-----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, Q8NudPPJaUkxtxKLaVGRw//qmHpCYvHxf/jhjWGvZXyJTKecvy30Id6AYmG7iuPV qnq1Ao+sz49nVfwenXt0RA== 0000950116-03-004989.txt : 20031229 0000950116-03-004989.hdr.sgml : 20031225 20031229163152 ACCESSION NUMBER: 0000950116-03-004989 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESOURCE AMERICA INC CENTRAL INDEX KEY: 0000083402 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 720654145 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-04408 FILM NUMBER: 031075783 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 ten-k.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, 2003 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.) 1845 Walnut Street Suite 1000 Philadelphia, PA 19103 - ---------------------------------------- ---------- (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] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The aggregate market value of the voting common equity held by non-affiliates of the registrant, based upon the closing price of such stock on December 15, 2003, was approximately $229.6 million. The number of outstanding shares of the registrant's common stock on December 15, 2003 was 17,354,300. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for registrant's 2003 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. [THIS PAGE INTENTIONALLY LEFT BLANK] RESOURCE AMERICA, INC. AND SUBSIDIARIES INDEX TO ANNUAL REPORT ON FORM 10-K
Page ---- PART I Item 1: Business................................................................ 2 - 24 Item 2: Properties.............................................................. 24 - 28 Item 3: Legal Proceedings....................................................... 28 Item 4: Submission of Matters to a Vote of Security Holders..................... 28 PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters... 29 Item 6: Selected Financial Data................................................. 30 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation............................................... 31 - 50 Item 7A: Quantitative and Qualitative Disclosures about Market Risk.............. 51 - 52 Item 8: Financial Statements and Supplementary Data............................. 53 - 102 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................. 103 Item 9A: Controls and Procedures................................................. 103 PART III Item 10: Directors and Executive Officers of the Registrant...................... 104 Item 11: Executive Compensation.................................................. 104 Item 12: Security Ownership of Certain Beneficial Owners and Management.......... 104 Item 13: Certain Relationships and Related Transactions.......................... 104 PART IV Item 14: Principal Accountant Fees and Services.................................. 105 Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 105 - 107 SIGNATURES.............................................................................. 108
1 PART I ITEM 1. BUSINESS THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS REGARDING EVENTS AND FINANCIAL TRENDS WHICH MAY AFFECT THE REGISTRANT'S FUTURE OPERATING RESULTS AND FINANCIAL POSITION. SUCH STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE THE REGISTRANT'S ACTUAL RESULTS AND FINANCIAL POSITION TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH STATEMENTS. IN OUR ENERGY BUSINESS, THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, LACK OF REVENUES, COMPETITION, NEED FOR ADDITIONAL CAPITAL, RISKS ASSOCIATED WITH EXPLORING, DEVELOPING, AND OPERATING OIL AND NATURAL GAS WELLS, AND FLUCTUATIONS IN THE MARKET FOR NATURAL GAS AND OIL. IN REAL ESTATE, THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, RISKS OF LOAN DEFAULTS AND ADEQUACY OF OUR PROVISION FOR LOSSES AND ILLIQUIDITY OF OUR PORTFOLIO. FOR A MORE COMPLETE DISCUSSION OF THE RISKS AND UNCERTAINTIES TO WHICH WE ARE SUBJECT, SEE "RISK FACTORS" IN THIS ITEM 1. General We are a specialized asset management company that uses industry specific expertise to generate and administer investment opportunities for our own account and for outside investors in the energy, financial services, real estate and equipment leasing sectors. As a specialized asset manager, we seek to develop investment vehicles in which outside investors invest along with us and for which we manage the assets acquired, pursuant to long-term management and operating agreements. We limit our investment vehicles to investment areas where we own existing operating companies or have specific expertise. We believe this strategy enhances our return on investment as well as that of our third-party investors. We typically receive an interest in the investment vehicle in addition to the interest resulting from our investment. We managed approximately $2.6 billion in assets at the end of fiscal 2003, as follows: - $516 million of energy assets (20%) (1) - $682 million of real estate assets (27%) (2) - $1.3 billion of financial services assets (51%), (3) and - $63 million of equipment leasing assets (2%) (4) - ---------- (1) We value our managed energy assets as the sum of the PV-10 values, as of September 30, 2003, of the proved reserves owned by us and the investment partnerships and other entities whose assets we manage, plus the book value, as of September 30, 2003, of the total assets of Atlas Pipeline Partners, L.P. For a definition of the term "PV-10 value" see Note 6 at page 3 of this report. (2) We value our managed real estate assets as the sum of the amount of our outstanding loan receivables, including the loans underlying the assets and liabilities consolidated pursuant to Financial Accounting Standards Board Interpretation No. 46, plus the book value of our interests in real estate and the sum of the book values of real estate assets and other assets held by a real estate investment partnership we managed as of September 30, 2003. (3) We value our financial services assets as the acquisition cost of securities acquired by ventures which we co-manage that acquired trust preferred securities of regional banks and bank holding companies. (4) We value our equipment leasing assets as the sum of the book values of equipment held by equipment leasing ventures or partnerships which we managed as of September 30, 2003. 2 During fiscal 2003, we continued developing our energy operations, which account for approximately 79% of our total revenues and 35% of our total assets. The number of gross wells we drilled increased 17% and the number of net wells increased 16% in fiscal 2003 as compared to fiscal 2002. We have funded our development operations primarily by sponsoring drilling investment partnerships. We, and our drilling investment partnerships, own interests in approximately 5,300 wells, 85% of which we operate. At September 30, 2003, proved reserves net to our interest were approximately 144.4 Bcfe (5) with a PV-10 value (6) of $191.4 million and a standardized measure value(7) of $144.3 million. Of these reserves, 92% were natural gas and 68% were classified as proved developed reserves. We also developing our natural gas transportation operations, which we conduct through Atlas Pipeline Partners, L.P., a publicly held (AMEX: APL) natural gas pipeline master limited partnership of which a subsidiary of ours is the general partner and in which we own a 39% interest. At September 30, 2003, Atlas Pipeline Partners owned approximately 1,400 miles of intrastate gathering systems located in eastern Ohio, western New York and western Pennsylvania, to which approximately 4,200 natural gas wells were connected. In September 2003, Atlas Pipeline Partners entered into an agreement to acquire the Alaska Pipeline Company, LLC, the owner of approximately 354 miles of natural gas gathering systems in the Anchorage, Alaska area. In real estate finance, we continued to implement our strategic shift from loan acquisition and resolution to the sponsorship and management of real estate investments and the management of our existing loan portfolio. We sponsored two private real estate partnerships, one of which was fully funded in fiscal 2003 and anticipates full investment in properties in December 2003, and one of which is in the offering stage. We have not purchased any loans since fiscal 1999 although, as part of our portfolio management activities, we have from time to time purchased senior lien interests relating to properties in which we have junior lien interests. We did not purchase any loan participations in fiscal 2003, but did acquire property interests through loan restructurings and foreclosures. We have also continued the development of our financial services and equipment leasing operations. In financial services, we have co-sponsored and are the co-manager of five investment entities that were formed to acquire the trust preferred securities of small to mid-sized regional banks and bank holding companies. One of these entities was sponsored in fiscal 2002 and became funded and fully invested in fiscal 2002. Two of these entities were sponsored, funded and became fully invested during fiscal 2003. The fourth and fifth entities were in the offering stage in fiscal 2003, and became funded and fully invested by December 2003. In equipment leasing, our Lease Equity Appreciation Fund I, L.P. ("LEAF I LP"), lease investment partnership commenced operations in March 2003, and continues in its offering stage. In April 2003, we entered into an agreement with a third party under which we originate equipment leases for sale to that party, to a maximum of $300.0 million of equipment leases, retaining management and servicing of these leases. - ---------- (5) "Mcfe," "Mmcfe" and "Bcfe" mean thousand cubic feet equivalent, million cubic feet equivalent and billion cubic feet equivalent, respectively. Natural gas volumes are converted to barrels, or "Bbls", of oil equivalent using the ratio of six thousand cubic feet, or "Mcf" of natural gas to one Bbl of oil and are stated at the official temperature and pressure bases of the area in which the reserves are located. (6) "PV-10 value" means, in accordance with SEC guidelines, the estimated future net cash flow to be generated from the production of proved reserves discounted to present value using an annual discount rate of 10%. This amount is calculated net of estimated production costs and future development costs, using prices and costs in effect as of a specified date, without escalation and without giving effect to non-property or non-production related expenses such as general administrative expenses, debt service or future income tax expense, or to depreciation, depletion and amortization. (7) "Standardized measure value" means the estimated future net cash flows to be generated from the production of proved reserves less a 10% discount. This amount is calculated using year-end prices, adjusted for only fixed and determinable increases in natural gas prices provided by contractual arrangements. Future net cash flows are reduced by estimated future costs to develop and produce the proved reserves, based on year-end cost levels. See Note 18 to our Consolidated Financial Statements. The difference between this amount and the total PV-10 value is attributable to estimated income taxes. 3 During 2003 we reduced the amount of our outstanding 12% senior notes due 2004 and expect to have fully paid them off by January 2004, seven months ahead of their maturity date. We repurchased $11.3 million of senior notes during fiscal 2003 and, subsequent to fiscal year-end, repurchased an additional $1.0 million of senior notes. Also subsequent to year end, in November 2003 we called our senior notes for redemption, of which $40.0 million are scheduled for redemption on December 22, 2003 and the balance on January 20, 2004. After we sent notice of redemption, we repurchased $26.9 million of senior notes in November 2003 and applied them to the December 22, 2003 redemption amount. Our consolidated financial statements for fiscal 2003 have been affected by our early adoption of Financial Accounting Standards Board's Interpretation 46, "Consolidation of Variable Interest Entities," which we refer to as FIN 46. As a result, we have consolidated certain entities in our real estate loan business into our financial statements for the first time. FIN 46, intended to increase the transparency of off-balance sheet transactions and structures, affects our holding of real estate loans acquired at a discount between 1991 and 1998. Since we control certain important indicia relating to these loans, including cash flow and appointment of a property manager, FIN 46 affects our accounting for these holdings. FIN 46's consolidation criteria are based on analysis of risks and rewards, not formalities of control and ownership, and represent a significant and complex modification of previous accounting principles. The adoption of FIN 46 resulted in a non-cash cumulative effect adjustment of $13.9 million, net of taxes, in the fourth quarter of fiscal 2003, as well as in our recording assets and liabilities of $78.2 million and $45.2 million, respectively, related to the newly consolidated entities. In line with our strategic focus in real estate, we classified an additional $222.7 million of our FIN 46 assets as being held for sale along with $141.5 million of associated liabilities. For a more detailed discussion of FIN 46, you should read Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cumulative Effect of Change in Accounting Principle" and Note 3, Adoption of FASB Interpretation 46, to our Consolidated Financial Statements. For financial information about our operating segments, see Note 17, Operating Segment Information and Major Customer Information, to our Consolidated Financial Statements. Energy General. We concentrate our energy operations in the western New York, eastern Ohio and western Pennsylvania region of the Appalachian Basin. As of September 30, 2003, we owned proved reserves of approximately 144.4 Bcfe as compared to 123.7 Bcfe at the beginning of fiscal 2000. As of September 30, 2003: - We had, either directly or through investment partnerships managed by us, interests in approximately 5,300 gross wells, including royalty or overriding royalty interests in over 600 wells. We operate 85% of these wells. - Wells in which we have an interest produced, net to our interest, approximately 19,100 Mcf of natural gas and 438 Bbls of oil per day. - We had an acreage position of approximately 431,200 gross (379,000 net) acres, of which 205,400 gross (190,500 net) acres were undeveloped. - We owned and operated, either directly or through Atlas Pipeline Partners, approximately 1,600 miles of gas gathering systems and pipelines. 