management. Inc. et al, District Court of Douglas County, Nebraska, No. 98-98CV487 No pending litigation matters involving any subsidiaries of Resource America, Inc. asr not included in this Schedule. -31- Schedule 5.15 ------------- NONE -32- Schedule 6.10 ------------- Loans to Resource America, Inc.: 1. $5,088.351 from Resource Energy, Inc. 2. $456,724 from Bryn Mawr Resources, Inc. Loans from Resource America, Inc.: 1. $130,575,171 to Resource Properties, Inc. 2. $63,448,757 to Resource Leasing, Inc. 3. $8,440,653 to Fidelity Mortgage Funding, Inc. -33- EX-12 11 0011.txt EXHIBIT 12 EXHIBIT 12 COMPUTATION OF RATIOS (in thousands) 2000 ------ Income from continuing operations before income taxes 5,700 Fixed charges 18,632 ------ Total 24,332 Earnings to fixed charges(1) 1.31 (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 12 0012.txt 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 Atlas Energy Holdings, Inc. Delaware Atlas America, Inc. Delaware Atlas America, Inc. Pennsylvania AIC, Inc. Delaware Anthem Securities, Inc. Pennsylvania Atlas Energy Corporation Ohio Transatco, Inc. Ohio Pennsylvania Industrial Energy, Inc. Pennsylvania Atlas Information Management, L.L.C. Pennsylvania Atlas Technologies, L.L.C. Pennsylvania Atlas Energy Group, Inc. Ohio AED Investments, Inc. Delaware Atlas Resources, Inc. Pennsylvania ARD Investments, Inc. Delaware Viking Resources Corporation Pennsylvania Ohio Hauling, Inc. Ohio RFI Holding Company, Inc. Ohio Viking Natural Gas Marketing, Inc. Ohio Viking Investments, Inc. Delaware Resource Leasing, Inc. Delaware FL Partnership Management, Inc. Delaware FLI Holdings, Inc. Delaware Resource Press Building Manager, 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 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 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 FM Sheridan Land, 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 Resource Properties 54, Inc. Delaware RAI Financial, 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 Headhouse GP Corp. Pennsylvania Resource Housing Investors IV, Inc. Delaware ABB Associates I, Inc. Delaware ABB Associates II, Inc. Delaware Resource Brokerage, Inc. Delaware Chesterfield Mortgage Investors, Inc. Delaware LowCostLoan.com, Inc. (f/k/a Fidelity Mortgage Funding, Inc.) Delaware Atlas Pipeline Partners GP, LLC Delaware Atlas Pipeline Partners, L.P. Delaware Atlas Pipeline Operating Partnership, L.P. Delaware Atlas Pipeline Ohio, LLC Pennsylvania Atlas Pipeline Pennsylvania, LLC Pennsylvania Atlas Pipeline New York, LLC Pennsylvania St. Julien Acquisition, LLC Pennsylvania Atlas Noble Corp. Delaware Optiron Corporation Delaware Resource Technologies, Inc. Delaware EX-23 13 0013.txt EXHIBIT 23 EXHIBIT 23 December 18, 2000 Mr. Jeffrey C. Simmons Executive Vice President Resource Energy, Inc. 3500 Massillon, Suite 100 Uniontown, OH 44685 Gentlemen: Wright & Company, Inc. (Wright) hereby consents to the use of our report dated November 27, 2000 on oil and gas reserves to the interests of Atlas America, Inc., a subsidiary of Resource America, Inc. in Resource America, Inc.'s Annual Report on Form 10-K for the fiscal year, ending September 30, 2000. Very truly yours, Wright & Company, Inc. By: /s/ D. Randall Wright --------------------------------- D. Randall Wright President DRW/seb EX-23.1 14 0014.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PETROLEUM CONSULTANTS Wright & Company, Inc. (Wright) hereby consents to the use of our reports dated November 24, 1998, entitled "Evaluation and Review of Oil and Gas Reserves to the Interests of Resource Energy, Inc. and Atlas America, Inc., in Certain Properties Located in Various States, Job 8.463" and November 15, 1999, entitled "SUMMARY REPORT, Evaluation of Oil and Gas Reserves to the Interests of Resource America, Inc. in Certain Properties Located in Various States, Pursuant to the Requirements of the Securities and Exchange Commission, Effective September 30, 1999, Job 9.510" in Resource America, Inc.'s Annual Report on Form 10-K for fiscal year ended September 30, 1999. Wright & Company, Inc. By: /s/ D. Randall Wright ------------------------------ D. Randall Wright President December 29, 1999 Brentwood, Tennessee EX-23.1 15 0015.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PETROLEUM CONSULTANTS Wright & Company, Inc. (Wright) hereby consents to the use of our reports dated November 24, 1998, entitled "Evaluation and Review of Oil and Gas Reserves to the Interests of Resource Energy, Inc. and Atlas America, Inc., in Certain Properties Located in Various States, Job 8.463" and November 15, 1999, entitled "SUMMARY REPORT, Evaluation of Oil and Gas Reserves to the Interests of Resource America, Inc. in Certain Properties Located in Various States, Pursuant to the Requirements of the Securities and Exchange Commission, Effective September 30, 1999, Job 9.510" in Resource America, Inc.'s Annual Report on Form 10-K for fiscal year ended September 30, 1999. Wright & Company, Inc. By: s/s D. Randall Wright ------------------------------ D. Randall Wright President December 29, 1999 Brentwood, Tennessee EX-27 16 0016.txt FINANCIAL DATA SCHEDULE
5 1,000 0 12-MOS SEP-30-2000 OCT-01-1999 SEP-30-2000 1,000 117,107 10,533 201,486 2,013 0 135,184 111,840 26,977 509,204 55,144 127,682 0 0 246 280,969 507,204 0 99,611 0 86,017 7,894 936 18,632 5,700 1,638 4,062 13,420 683 0 18,165 .78 .76
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