4 Since 1976, we or our predecessors have funded our development operations through private and, since 1992, public drilling investment partnerships. 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 capital. We receive an interest in a partnership proportionate to the capital and leases we contribute, generally 25% to 27%, plus a 7% carried interest. We typically subordinate a portion of our partnership interest to a preferred return to the limited partners for the first five years of distributions. We also receive monthly operating fees of approximately $275 per well and monthly administrative fees of $75 per well. In addition, we typically act as the drilling contractor and operator of the wells drilled by the partnerships on a cost-plus basis. In fiscal 2003, our drilling partnerships invested $68.6 million in drilling and completing wells, of which we contributed $15.7 million. In fiscal 2002, our drilling partnerships invested $75.5 million in drilling and completing wells, of which we contributed $19.7 million. In fiscal 2001, our drilling partnerships invested $55.1 million in drilling and completing wells of which we contributed $14.3 million. Additionally, we invested $9.3 million, $10.6 million and $8.8 million in syndication and organization costs related to these partnerships in fiscal 2003, 2002 and 2001, respectively. We transport the natural gas produced from wells we operate through the gas gathering pipeline systems owned and operated by Atlas Pipeline Partners. See "Energy- Pipeline Operations." We also own directly approximately 200 miles of gathering systems. The gathering systems transport the natural gas to public utility pipelines for delivery to customers. To a lesser extent, the gathering systems deliver natural gas directly to customers. We sell the natural gas we produce to customers such as gas brokers and local utilities under a variety of contractual arrangements. We sell the oil we produce to regional oil refining companies at the prevailing spot price for Appalachian crude oil. Appalachian Basin Overview. The Appalachian Basin includes the states of Kentucky, Maryland, New York, Ohio, Pennsylvania, Virginia, West Virginia and Tennessee. It is the most mature oil and gas producing region in the United States, having established the first oil production in 1859. In addition, the Appalachian Basin is strategically located near the energy-consuming regions of the mid-Atlantic and northeastern United States which has historically resulted in Appalachian producers selling their natural gas at a premium to the benchmark price for natural gas on the New York Mercantile Exchange, or NYMEX. According to the Energy Information Administration, a branch of the U.S. Department of Energy, in 2002 there were 22.8 trillion cubic feet, or Tcf, of natural gas consumed in the United States which represented approximately 23.9% of the total energy used. Additionally, at December 31, 2001, there were approximately 137,000 gas wells in the Appalachian Basin which represented approximately 37.3% of the total number of gas wells in the United States. Of those wells, we and our drilling investment partnerships own interests in approximately 5,600 wells, 85% of which we operate. The Appalachian Basin accounted for approximately 3.1% of total 2002 domestic natural gas production, or 603 Bcf. Furthermore, according to the Advance Summary 2002 Annual Report published by the Energy Information Administration, Office of Oil and Gas in October 2003, the Appalachian Basin holds 10.6 Tcf of economically recoverable reserves, representing approximately 5.7% of total domestic reserves as of December 31, 2002. The raised forecast in August 2003 of World Oil magazine predicted that approximately 5,060 gas wells would be drilled in the Appalachian Basin during 2003, representing approximately 17.1% of the total number of wells to be drilled in the United States, and that the average depth of those 4,600 wells would be approximately 3,200 feet, compared to an estimated average depth of 5,100 feet for nationwide drilling efforts in 2003. The American Petroleum Institute has reported that in recent years the drilling success rate in the Appalachian basin has exceeded 90%. Our success rates have averaged in excess of 95% over the past 15 years. Natural Gas and Oil Properties. For information concerning our natural gas and oil properties, including the number of wells in which we have a working interest, production, reserve and acreage information and information concerning future dismantlement, restoration, reclamation and abandonment costs and salvage values, see Item 2, "Properties - Energy." 5 Natural Gas Hedging. Pricing for gas and oil production has been volatile and unpredictable for many years. To limit exposure to changing natural gas prices, from time to time we use hedges. Through our hedges, we seek to provide a measure of stability in the volatile environment of natural gas prices. Our risk management objective is to lock in a range of pricing for expected production volumes. This allows us to forecast future earnings within a predictable range. For the fiscal year ended September 30, 2003, approximately 61% of our volumes produced were hedged in this manner. For the fiscal year ending September 30, 2004, we estimate that approximately 50% of our natural gas volumes produced will be hedged in this manner, leaving our remaining production volumes to be sold at prevailing spot market prices in the month produced. For information concerning our natural gas hedging, see Item 7A, "Quantitative and Qualitative Disclosures about Market Risk - Energy - Commodity Price Risk." Pipeline Operations. Atlas Pipeline Partners GP LLC, our indirect wholly owned subsidiary, is the general partner of Atlas Pipeline Partners. On a consolidated basis, it has a 2% interest in Atlas Pipeline Partners. In addition, as of September 30, 2003, we owned 1,641,026 subordinated units of Atlas Pipeline Partners, constituting a 37% interest in it. Atlas Pipeline Partners GP manages the activities of Atlas Pipeline Partners using Atlas America, Inc. a wholly owned subsidiary, personnel who act as its officers and employees. At September 30, 2003, Atlas Pipeline Partners owned approximately 1,400 miles of intrastate gathering systems located in eastern Ohio, western New York and western Pennsylvania, to which approximately 4,200 natural gas wells were connected. Atlas Pipeline Partners' gathering systems had an average daily throughput of 52.7 Mmcf , 49.7 Mmcf and 45.1 Mmcf of natural gas in fiscal 2003, 2002 and 2001, respectively. In May 2003, Atlas Pipeline Partners concluded a public offering of 1,092,500 common units, obtaining net proceeds of $25.2 million after deduction of expenses, including underwriting discounts and commissions. The offering proceeds were used to pay down Atlas Pipeline Partners' credit facility and to provide funding for planned capital projects and working capital. Our subordinated units in Atlas Pipeline Partners are a special class of interest under which our right to receive distributions is subordinated to those of the publicly held common units. The subordination period is scheduled to expire on December 31, 2004 unless certain financial tests specified in the partnership agreement are not met. Upon expiration of the subordination period, our subordinated units will convert to an equal number of common units. As general partner, we have the right to receive incentive distributions if Atlas Pipeline Partners meets or exceeds its minimum quarterly distribution obligations to the common and subordinated units. The incentive distributions are as follows: - of the first $.10 per unit available for distribution in excess of the $.42 minimum quarterly distribution, 85% goes to all unit holders (including to us as a subordinated unit holder) and 15% goes to us as a general partner; - of the next $.08 per unit available for distribution, 75% goes to all unit holders and 25% goes to us as a general partner, and - after that, 50% goes to all unit holders and 50% goes to us as a general partner. We have agreements with Atlas Pipeline Partners that require us to do the following: - Pay gathering fees to Atlas Pipeline Partners 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. For the years ended September 30, 2003, 2002 and 2001, these gathering fees averaged $.75, $.57 and $.81 per Mcf, respectively. - Connect wells owned or controlled by us that are within specified distances of Atlas Pipeline Partners' gathering systems to those gathering systems. 6 - Provide stand-by construction financing to Atlas Pipeline Partners, at its request, for gathering system extensions and additions, to a maximum of $1.5 million per year, until 2005. We have not been required to provide any construction financing under this agreement since Atlas Pipeline Partners' inception. We believe that we comply with all the requirements of these agreements. On September 16, 2003, Atlas Pipeline Partners entered into an agreement to acquire the Alaska Pipeline Company for $95.0 million. Completion of the acquisition is conditioned upon obtaining approval of the Regulatory Commission of Alaska, which regulates Alaska Pipeline Company's operations, and the expiration, without adverse action, of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. At closing, the seller will enter into various agreements that will require the seller to pay Alaska Pipeline Company a minimum monthly capacity reservation fee and a volume-based transportation fee for 10 years. These agreements also require the seller to provide operational, maintenance and administrative services for five years at a specified fee, subject to inflation-based adjustments in the fourth and fifth contract years. Atlas Pipeline Partners will form a subsidiary to implement the acquisition. The subsidiary will fund the acquisition with a combination of debt and preferred equity financing and an equity contribution from Atlas Pipeline Partners. Atlas Pipeline Partners equity contribution will be funded in part by a draw on its existing line of credit. Availability of Oil Field Services. We contract for drilling rigs and purchase goods and services necessary for the drilling and completion of wells from a number of drillers and suppliers, none of which supplies a significant portion of our annual needs. During fiscal 2003, we faced no shortage of these goods and services. We cannot predict the duration of the current supply and demand situation for drilling rigs and other goods and services with any certainty due to numerous factors affecting the energy industry and the demand for natural gas and oil. Major Customers. During fiscal 2003, 2002 and 2001, gas sales to First Energy Solutions Corporation accounted for 14%, 13% and 14%, respectively, of our total consolidated revenues. Competition. The energy industry 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. 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 and other resources than ours which may enable them to identify and acquire desirable properties and market their natural gas and oil production more effectively than we do. 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. Moreover, we also compete with a number of other companies that offer interests in drilling partnerships. As a result, competition for investment capital to fund drilling partnerships is intense. Markets. The availability of a ready market for natural gas and oil produced by us, and the price obtained, depends 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. During fiscal 2003, 2002 and 2001, we experienced no problems in selling our natural gas and oil, although prices have varied significantly during and after those periods. 7 Governmental Regulation. Our energy business and the energy industry in general are heavily regulated by federal and state authorities, including regulation of production, environmental quality, pollution control, and pipeline construction and operation. The intent of federal and state regulations generally is 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 substantially comply with applicable regulatory requirements. The following discussion of the regulations of the United States energy industry does not intend 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 these operations. Many states also impose conservation requirements, principally regulating 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 related matters. The effect of these regulations may limit the amount we can produce and may limit the number of wells or the locations which we can drill. The regulatory burden on the energy industry increases our costs of doing business and, consequently, affects our profitability. Since these 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 ("FERC") under the Natural Gas Act of 1938, because Atlas Pipeline Partners' individual gathering systems perform primarily a gathering function, as opposed to the transportation of natural gas in interstate commerce, Atlas Pipeline Partners believes that it is not subject to regulation under the Natural Gas Act. However, Atlas Pipeline Partners 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. 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. We cannot predict what actions FERC will take in the future. 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 producers, gatherers and marketers. State-level regulation for pipeline operations, similar to that of Atlas Pipeline Partners', is through the Public Utility Commission of Ohio, the New York Public Service Commission and the Pennsylvania Public Utilities Commission. Atlas Pipeline Partners has been granted an exemption from regulation by the Public Utility Commission of Ohio, and believes that it is not subject to New York or Pennsylvania regulation since it does not generally provide service to the public. Alaska Pipeline Company, upon its acquisition by Atlas Pipeline Partners, will be subject to regulation by the Regulatory Commission of Alaska as to rates for natural gas transportation, construction of new facilities, pipeline extensions, abandonment of services and similar matters. 8 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, and methods of welding and other construction-related standards. State public utility regulators in New York, Ohio and Pennsylvania have either adopted federal standards or promulgated their own safety requirements consistent with 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 since 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. Real Estate Finance General. From fiscal 1991 through fiscal 1999, we sought to purchase commercial real estate loans at discounts to their outstanding loan balances and the appraised value of their underlying properties. In 1999, we shifted our focus to managing our existing loan portfolio and, beginning in 2002, have sought to expand our real estate operations through the sponsorship and management of real estate investment partnerships. While we may sell, purchase or originate portfolio loans or real property investments in the future as part of our management process or as opportunities arise, during fiscal 2003 we reduced the number of loans in our portfolio through the repayment of two loans, the restructuring of one loan and the foreclosure of four loans. We have retained interests in the properties underlying the restructured and foreclosed loans. In fiscal 2002, we sponsored one real estate investment program, SR Real Estate Investors, L.P., which completed a $20.0 million private equity offering in fiscal 2003. This partnership is currently in the acquisition stage, which it expects to complete in December 2003. At the conclusion of the acquisition stage, we expect that the partnership will own approximately $87.8 million (net book value) of multi-family residential properties. In fiscal 2003, we sponsored a second program, S.R. Real Estate Investors II, L.P. which commenced operations subsequent to fiscal year end and continues in its offering stage. Real Estate Loan Portfolio. The following table sets forth information concerning our portfolio loans at September 30, 2003. We include in this table loans that we account for under FIN 46, presented in accordance with the legal relationship of creditor/debtor between us and the borrowers. 9 Loan Status - Portfolio Loans. The following table sets forth information about our portfolio loans, classified as portfolio loans on our consolidated balance sheet, grouped by the type of property underlying the loans, as of September 30, 2003 (in thousands):
Fiscal Appraised Year Outstanding Value of Loan Type of Loan Loan Property Cost of Third Party Number Property Location Acquired Receivable(1) Loan(2) Investment(3) Liens (4) ---------- ------------ -------------- -------- ------------- --------- ------------- ----------- 020 (15) Office New Jersey 1996 $ 8,822 $ 4,700 $ 3,300 $ 2,258 035 (09)(10) Office Pennsylvania 1997 2,799 2,900 1,846 1,664 053 (13) Office Washington, DC 1999 136,918 94,700 71,830 63,354 ------------- --------- ------------- ----------- Office Total $ 148,539 $ 102,300 $ 76,976 $ 67,276 ------------- --------- ------------- ----------- 022 Multi-family Pennsylvania 1996 $ 6,326 $ 5,200 $ 2,472 $ 3,310 024 Multi-family Pennsylvania 1996 3,196 4,300 2,743 2,342 041 Multi-Family Connecticut 1998 20,974 22,600 14,737 13,312 ------------- --------- ------------- ----------- Multifamily Total $ 30,496 $ 32,100 $ 19,952 $ 18,964 ------------- --------- ------------- ----------- 013 (9)(14) Single User/ Commercial California 1994 $ 2,492 $ 2,700 $ 1,705 $ 2,273 018 Single User/ Retail California 1996 3,403 6,800 2,678 1,969 ------------- --------- ------------- ----------- Commercial Total $ 5,895 $ 9,500 $ 4,383 $ 4,242 ------------- --------- ------------- ----------- Condo/ Multifamily Pennsylvania 2001 $ 596 - $ 596 - Office Pennsylvania 2003 1,350 - 1,350 - ------------- ------------- Other Total $ 1,946 - $ 1,946 - ------------- ------------- Balance as of September 30, 2003 $ 186,876 $ 143,900 $ 103,257 $ 90,482 ============= ========= ============= =========== Company's Net Interest in Carried Cost Outstanding Loan Type of Net of Loan Number Property Investment(5) Investment(6) Receivables (7) ---------- ------------ ------------- ------------- --------------- 020 (15) Office $ 768 $ 2,322 $ 6,564 035 (09)(10) Office 96 961 1,135 053 (13) Office 6,830 24,331 73,564 ------------- ------------- --------------- Office Total $ 7,694 $ 27,614 $ 81,263 ------------- ------------- --------------- 022 Multi-family $ (963) $ 981 $ 3,016 024 Multi-family 424 764 854 041 Multi-Family 637 7,757 7,662 ------------- ------------- --------------- Multifamily Total $ 98 $ 9,502 $ 11,532 ------------- ------------- --------------- 013 (9)(14) Single User/ Commerical $ (543) $ 122 $ 219 018 Single User/ Retail 709 1,221 1,434 ------------- ------------- --------------- Commercial Total $ 166 $ 1,343 $ 1,653 ------------- ------------- --------------- Condo/ $ 596 $ 596 $ 596 Multifamily Office 1,350 1,361 1,350 ------------- ------------- --------------- Other Total $ 1,946 $ 1,957 $ 1,946 ------------- ------------- --------------- Balance as of September 30, 2003 $ 9,904 $ 40,416 $ 96,394 ============= ============= ===============
10 Loan status - Loans held as FIN 46 Entities' Assets. The following table sets forth information about our portfolio loans, classified as FIN 46 entities assets on our consolidated balance sheet, grouped by the type of property underlying the loans, as of September 30, 2003 (in thousands).
Fiscal Appraised Year Outstanding Value of Loan Type of Loan Loan Property Cost of Third Party Number Property Location Acquired Receivable(1) Loan(2) Investment(3) Liens(4) ----------- ------------ -------------- -------- ------------- ----------- ------------- ----------- 005 (16) Office Pennsylvania 1993 $ 11,788 $ 1,700 $ 1,747 $ - 014 (8) Office Washington, DC 1995 22,975 14,300 12,696 5,895 026 (9) Office Pennsylvania 1997 11,380 4,700 2,953 1,961 029 Office Pennsylvania 1997 10,144 4,075 3,186 - 044 (11) Office Washington, DC 1998 118,446 108,525 85,120 65,661 049 (12) Office Maryland 1998 111,209 99,000 92,328 57,552 ------------- ----------- ------------ ------------ Office Total $ 285,942 $ 232,300 $ 198,030 $ 131,069 ------------- ----------- ------------ ------------ 015 Condo/ Multifamily North Carolina 1995 & $ 6,403 $ 5,917 $ 2,337 $ 2,808 028 Condo/ 1997 Multifamily North Carolina 1997 640 498 452 - 031 Multifamily Connecticut 1997 12,089 12,000 4,788 8,833 032 Multifamily New Jersey 1997 14,684 14,300 7,404 - 050 Multifamily Illinois 1998 57,124 24,000 20,014 14,845 ------------- ----------- ------------ ------------ Multifamily Total $ 90,940 $ 56,715 $ 34,995 $ 26,486 ------------- ----------- ------------ ------------ 007 (9)(17) Single User/ Retail Minnesota 1993 $ 6,045 $ 2,300 $ 1,490 $ 1,706 017 (9) Single User/ Retail West Virginia 1996 1,705 1,600 904 932 ------------- ----------- ------------ ------------ Commercial Total $ 7,750 $ 3,900 $ 2,394 $ 2,638 ------------- ----------- ------------ ------------ 025 Hotel/ Commercial Georgia $ 8,919 $ 10,173 $ 7,263 $ - ------------- ----------- ------------ ------------ Hotel Total $ 8,919 $ 10,173 $ 7,263 $ - ------------- ----------- ------------ ------------ Balance as of September 30, 2003 $ 393,551 $ 303,088 $ 242,682 $ 160,193 ============= =========== ============ ============ Company's Net Interest in Carried Cost Outstanding Loan Type of Net of Loan Number Property Investment(5) Investment(6) Receivables (7) ------------ ------------ ------------ ------------- --------------- 005 (16) Office $ 1,747 $ 1,484 $ 11,788 014 (8) Office 6,209 6,552 17,080 026 (9) Office 721 1,310 9,419 029 Office 3,186 3,002 10,144 044 (11) Office 21,472 36,650 52,785 049 (12) Office 32,329 35,841 53,657 ------------ ------------- --------------- Office Total $ 65,664 $ 84,839 $ 154,873 ------------ ------------- --------------- 015 Condo/ Multifamily $ (663) $ 1,319 $ 3,595 028 Condo/ Multifamily 452 233 640 031 Multifamily (4,587) 172 3,256 032 (12) Multifamily 7,404 11,249 14,684 050 Multifamily 4,664 6,969 42,279 ------------ ------------- --------------- Multifamily Total $ 7,270 $ 19,942 $ 64,454 ------------ ------------- --------------- 007 (9)(17) Single User/ Retail $ (609) $ 394 $ 4,339 017 (9) Single User/ Retail (95) 631 773 ------------ ------------- --------------- Commercial Total $ (704) $ 1,025 $ 5,112 ------------ ------------- --------------- 025 Hotel/ Commercial $ 6,388 $ 7,796 $ 8,919 ------------ ------------- --------------- Hotel Total $ 6,388 $ 7,796 $ 8,919 ------------ ------------- --------------- Balance as of September 30, 2003 $ 78,618 $ 113,602 $ 233,358 ============ ============= ===============
The following table reconciles the carried cost of investment for our portfolio loans classified as FIN 46 assets to our consolidated balance at September 30, 2003 (in thousands). FIN 46 entities' assets and other assets held for sale........................ $ 222,677 FIN 46 entities' liabilities and other liabilities associated with assets held for sale................................................... (141,473) Real estate owned classified as held for sale net of related debt............. (665) FIN 46 entities' assets....................................................... 78,247 FIN 46 entities' liabilities.................................................. (45,184) ----------- Balance at September 30, 2003................................................. $ 113,602 ===========
- ---------- (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, 2003. (2) We generally obtain appraisals on each of the properties underlying our portfolio loans at least once every three years. (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. 11 (4) Represents the amount of the senior lien interests at September 30, 2003. (5) 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. (6) Represents the book cost of our investment, including subsequent advances, 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 $1.4 million. For loans held as FIN 46 entities' assets, the carried costs represents the book cost of our investment adjusted to reflect the requirements of FIN 46. (7) Consists of the amount set forth in the column "Outstanding Loan Receivable" less senior lien interests at September 30, 2003. (8) The borrower, Washington Properties Limited Partnership, is a limited partnership in which Edward E. Cohen, our Chairman, Chief Executive Officer and President, Jonathan Z. Cohen, our Chief Operating Officer, Executive Vice President and director, Scott F. Schaeffer, our former Vice Chairman and Executive Vice President, and Adam Kauffman, the president of Brandywine Construction & Management are equal limited partners. (9) With respect to loans 7 and 17, A. Kaufman is the general partner of the borrower and, with respect to loan 29, he is the president of the sole general partner of the borrower. With respect to loans 26 and 35, Mr. Kauffman is the sole shareholder of the general partner of the borrower. (10) The borrower, New 1521 Associates, is a limited partnership formed in 1991. The general partner, New 1521 G.P., Inc., is a corporation of which A. Kauffman is the sole shareholder. E. Cohen, and his wife, Betsy Z. Cohen, beneficially own a 49% limited partnership interest in the partnership and A. Kauffman owns a 24.75% limited partnership interest. (11) The borrower, Evening Star Associates, is a limited partnership in which one of our subsidiaries, Resource Properties, Inc., is the sole shareholder of ES GP, Inc., the sole general partner of the borrower. E. Cohen, B. Cohen, D. Gideon Cohen, our former President, Chief Operating Officer and director, and S. Schaeffer are limited partners of Evening Star Associates. (12) The borrower, Commerce Place Associates, LLC, is a limited liability company whose manager is a corporation of which S. Schaeffer, is the sole shareholder, officer and director. Messrs. E. Cohen, D. Cohen, Schaeffer and Kauffman are equal limited partners of an entity, Brandywine Equity Investors, L.P., that owns approximately 30% of the borrower. (13) Our subsidiary, Resource Press Building Manager, Inc., is the manager of the borrower, Resource/Press Building Realty, LLC. (14) E. Cohen and B. Cohen beneficially own a 40% limited partnership interest in the borrower, Pasadena Industrial Associates. A. Kauffman is the general partner of the borrower. (15) The property is owned by EJGB, LLC, a limited liability company in which D. Cohen owns a 94% interest. (16) The borrower, Granite GEC (Pittsburgh), L.L.C., is a limited liability company. D. Cohen owns 79% of Odessa Real Estate Management, Inc., the assistant managing member of the borrower. (17) The borrower, St. Cloud Associates, is a limited partnership of which A. Kauffman is the sole general partner. 12 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. At September 30, 2003, senior lien holders on these properties held outstanding obligations of $90.5 million. Pursuant to agreements with most borrowers, we generally retain the excess of operating cash flow after required debt service on senior lien obligations as debt service on the outstanding balance of our loans. After a refinancing 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 similar devices. As of September 30, 2003, we have six retained interests aggregating $55.7 million and constituting 36%, by carried cost of investment, of our loan portfolio and FIN 46 investments that are not secured by a lien on the underlying property. As of September 30, 2003, senior lien interests with an aggregate balance of $4.9 million relating to three portfolio loans obligate us, in the event of a default on a loan, to replace the loan with a performing loan. Because our loans typically were not performing in accordance with the original terms when we acquired them, they generally are subject to forbearance agreements that defer foreclosure or other action so long as the borrower meets the terms of the forbearance agreement. These terms are generally designed to give us control over the operations and cash flow of the underlying properties, subject to the rights of senior lien holders. We may permit a borrower to obtain management control of a property's cash flow where we believe that operating problems have been substantially resolved. Our forbearance agreements require borrowers to retain a property management firm acceptable to us. As a result, Brandywine Construction & Management, Inc., a property manager affiliated with us, has assumed responsibility for supervisory and, in many cases, day-to-day management of the underlying properties with respect to substantially our entire loan portfolio as of September 30, 2003. In seven instances, the president of Brandywine Construction & Management, 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. However, except for amounts we recognize as accretion of discount, we do not recognize the accrued but unpaid amounts as revenue until actually paid. For a discussion of how we account for accretion of discount, you should read "Real Estate Finance-Accounting for Discounted Loans." 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 of the underlying property, the state of real estate and financial markets generally and as they pertain 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 loan or otherwise liquidate the loan. If the borrower is unsuccessful, we may foreclose on the underlying property. 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. Investments in Real Estate. As part of the process of resolving our loans, we may foreclose on a property underlying a loan or accept a deed-in-lieu of foreclosure. In fiscal 2003, we foreclosed or accepted deeds-in-lieu of foreclosure on four properties. Also, when we restructure a loan, we typically retain an interest in the underlying property or in an entity owning the property. We had one such restructuring in fiscal 2003, while in fiscal 2002 we had one such restructuring. Moreover, in fiscal 2002 we invested in three limited partnerships which acquired properties adjacent to a property in which we had received a 50% interest in satisfaction of another portfolio loan in June 1999. 13 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 flows, which include amounts realizable from the disposition of 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 real estate loans at cost, which is discounted significantly from the stated principal amount plus accrued interest and penalties on the loans. We refer to the stated principal, accrued interest and penalties as the face value of the loan. The discount from face value, as adjusted to give effect to refinancings totaled $56.0 million, $165.2 million and $150.7 million at September 30, 2003, 2002 and 2001, respectively. We review the carrying value of each of our loans quarterly to determine whether it is greater than the sum of the future projected cash flows. Because of our knowledge of the underlying properties, our monitoring of and influence over their respective operating budgets and, for most properties, management of the property by our affiliate, Brandywine Construction and Management, we believe that we can reasonably estimate the amount and timing of our probable collections from the underlying properties. For a discussion of our involvement with the properties underlying our loans, see "Real Estate Finance-General." If we determine that the 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. Accounting for FIN 46 Assets. Subsequent to the adoption of FIN 46 in July 2003, we record the assets, liabilities and operations of cerain entities in which we hold loans in our consolidated financial statements. We have classified certain of these entities' assets as held for sale and accordingly show their operations as discontinued in our consolidated financial statements. Allowance for Possible Losses. For the year ended September 30, 2003, we recorded a provision for possible losses of $1.8 million. Our allowance for possible losses was $1.4 million at September 30, 2003 after write-downs of $3.9 million on three loans. In determining our allowance for possible losses related to our real estate loans, we consider general and local economic conditions, neighborhood values, competitive overbuilding, casualty losses and other factors which may affect the value of loans. The value of our loans may also be affected by factors such as the cost of compliance with regulations and liability under applicable environment laws, changes in interest rates and the availability of financing. Income from a property will be reduced if a significant number of tenants are unable to pay rent or if available space cannot be rented on favorable terms. In addition, we continuously monitor collections and payments from our borrowers and maintain an allowance for estimated losses based upon our historical experience and our knowledge of specific borrower collection issues identified. We reduce our investment in real estate loans by an allowance for amounts that may become unrealizable in the future. Such allowance can be either specific to a particular loan or venture or general to all loans. We also follow the cost recovery method for certain loans due to unanticipated events such as the loss of a major tenant of one underlying property, the declaration of bankruptcy and voiding of the lease by a sole tenant of another property and, for a hotel property underlying one loan, the severe effect of the post-9/11 travel slump. Financial Services Our financial services operations currently focus on managing entities that invest in trust preferred securities of small to mid-size regional banks and bank holding companies and debt securities collateralized by these trust preferred securities. 14 Beginning in fiscal 2002, through December 2003, we have co-sponsored a series of five investments involving issuers of collateralized debt obligations, or CDOs. The collateralized debt obligations of each CDO issuer are supported by a pool of trust preferred securities issued by trusts affiliated with, and whose preferred securities are guaranteed by small to mid-size regional banks and bank holding companies. We own a 50% interest in the entities that act as the general partners of the limited partnerships that own the equity interest in the CDO issuers. We also invest in the partnerships, for which we receive partnership interests. The issuers are Trapeza CDO I, LLC through Trapeza CDO V, Ltd. The general partners are Trapeza Funding, LLC through Trapeza Funding V, LLC, and the partnerships are Trapeza Partners L.P. through Trapeza Partners V L.P. We also own a 50% interest in Trapeza Capital Management, LLC which acts as collateral manager of the trust preferred securities pools. Through Trapeza Capital Management the Trapeza Funding entities and the Trapeza partnerships, we receive collateral management fees from the CDO issuers, as well as general partner and limited partner distributions and partnership administration fees. We also own a 50% interest in 1845 Warehouse, LLC, an entity created to support a warehouse line of credit to be used to provide financing to CDO issuers we sponsor in the future. We invested $2.5 million in 1845 Warehouse in November 2003 along with a like amount by the other owner of 1845 Warehouse. 1845 Warehouse has obtained a warehouse line of credit for its own account from an unaffiliated third party. We expect that 1845 Warehouse will receive distributions from future CDO closings equal to a portion of the positive spread between its warehouse financing costs and the interest received on the trust preferred securities it finances. The third party lender will receive the balance of such positive spread. We sponsored Trapeza CDO I in fiscal 2002, which, in November 2002 acquired $330.0 million of trust preferred securities. Trapeza Partners I, the equity owner of Trapeza CDO I, raised $27.4 million for its equity investment, including $2.8 million from us and a like amount from our co-sponsor. We also provided a $5.0 million bridge loan, which was repaid in fiscal 2003, to facilitate its purchase of trust preferred securities. We sponsored Trapeza CDO II, Trapeza CDO III and Trapeza CDO IV in fiscal 2003. Trapeza CDO IV was in the offering stage at September 30, 2003, and thereafter closed in October 2003. These three Trapeza CDO issuers acquired $1.0 billion of trust preferred securities. The related partnerships invested $58.8 million in the Trapeza CDO issuers, including $2.4 million from us and a like amount from our co-sponsor. Subsequent to September 30, 2003, we sponsored Trapeza CDO V, Ltd., which we anticipate closed in December 2003 and acquired an additional $300.0 million of trust preferred securities. Equipment Leasing We operate our equipment leasing business through LEAF Financial Corporation, a wholly-owned subsidiary. A subsidiary of LEAF Financial acts as the general partner of a public equipment leasing partnership, Lease Equity Appreciation Fund I. The partnership began operations in March 2003 and, as of September 30, 2003, had $18.5 million (original equipment cost) of equipment under lease. As of September 30, 2003, LEAF Financial had invested $401,000 in the partnership. The partnership continues in its offering stage. In April 2003, LEAF Financial entered into a multi-year agreement to originate and service equipment leases on behalf of Merrill Lynch Equipment Finance LLC. Under this financing and service arrangement, LEAF Funding, Inc., a subsidiary of LEAF Financial, will originate and, through a subsidiary, sell equipment leases to Merrill Lynch Equipment Finance. LEAF Funding will receive cash consideration for these leases equal to the present value of the remaining scheduled payments under each lease plus the estimated residual value of the leased equipment at the end of the lease. An affiliate of Merrill Lynch Equipment Finance will finance its purchase of the equipment and leases to an aggregate maximum amount of $300.0 million. Pursuant to a servicing agreement, LEAF Financial will manage, administer and service the leases, for which it will receive servicing and asset management fees. These agreements terminate on April 8, 2005, unless otherwise extended. At the time we acquired LEAF Financial in 1995, it acted as the general partner of a series of public equipment leasing partnerships. These partnerships began their liquidation periods at various times commencing in December 1995. We anticipate that the last four of these partnerships will complete their liquidation procedures in December 2003. 15 Credit Facilities and Senior Notes Credit Facilities. In July 2002, our principal energy subsidiary, Atlas America, entered into a $75.0 million credit facility administered by Wachovia Bank. The revolving credit facility is guaranteed by Atlas America's subsidiaries and by us. Credit availability, which is principally based on the value of Atlas America's assets, was $54.2 million at September 30, 2003. Up to $10.0 million of the borrowings under the facility may be in the form of standby letters of credit. Borrowings under the facility are secured by the assets of Atlas America and its subsidiaries, including the stock of Atlas America's subsidiaries and our interests in Atlas Pipeline Partners and its general partner. Loans under the facility bear interest at one of the following two rates, at the borrower's election: - the base rate plus the applicable margin; or - the adjusted London Interbank Offered Rates or LIBOR plus the applicable margin. The base rate for any day equals the higher of the federal funds rate plus 1/2 of 1% or the Wachovia Bank prime rate. Adjusted LIBOR is LIBOR divided by 1.00 minus the percentage prescribed by the Federal Reserve Board for determining the reserve requirement for euro currency funding. The applicable margin is as follows: - where utilization of the borrowing base is equal to or less than 50%, the applicable margin is 0.25% for base rate loans and 1.75% for LIBOR loans; - where utilization of the borrowing base is greater than 50%, but equal to or less than 75%, the applicable margin is 0.50% for base rate loans and 2.00% for LIBOR loans; and - where utilization of the borrowing base is greater than 75%, the applicable margin is 0.75% for base rate loans and 2.25% for LIBOR loans. At September 30, 2003, borrowings under the Wachovia credit facility bore interest at rates ranging from 2.88% to 2.90%. The Wachovia credit facility requires Atlas America to maintain specified net worth and specified ratios of current assets to current liabilities and debt to EBITDA, and requires us to maintain a specified interest coverage ratio. In addition, the facility limits sales, leases or transfers of assets and the incurrence of additional indebtedness. The facility limits the dividends payable by Atlas America to us, on a cumulative basis, to 50% of Atlas America's net income from and after April 1, 2002 plus $5.0 million. In addition, Atlas America is permitted to repay intercompany debt to us only up to the amount of our federal income tax liability attributable to Atlas America and accrued interest on the our senior notes. The facility terminates in July 2005, when all outstanding borrowings must be repaid. At September 30, 2003, $31.0 million was outstanding under this facility. Through our real estate subsidiaries, we have 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 2005. Advances under this facility must be used to acquire real property, loans on real property or to reduce indebtedness on property loans. The facility is secured by the interest of our subsidiaries in assets they acquire using advances under the line of credit. Credit availability is based on the value of the assets pledged as security and was $18.0 million as of September 30, 2003, all of which had been drawn at that date. The facility imposes limitations on the incurrence of future indebtedness by our subsidiaries whose assets 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. 16 We have a second line of credit with Sovereign Bank for $5.0 million that is similar to the $18.0 million line of credit. This facility bears interest at the same rate as the $18.0 million line of credit and also expires in July 2005. Advances under this facility must be used to acquire real property, loans on real property or to reduce indebtedness on property or loans. The facility is secured by a pledge of approximately 425,000 of our RAIT common shares and by a guaranty from the subsidiaries holding the assets securing the $18.0 million line of credit. Credit availability is based on the value of the pledged RAIT shares and was $5.0 million as of September 30, 2003, all of which had been drawn at that date. The facility restricts us from making loans to our affiliates other than: - existing loans, - loans in connection with lease transactions in an aggregate not to exceed $50,000 in any fiscal year, - loans to RAIT made in the ordinary course of business, and - loans to our subsidiaries. We have a line of credit with Commerce Bank for $5.0 million, all of which had been drawn as of September 30, 2003. The facility is secured by our pledge of 440,000 of our RAIT common shares. Credit availability is 50% of the value of those shares, and was $5.0 million at September 30, 2003. Loans bear interest, at our election, at either the prime rate reported in The Wall Street Journal or specified LIBOR, plus 250 basis points, in either case with a minimum rate of 5.5% and a maximum rate of 9.0%. The facility terminates in May 2005, subject to extension. The facility requires us to maintain a specified net worth and ratio of liabilities to tangible net worth, and prohibits our transfer of the collateral. We and certain of our real estate subsidiaries are the obligors under a $6.8 million term note to Hudson United Bank. At September 30, 2003, $6.4 million was outstanding on this note which matures in October 2004. The note bears interest at the prime rate reported in The Wall Street Journal, minus one percent, and is secured by certain portfolio loans. LEAF Financial and Lease Equity Appreciation Fund have entered into revolving credit facilities with National City Bank and Commerce Bank that have an aggregate borrowing limit of $20.0 million. Each facility bears interest at the LIBOR plus 300 basis points at the time of borrowing. Borrowings under the facilities are secured by an assignment of the leases being financed and the underlying equipment being leased. Repayment of both facilities has been guaranteed by us. The facility with National City Bank expires on December 31, 2003. At September 30, 2003, $2.5 million was outstanding on this facility with current interest rates ranging from 4.10% to 4.18% per year. The facility with Commerce Bank expires on May 27, 2004. At September 30, 2003, $4.7 million was outstanding on this facility with a current interest rate of 4.10% per year. We are a guarantor under both facilities. Atlas Pipeline Partners has a $20.0 million revolving credit facility administered by Wachovia Bank. Up to $3.0 million of the facility may be used for standby letters of credit. Borrowings under the facility are secured by a lien on all the property of Atlas Pipeline Partners' assets, including its subsidiaries. The facility has a term ending in December 2005 and bears interest, at Atlas Pipeline Partners' election, at the base rate plus the applicable margin or the euro rate plus the applicable margin. As used in the facility agreement, the base rate is the higher of: - Wachovia Bank's prime rate or - the sum of the federal funds rate plus 50 basis points. 17 The euro rate is the average of specified LIBORs divided by 1.00 minus the percentage prescribed by the Federal Reserve Board for determining the reserve requirement for euro currency funding. The applicable margin varies with Atlas Pipeline Partners' leverage ratio from between 150 to 250 basis points, for the euro rate option, or 0 to 50 basis points, for the base rate option. Draws under any letter of credit bear interest as specified under the first bullet point above. The credit facility requires Atlas Pipeline Partners to maintain a specified net worth, ratio of debt to tangible assets and an interest coverage ratio. In addition, the facility limits sales, leases or transfers of assets, incurrence of other indebtedness and guarantees, and certain investments. As of September 30, 2003, no amounts were outstanding under this facility. Atlas Pipeline Partners expects that it will draw the full amount of this facility as part of its financing of its acquisition of the Alaska Pipeline Company. As of September 30, 2003, we also had a $5.8 million term loan with The Marshall Group. This loan was repaid in October 2003. Senior Notes. As of September 30, 2003, we had outstanding $54.0 million of our 12% senior notes due 2004. Subsequent to our fiscal year end, we repurchased $1.0 million of senior notes. The senior notes are payable interest only until their maturity on August 1, 2004, but are subject to earlier redemption at our option. We have called $40.0 million of senior notes for redemption on December 22, 2003 (including $26.9 million repurchased in November 2003) and the balance of $13.0 million for redemption on January 20, 2004. See "Business - General." Employees As of September 30, 2003, we employed 278 persons: 208 in energy, 41 in equipment leasing, eight in real estate finance, three in financial services and 18 corporate employees. 18 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: General Interest rate increases will increase our interest costs under our eight credit facilities. See Item 7A, "Quantative and Qualitative Disclosures about Market Risk." This could have material adverse effects, including reduction of net revenues for both our energy, real estate finance and equipment leasing operations. Risks Relating to Our Energy Business Our future financial condition, results of operations and the value of our natural gas and oil properties will depend upon market prices for natural gas and oil. Natural gas and oil prices historically have been volatile and will likely continue to be volatile in the future. Prices for natural gas and oil are affected by many factors, over which we have no control, including: - political instability or armed conflict in oil producing regions or other market uncertainties; - worldwide and domestic supplies of oil and gas; - weather conditions; - the level of consumer demand; - the price and availability of alternative fuels; - the availability of pipeline capacity; - the price and level of foreign imports; - domestic and foreign governmental regulations and taxes; - the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil prices and production controls; and - the overall economic environment. These factors and the volatility of the energy markets make it extremely difficult for us to predict future oil and gas price movements with any certainty. Price fluctuations can materially adversely affect us because: - price decreases will reduce our energy revenues; - price decreases may make it more difficult to obtain financing for our drilling and development operations through sponsored investment partnerships, borrowings or otherwise; - price decreases may make some reserves uneconomic to produce, reducing our reserves and cash flow; - price decreases may cause the lenders under our energy credit facility to reduce our borrowing base because of lower revenues or reserve values, reducing our liquidity and, possibly, requiring mandatory loan repayment; - price increases may make it more difficult, or more expensive, to drill and complete wells if they lead to increased competition for drilling rigs and related materials; - price increases may make it more difficult, or more expensive, to execute our business strategy of acquiring additional natural gas properties and energy companies. 19 Further, oil and gas prices do not necessarily move in tandem. Because approximately 92% of our proved reserves are natural gas reserves, we are more susceptible to movements in natural gas prices. 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 are inherent operating hazards for us. The occurrence of any of these hazards 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. In accordance with customary industry practices, we maintain insurance against some, but not all, of such risks and losses. Pollution and environmental risks generally are not fully insurable. 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 reduce our revenues and the value of our assets. The amount of recoverable natural gas and oil 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. The geologic data and technologies we use do not allow us to know conclusively prior to drilling a well that natural gas or oil is present or may be produced economically. The cost of drilling, completing and operating a well is often uncertain, and cost factors can adversely affect the economics of a project. Further, our drilling operations may be curtailed, delayed or cancelled as a result of many factors, including: - unexpected drilling conditions; - title problems; - pressure or irregularities in formations; - equipment failures or accidents; - adverse weather conditions; - environmental or other regulatory concerns; and - costs of, or shortages or delays in the availability of drilling rigs and equipment. We base our estimates of our proved natural gas and oil reserves and future net revenues from those reserves upon analyses that rely upon various assumptions, including those required by the SEC, as to natural gas and oil prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Any significant variance in these assumptions could materially affect the estimated quantity of our reserves. As a result, our estimates of our proved natural gas and oil reserves are inherently 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. 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. You should not assume that the PV-10 values referred to in this report represent the current market value of our estimated natural gas and oil reserves. In accordance with SEC requirements, the estimates are based on prices and costs as of the date of the estimates. Moreover, the 10% discount factor, which the SEC requires in calculating future net cash flows for reporting purposes, is not necessarily the most appropriate discount factor to calculate risk-based value. The effective interest rate at various times and the risks associated with the oil and gas industry generally will affect the appropriateness of the 10% discount factor. 20 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 and drilling activities, the primary source of our energy revenues, will decrease. 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, all of which are subject to risks discussed elsewhere in this section. The growth of our energy operations has resulted from both our acquisition of energy companies and assets and from our ability to obtain capital funds through our sponsored drilling partnerships. If we are unable to identify acquisitions on acceptable terms, or if our ability to obtain capital funds through sponsored partnerships is impaired, we may be unable to increase or maintain our inventory of properties and reserve base, or may be forced to curtail drilling, production or other activities. This would likely result in a decline in our revenues from our energy operations. Under current federal tax laws, there are tax benefits to investing in drilling investment partnerships such as ours, including deductions for intangible drilling costs and depletion deductions. Changes to federal tax laws that reduce or eliminate these benefits may make investment in our drilling partnerships less attractive and, thus, reduce our ability to obtaining funding from this significant source of capital. Moreover, the Jobs and Growth Tax Relief Reconciliation Act of 2003 has reduced the maximum federal income tax rate on long-term capital gains and qualifying dividends to 15% through 2008. This change may make investment in our drilling partnerships relatively less attractive than investments in assets likely to yield capital gains or qualifying dividends. We operate in a highly competitive environment, competing with major integrated and independent energy companies for desirable oil and gas properties, as well as for the equipment, labor and materials required to develop and operate such properties. Many of our competitors have financial and technological resources substantially greater than ours. We may incur higher costs or be unable to acquire and develop desirable properties at costs we consider reasonable because of this competition. Under our agreements with Atlas Pipeline Partners, we are required to pay transportation fees for natural gas produced by our drilling partnerships and certain unaffiliated producers. Many of our transportation arrangements with our existing drilling partnerships and unaffiliated producers require them to pay us lesser fees than those we pay to Atlas Pipeline Partners. For the years ended September 30, 2003 and 2002, the fees we paid to Atlas Pipeline Partners, net of reimbursements and distributions to us from our general and limited partner interests in it, exceeded the amount we received from producers by $10.4 million and $6.5 million, respectively. Subsidiaries of ours currently serve as general partners of 84 energy investment partnerships. We intend to develop further energy investment partnerships for which we will act as general partner. As a general partner, each subsidiary is contingently liable for the obligations of these partnerships to the extent that these obligations cannot be repaid from program assets or insurance proceeds. Federal, state and local authorities extensively regulate our drilling and production activities, including the drilling of wells, the spacing of wells, the use of pooling of oil and gas properties, environmental matters, safety standards, production limitations, plugging and abandonment, and restoration. These laws are under constant review for amendment or expansion, raising the possibility of changes that may affect, among other things, the pricing or marketing of oil and gas production. If we do not comply with these laws, we may incur substantial penalties. The overall regulatory burden on the industry increases the cost of doing business and, in turn, decreases profitability. Our operations are subject to complex and constantly changing environmental laws adopted by federal, state and local governmental authorities. We could face significant liabilities to the government and third parties for discharges of natural gas, oil or other pollutants into the air, soil or water, and we could have to spend substantial amounts on investigation, litigation and remediation. For a discussion of the environmental laws that affect our operations, see "Business - Energy - Environmental and Safety Regulations." 21 Risks Relating to Our Real Estate Financial and Financial Leasing Services Businesses The primary or sole source of recovery for our real estate loans is typically the underlying real property. Accordingly, the value of our loans depends upon the value of that real property. Many of the properties underlying our portfolio loans, while income producing, do not generate sufficient revenues to pay the full amount of debt service required under the original loan terms or have other problems. There may be a higher risk of default with these loans as compared to conventional loans. Loan defaults will reduce our current return on investment and may require us to become involved in expensive and time-consuming bankruptcy, reorganization or foreclosure proceedings. Our loans, include those treated in our consolidated financial statements as FIN 46 assets and liabilities, typically provide payment structures other than equal periodic payments that retire a loan over its specified term, including structures that defer payment of some portion of accruing interest, or defer repayment of principal, until loan maturity. Where a borrower must pay a loan balance in a large lump sum payment, its ability to satisfy this obligation may depend upon its ability to obtain suitable refinancing or otherwise to raise a substantial cash amount, which we do not control. In addition, lenders can lose their lien priority in many jurisdictions, including those in which our existing loans are located, to persons who supply labor or materials to a property. For these and other reasons, the total amount which we may recover from one of our loans may be less than the total amount of the loan or our cost of acquisition. Declines in real property values generally and/or in those specific markets where the properties underlying our portfolio loans are located could affect the value of and default rates under those loans. Properties underlying our loans may be affected by general and local economic conditions, neighborhood values, competitive overbuilding, casualty losses and other factors beyond our control. The value of real properties may also be affected by factors such as the cost of compliance with, and liability under environmental laws, changes in interest rates and the availability of financing. Income from a property will be reduced if a significant number of tenants are unable to pay rent or if available space cannot be rented on favorable terms. Operating and other expenses of properties, particularly significant expenses such as real estate taxes, insurance and maintenance costs, generally do not decrease when revenues decrease and, even if revenues increase, operating and other expenses may increase faster than revenues. Many of our portfolio loans, including those treated in our consolidated financial statements as FIN 46 assets and liabilities, are junior lien obligations. Subordinate lien financing poses a greater credit risk, including a substantially greater risk of nonpayment of interest or principal, than senior lien financing. If we or any senior lender forecloses on a loan, we will be entitled to share only in the net foreclosure proceeds after payment to all senior lenders. It is therefore possible that we will not recover the full amount of a foreclosed loan or the amount of our unrecovered investment in the loan. At September 30, 2003, our allowance for possible losses was $1.4 million, which represents 3% of the book value of our loan portfolio. We cannot assure you that this allowance will prove to be sufficient to cover future losses, or that future provisions for loan losses will not be materially greater than those we have recorded to date. Losses that exceed our allowance for losses, or an increase in our provision for losses, could materially reduce our earnings. Our loans, including those treated in our consolidated financial statements as FIN 46 assets and liabilities typically do not conform to standard loan underwriting criteria. Many of our loans are subordinate loans. As a result, our loans are relatively illiquid investments. We may be unable to vary our portfolio in response to changing economic, financial and investment conditions. 22 The existence of hazardous or toxic substances on a property will reduce its value and our ability to sell the property in the event of a default in the loan it underlies. Contamination of a real property by hazardous substances or toxic wastes not only may give rise to a lien on that property to assure payment of the cost of remediation, but also can result in liability to us as a lender, or, if we assume ownership or management, as an owner or operator, for that cost regardless of whether we know of, or are responsible for, the contamination. In addition, if we arrange for disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses to remediate contaminated properties and may materially limit use of these properties. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Our income from our real estate operations includes accretion of discount, which is a non-cash item. For a discussion of accretion of discount, see "Business - Real Estate Finance - Accounting for Discounted Loans." For the years ended September 30, 2003, 2002 and 2001, accretion of discount, net of collection of interest, was $2.0 million, $3.2 million and $5.9 million, respectively. We accrete income on a loan to a maximum amount equal to the difference between our cost basis in the loan and the present value of the estimated cash flows from the property underlying the loan. If the actual cash flows from the property are less than our estimates, or if we reduce our estimates of cash flows, our earnings may be adversely affected. Moreover, if we sell a loan, or foreclose upon and sell the underlying property, and the amount we receive is less than the amount of our carrying cost, we will recognize an immediate charge to our allowance for losses or, if that amount is insufficient to absorb the shortfall and provide for possible losses on remaining real estate investments, our statement of operations. In addition, the property owners have obtained senior lien financing with respect to nine loans. The senior loans are with recourse only to the properties securing them subject to certain standard exceptions, which we have guaranteed. These exceptions relate principally to the following: - fraud or intentional misrepresentation in connection with the loan documents; - misapplication or misappropriation of rents, insurance proceeds or condemnation awards during continuance of an event of default or, at any time, of tenant security deposits or advance rents; - payments of fees or commissions to various persons related to the borrower or to us during an event of default, except as permitted by the loan documents; - failure to pay taxes, insurance premiums or specific other expenses, failure to use property revenues to pay property expenses, and commission of criminal acts or waste with respect to the property; - environmental violations; and - the undismissed or unstayed bankruptcy or insolvency of borrower. We account for our investment in the Trapeza entities, described in "Business-Financial Services," by the equity method of accounting. Accordingly, we recognize our percentage share of any income or loss of these entities. Because the Trapeza entities are investment companies for accounting purposes, such income or loss will include a "mark-to-market" adjustment to reflect the net changes in value, including unrealized appreciation or depreciation, in investments and swap agreements. Such value will be impacted by changes in the underlying quality of the Trapeza entities' investments, and by changes in interest rates. To the extent that the Trapeza entities' investments are securities denominated at a fixed rate of interest, increases in interest rates will likely cause the value of the investments to fall and decreases in interest rates will likely cause the value of the investments to rise. The Trapeza entities' various interest rate hedges and swap agreements will also change in value with changes in interest rates. Accordingly, our income or loss from our Trapeza investments, and from future similar collateralized debt issuer investments, may be volatile as interest rates change, and/or if the underlying credit quality of their investments changes. 23 Before fiscal 2000, we entered into a series of standby commitments with some participants in our loans which obligate us to repurchase their participations or substitute a performing loan if the borrower defaults. At September 30, 2003, the participations as to which we had standby commitments had aggregate outstanding balances of $6.4 million. At September 30, 2003, we also were contingently liable under guarantees of $1.2 million in mortgage loan receivables connected with a discontinued operation and contingently liable under guarantees of $1.9 in standby letters of credit issued in connection with Atlas America and our lease of office space in New York City. A real estate investment partnership in which we have a general partner interest, has obtained senior lien financing with respect to four properties it acquired. The senior liens are with recourse only to the properties securing them subject to certain standard exceptions, which we have guaranteed. These guarantees expire as the related indebtedness is paid down over the next ten years. In addition, property owners have obtained senior lien financing with respect to six of our loans. The senior liens are with recourse only to the properties securing them subject to certain standard exceptions, which we have guaranteed. These guarantees expire as the related indebtedness is paid down over the next six years. We believe the likelihood of our being required to pay any claims under any of them is remote under the facts and circumstances pertaining to each of them. An adverse change in these facts and circumstances could cause us to determine that the likelihood that a particular contingency may occur is no longer remote. In that event, we may be required to include all or a portion of the contingency as a liability in our financial statements, which could result in: - violations of restrictions on incurring debt contained in our senior notes or in agreements governing our other outstanding debt; and - prohibitions on additional borrowings under our credit lines. In addition, if one or more of these contingencies were to occur, we may not have sufficient funds to pay them and, in order to meet our obligations, may have to sell assets at times and for prices that are disadvantageous to us. Subsidiaries of ours currently serve as general partners of five public equipment leasing partnerships, including one in the offering stage, two private real estate investment partnerships, including one in the offering stage, and five private investment partnerships that have invested and will invest in issuers of debt obligations collateralized by trust preferred securities, one of which is in the offering stage. We intend to develop further investment partnerships for which we will act as general partner. As a general partner, each subsidiary is contingently liable for the obligations of these partnerships to the extent that their obligations cannot be repaid from partnership assets or insurance proceeds. ITEM 2. PROPERTIES We maintain our executive office, real estate finance, leasing and financial services operations in Philadelphia, Pennsylvania under leases for 18,000 square feet. These leases, which expire in May 2008, contains extension options through 2033, and is located in an office building in which we have a 50% equity interest. We also maintain a 3,200 square foot office in New York, New York under a lease agreement that expires in December 2006. 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 lease one 1,400 square foot field office in Ohio under a lease expiring in 2009 and one 3,100 square foot field office in Pennsylvania under a lease expiring in 2005. In addition, we lease other field offices in Ohio and New York on a month-to-month basis. We also rent 9,300 square feet of office space in Uniontown, Ohio under a lease expiring in February 2006. All of these properties are used for our energy operations. 24 Energy Production. The following table sets forth the quantities of our natural gas and oil production, average sales prices, average production costs per equivalent unit of production and average exploration costs per equivalent unit of production, for the periods indicated. Average Production Average Sales Price Production ---------------------- --------------------- Cost per Fiscal Year Oil (Bbls) Gas (Mcf) per Bbl per Mcf (1) Mcfe (2) - ----------- ---------- --------- ------- ----------- ---------- 2003....... 160,048 6,966,899 $ 26.91 $ 4.92 $ .84 2002....... 172,750 7,117,276 $ 20.45 $ 3.56 $ .82 2001....... 177,437 6,342,667 $ 25.56 $ 5.04 $ .84 - ---------- (1) Our average sales prices before the effects of hedging was $5.08, $3.57 and $5.13 for the fiscal years ending in 2003, 2002 and 2001, respectively. (2) Production costs include labor to operate the wells and related equipment, repairs and maintenance, materials and supplies, property taxes, severance taxes, insurance, gathering charges and production overhead. Productive wells. The following table sets forth information as of September 30, 2003 regarding productive natural gas and oil wells in which we have a working interest: Number of Productive Wells -------------------------- Gross (1) Net (1) --------- ------- Oil wells................................ 331 272 Gas wells................................ 4,324 2,338 --------- ------- 4,655 2,610 ========= ======= - ---------- (1) Includes our equity interest in wells owned by 84 investment partnerships for which we serve as general partner and various joint ventures. Does not include our royalty or overriding interests in 619 other wells. Developed and Undeveloped Acreage. The following table sets forth information about our developed and undeveloped natural gas and oil acreage as of September 30, 2003. The information in this table includes our equity interest in acreage owned by investment partnerships sponsored by us. Developed Acreage Undeveloped Acreage ----------------- ------------------- Gross Net Gross Net ------- ------- ------- ------- Arkansas....................... 2,560 403 - - Kansas......................... 160 20 - - Kentucky....................... 924 462 12,106 6,053 Louisiana...................... 1,819 206 - - Mississippi.................... 40 3 - - Montana........................ - - 2,650 2,650 New York....................... 20,236 15,417 12,004 12,004 North Dakota................... 639 96 - - Ohio........................... 115,709 96,600 41,498 37,989 Oklahoma....................... 4,323 468 - - Pennsylvania................... 73,784 73,701 126,277 126,277 Texas.......................... 4,520 329 - - West Virginia.................. 1,078 539 10,806 5,403 Wyoming........................ - - 80 80 ------- ------- ------- ------- 225,792 188,244 205,421 190,456 ======= ======= ======= ======= 25 The leases for our developed acreage generally have terms that extend for the life of the wells, while the leases on our undeveloped acreage have terms that vary from less than one year to five years. We paid rentals of approximately $386,300 in fiscal 2003 to maintain our leases. 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, we conduct only a perfunctory title examination at the time we acquire a property. Before we commence drilling operations, we conduct an extensive title examination and we perform curative work on defects that 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, 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. Drilling activity. The following table sets forth information with respect to the number of wells completed for the periods indicated, regardless of when drilling was initiated.
Exploratory Wells Development Wells ------------------------------- ------------------------------ Productive Dry Productive Dry --------------- ------------ ------------ ------------ Fiscal Year Gross Net Gross Net Gross Net Gross Net - ----------- ----- --- ----- --- ----- --- ----- --- 2003............. - - - - 295.0 92.9 1 .33 2002............. - - - - 246.0 78.7 6 2.00 2001............. - - 1.0 .18 256.0 76.6 1 .27
Delivery Commitments. We are not obligated to provide fixed quantities of oil in the future. At our option, we from time to time make short-term delivery commitments for a portion of our natural gas. See Item 7A, "Quantitative and Qualitative Disclosures of Market Risk-Energy-Commodity Price Risk." Natural Gas and Oil Reserve Information. The following tables summarize information regarding our estimated proved natural gas and oil reserves as of the dates indicated. All of our reserves are located in the United States. We base our estimates relating to our proved natural gas and oil reserves and future net revenues of natural gas and oil reserves upon reports prepared by Wright & Company, Inc. In accordance with SEC guidelines, we make the standardized and SEC PV-10 estimates of future net cash flows from proved reserves using natural gas and oil sales prices in effect as of the dates of the estimates which are held constant throughout the life of the properties. We based our estimates of proved reserves upon the following weighted average prices: Years Ended September 30, ----------------------------- 2003 2002 2001 -------- -------- ------ Natural gas (per Mcf)...................... $ 4.96 $ 3.80 $ 3.81 Oil (per Bbl).............................. $ 26.00 $ 26.76 $ 19.60 26 Reserve estimates are imprecise and may change as additional information becomes available. Furthermore, estimates of natural gas and oil reserves, of necessity, are projections based on engineering data. 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 natural gas and oil 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 our consultants, 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 estimated by Wright & Company in preparing its reports. The amounts and timing of future operating and development costs may also differ from those used. Accordingly, the reserves set forth in the following tables ultimately may not be produced and the proved undeveloped reserves may not be developed within the periods anticipated. You should not construe the estimated PV-10 values as representative of the fair market value of our proved natural gas and oil properties. PV-10 values 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 depends upon the accuracy of the assumptions upon which they were based. We evaluate natural gas reserves at constant temperature and pressure. A change in either of these factors can affect the measurement of natural gas reserves. We deduct operating costs, development costs and production-related and ad valorem taxes in arriving at the estimated future cash flows. We make no provision for income taxes, and base the estimates on operating methods and conditions prevailing as of the dates indicated. 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. For additional information concerning our natural gas and oil reserves and estimates of future net revenues, see Note 18 of the Notes to Consolidated Financial Statements.
Proved Natural Gas and Oil Reserves ------------------------------------------ At September 30, ------------------------------------------ 2003 2002 2001 ------------ ---------- ------------ Natural gas reserves (Mmcf): Proved developed reserves.............................................. 87,760 83,996 80,249 Proved undeveloped reserves............................................ 45,533 39,226 37,868 ------------ ------------ ------------ Total proved reserves of natural gas................................... 133,293 123,222 118,117 ============ ============ ============ Oil reserves (Mbbl): Proved developed reserves.............................................. 1,825 1,846 1,735 Proved undeveloped reserves............................................ 30 32 66 ------------ ------------ ------------ Total proved reserves of oil........................................... 1,855 1,878 1,801 ============ ============ ============ Total proved reserves (Mmcfe).......................................... 144,423 134,490 128,923 ============ ============ ============ Standardized measure of discounted future cash flows (in thousands).......................................................... $ 144,335 $ 104,126 $ 98,712 ============ ============ ============ PV-10 estimate of cash flows of proved reserves (in thousands): Proved developed reserves.............................................. $ 164,617 $ 120,260 $ 109,288 Proved undeveloped reserves............................................ 26,802 12,209 17,971 ------------ ------------ ------------ Total PV-10 estimate................................................... $ 191,419 $ 132,469 $ 127,259 ============ ============ ============
27 Dismantlement, Restoration, Reclamation and Abandonment Costs. When we determine that a well is no longer capable of producing natural gas or oil in economic quantities, we must dismantle the well and restore and reclaim the surrounding area before we can abandon the well. We contract these operations to independent service providers to whom we pay a fee, currently averaging approximately $7,700 per well. The contractor will also salvage the equipment on the well, which we then sell in the used equipment market. Our proceeds from the sales of salvaged equipment currently range between $6,900 and $11,000 per well. Under the partnership agreements of our investment drilling partnerships, which own substantially all of our wells, we are allocated abandonment costs in proportion to our partnership interest (generally between 27% and 33%) and are allocated between 66% and 100% of the salvage proceeds. As a consequence, we generally receive revenues from salvaged equipment at least equal to, and typically exceeding, our share of the related costs. See Note 2 of the notes to Consolidated Financial Statements, "Asset Retirement Obligations." ITEM 3. LEGAL PROCEEDINGS We are a defendant in a proposed class action originally 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 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 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 allegedly should have been paid. We are also a 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 No matter was submitted to a vote of security holders during the quarter ended September 30, 2003. 28 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is quoted on the Nasdaq National 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. High Low --------- --------- Fiscal 2003 Fourth Quarter.................................. $ 12.50 $ 9.79 Third Quarter................................... $ 11.04 $ 7.86 Second Quarter.................................. $ 9.50 $ 7.52 First Quarter................................... $ 9.50 $ 7.26 Fiscal 2002 Fourth Quarter.................................. $ 11.24 $ 7.48 Third Quarter................................... $ 11.65 $ 9.78 Second Quarter.................................. $ 11.24 $ 8.22 First Quarter................................... $ 9.80 $ 7.89 As of December 15, 2003, there were 17,354,300 shares of common stock outstanding held by 625 holders of record. We have paid regular quarterly cash dividends on our common stock commencing with the fourth quarter of fiscal 1995. The indenture governing our senior notes restricts our payment of dividends on our common stock unless we meet certain financial tests. However, we expect to redeem the outstanding senior notes, at which time such restrictions will lapse. See Item 1 "Business - General." For information concerning common stock authorized for issuance under our stock option plans and other equity compensation plans and stock options outstanding under these plans, see Note 11 of our Notes to Consolidated Financial Statements. 29 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read together with our consolidated financial statements, the notes to our consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this report. We have derived the selected consolidated financial data set forth below for each of the years ended September 30, 2003, 2002 and 2001, and at September 30, 2003 and 2002 from our consolidated financial statements appearing elsewhere in this report, which have been audited by Grant Thornton LLP, independent accountants. We have derived the selected financial data for the years ended September 30, 2000 and 1999 and at September 30, 2001, 2000 and 1999 from our consolidated financial statements for those periods which have been audited by Grant Thornton LLP but are not included in this report.
As of and for the Years Ended September 30, ------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ---------- ---------- --------- ---------- (in thousands, except per share data) Income statement data: Revenues: Energy......................................... $ 105,262 $ 97,912 $ 94,806 $ 70,552 $ 55,093 Real estate finance............................ 14,335 16,582 16,899 18,649 45,907 Leasing........................................ 4,071 1,246 1,066 - - Equity in earnings in Trapeza entities......... 1,444 185 - - - Interest, dividends, gains and other........... 7,417 5,459 6,222 11,460 8,525 ----------- ---------- ---------- --------- ---------- Total revenues............................... $ 132,529 $ 121,384 $ 118,993 $ 100,661 $ 109,525 =========== ========== ========== ========= ========== Income from continuing operations before income taxes and cumulative effect of change in accounting principle................... $ 14,330 $ 11,772 $ 20,410 $ 7,882 $ 35,775 Provision for income taxes........................ 4,586 3,414 6,327 2,401 11,262 ----------- ---------- ---------- --------- ---------- Income from continuing operations before cumulative effect of change in accounting principle........................................ $ 9,744 $ 8,358 $ 14,083 $ 5,481 $ 24,514 =========== ========== ========== ========= ========== Net (loss) income.............................. $ (2,915) $ (3,309) $ 9,829 $ 18,165 $ 18,460 =========== ========== ========== ========= ========== Net (loss) income per common share-basic: From continuing operations before cumulative effect of change in accounting principle......... $ .57 $ .48 $ .78 $ .24 $ 1.10 =========== ========== ========== ========= ========== Net (loss) income per common share-basic....... $ (.17) $ (.19) $ .55 $ .78 $ .83 =========== ========== ========== ========= ========== Net (loss) income per common share-diluted: From continuing operations before cumulative effect of change in accounting principle......... $ .55 $ .47 $ .76 $ .23 $ 1.07 =========== ========== ========== ========= ========== Net (loss) income per common share-diluted..... $ (.17) $ (.19) $ .53 $ .76 $ .81 =========== ========== ========== ========= ========== Cash dividends per common share................... $ .13 $ .13 $ .13 $ .13 $ .13 =========== ========== ========== ========= ========== Balance sheet data: Total assets...................................... $ 670,782 $ 467,498 $ 466,464 $ 507,831 $ 540,132 Long-term debt (including current maturities)..... $ 133,167 $ 153,089 $ 150,131 $ 134,932 $ 234,028 FIN 46 entities' liabilities...................... $ 186,657 $ - $ - $ - $ - Stockholders' equity.............................. $ 227,454 $ 233,539 $ 235,459 $ 281,215 $ 263,789
30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview During fiscal 2002 and 2001, our operations reflected the dominant position of our energy business. In fiscal 2003, while our energy operations remained the single largest contributor to our revenues, our strategic initiatives in financial services and equipment leasing also began to generate material revenues. We anticipate that these operations will increase in importance to us in fiscal 2004. Our decision in fiscal 2000 to focus our real estate finance operations on managing our existing portfolio of real estate loans and property interests has resulted in a decline in the relative significance of real estate operations to us. However, beginning in fiscal 2002 we began to seek new growth from our real estate operations through the sponsorship of real estate investment partnerships. While the assets in our real estate finance business increased significantly in fiscal 2003 from fiscal 2002 as a percentage of our total assets, the increase was due to the effects of our adoption of FIN 46. This new accounting standard required us to consolidate in our financial statements the assets and liabilities of a number of entities which are borrowers on loans in our portfolio, although our legal relationship as creditor of the entities has not been altered. We have classified $222.7 million of these FIN 46 assets as held for sale and, accordingly, expect to dispose of them in fiscal 2004. The following tables set forth the percentages of revenues and assets allocable to each of our four principal businesses for the periods indicated: Revenues as a Percent of Total Revenues (1) Year Ended September 30, ------------------------ 2003 2002 2001 ---- ---- ---- Energy............................. 79% 81% 80% Real estate finance................ 11% 14% 14% Leasing............................ 3% 1% 1% Financial services (Trapeza)....... 1% - - Assets as a Percent of Total Assets (2) As of September 30, ------------------- 2003 2002 ---- ---- Energy................................... 35% 41% Real estate finance...................... 55% 44% Leasing.................................. 2% 2% Financial services (Trapeza)............. 1% 1% - ---------- (1) The balance (6% in 2003, 4% in 2002 and 5% in 2001) is attributable to revenues derived from corporate assets not attributable to a specific industry segment. (2) The balance (7% in 2003 and 12% in 2002) is attributable to corporate assets not attributable to a specific industry segment. 31 Results of Operations: Energy 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 costs per Mcfe for our energy operations during fiscal 2003, 2002 and 2001:
Years Ended September 30 ---------------------------------------- 2003 2002 2001 ---------- --------- --------- (in thousands) Revenues: Production....................................... $ 38,639 $ 28,916 $ 36,681 Well drilling.................................... 52,879 55,736 43,464 Well services.................................... 7,843 7,871 8,946 Transportation................................... 5,901 5,389 5,715 ---------- --------- --------- $ 105,262 $ 97,912 $ 94,806 ========== ========= ========= Costs and expenses: Production....................................... $ 6,770 $ 6,693 $ 6,185 Exploration...................................... 1,715 1,571 1,661 Well drilling.................................... 45,981 48,443 36,602 Well services.................................... 3,916 3,938 4,151 Transportation................................... 2,444 2,052 2,001 Non-direct....................................... 6,389 6,883 9,376 ---------- --------- --------- $ 67,215 $ 69,580 $ 59,976 ========== ========= =========
Years Ended September 30 ---------------------------------------- 2003 2002 2001 ---------- --------- --------- Revenues (in thousands): Gas (1).......................................... $ 34,276 $ 25,359 $ 31,945 Oil.............................................. $ 4,307 $ 3,533 $ 4,535 Production volumes: Gas (Mcf/day) (1) (2)............................ 19,087 19,499 17,377 Oil (Bbls/day)................................... 438 473 486 Average sales prices: Gas (per Mmcf) (2)............................... $ 4.9 $ 3.56 $ 5.04 Oil (per Bbl).................................... $ 26.9 $ 20.45 $ 25.56 Production costs (3): As a percent of sales............................ 18% 23% 17% Per Mcfe......................................... $ .84 $ .82 $ .84
- ---------- (1) Excludes sales of residual gas and sales to landowners. (2) Our average sales price before the effects of hedging was $5.08, $3.57 and $5.13 for the years ended 2003, 2002 and 2001, respectively. (3) Production costs include labor to operate the wells and related equipment, repairs and maintenance, materials and supplies, property taxes, severance taxes, insurance, gathering charges and production overhead. 32 Our well drilling revenues and expenses represent the billings and costs associated with the completion of 282, 242 and 234 net wells for partnerships sponsored by Atlas America in fiscal 2003, 2002 and 2001, respectively. The following table sets forth information relating to these revenues and costs and expenses during the periods indicated:
Years Ended September 30, -------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (in thousands) Average drilling revenue per well..................... $ 187 $ 230 $ 186 Average drilling cost per well........................ 163 200 156 ---------- ---------- ---------- Average drilling gross profit per well................ $ 24 $ 30 $ 30 ========== ========== ========== Gross profit margin................................... $ 6,898 $ 7,293 $ 6,862 ========== ========== ========== Gross margin percent.................................. 13% 13% 16% ========== ========== ==========
Year Ended September 30, 2003 Compared to Year Ended September 30, 2002 Our natural gas revenues were $34.3 million in fiscal 2003, an increase of $8.9 million (35%) from $25.4 million in fiscal 2002. The increase was due to a 38% increase in the average sales price of natural gas partially offset by a 2% decrease in production volumes. The $8.9 million increase in natural gas revenues consisted of $9.7 million attributable to price increases, partially offset by $740,000 attributable to volume decreases. Production volumes decreased because normal production declines in our existing wells were not offset by the new wells we had drilled in Crawford County, Pennsylvania, since those wells could not be brought on line until the extension of our Crawford gathering system had been completed. The Crawford extension was completed in the fourth quarter of fiscal 2003. Our oil revenues were $4.3 million in fiscal 2003, an increase of $774,000 (22%) from $3.5 million in fiscal 2002. The increase resulted from a 32% increase in the average sales price of oil partially offset by a 7% decrease in production volumes. The $774,000 increase in oil revenues consisted of $1.1 million attributable to price increases partially offset by $342,000 attributable to volumes decreases. The decrease in oil volumes is a result of the natural production decline inherent in the life of a well. We did not offset the decline through the addition of new wells, as substantially all of the wells we have drilled during the past several years have targeted natural gas reserves. Our well drilling gross margin was $6.9 million in the year ended September 30, 2003, a decrease of $395,000 (5%) from $7.3 million in the year ended September 30, 2002. In the year ended September 30, 2003, the decrease of $395,000 was attributable to a decrease in the gross profit per well ($1.4 million) partially offset by an increase in the number of wells drilled ($978,000). Our gross profit per well decreased as a result of a decrease in our average cost per well which, because our drilling contracts are on a "cost plus" basis (typically cost plus 15%), determines our average revenue per well. The decrease in our average cost per well in fiscal 2003 resulted from drilling a portion of our wells to a more shallow formation making these wells less expensive to drill. In addition, in certain areas where we have become more active, many of our wells either have not required fracture stimulation or have needed less equipment than wells we have drilled in prior years, thus reducing the average cost per well. Although we raised approximately $23.7 million more in drilling funds in fiscal 2003 than in fiscal 2002, $14.1 million of these funds raised in fiscal 2003 had not been recognized as income as of September 30, 2003 due to the timing of drilling operations. We expect these amounts will be recognized as income in fiscal 2004. In addition, we raised $40.0 million in the first quarter of fiscal 2004. We anticipate drilling revenues and related costs to be substantially higher than in fiscal 2003. Our transportation revenues, which are derived from our natural gas transportation agreements with partnerships we sponsor, increased $512,000 (10%) in fiscal 2003 to $5.9 million from $5.4 million in fiscal 2002. The increase was a result of a 6% increase in natural gas volumes transported by Atlas Pipeline Partners and an increase in the average prices, upon which the fees chargeable under a substantial portion of our transportation contracts are based, received for natural gas transported by Atlas Pipeline Partners in fiscal 2003 as compared to fiscal 2002. 33 Our transportation expenses increased 19% in the year ended September 30, 2003, as compared to the similar prior year period. This increase resulted from an increase in compressor expenses due to the addition of more compressors and increased compressor lease rates. Compressors were added to increase the transportation capacity of our gathering systems. Our exploration costs were $1.7 million in the year ended September 30, 2003, an increase of $144,000 (9%) from the year ended September 30, 2002. The increase in the year ended September 30, 2003 as compared to the prior period was attributable to expenditures for lease costs of $275,000 which were charged to operations upon our decision to discontinue drilling on certain leases. Our non-direct expenses were $6.4 million in fiscal 2003, a decrease of $494,000 (7%) from $6.9 million in fiscal 2002. These expenses include, among other things, salaries and benefits not allocated to a specific energy activity, costs of running our energy corporate office, partnership syndication activities and outside services. These expenses were partially offset by reimbursements we received for costs we incurred in our partnership management and drilling activities, resulting from an increase in the number of wells we drilled and managed during the year as compared to the prior year. Reimbursements received by us related to our drilling activities increased $470,000 in year ended September 30, 2003 as compared to the year ended September 30, 2002. In addition, we more closely allocated direct costs associated with our other energy activities to those activities, thereby reducing non-direct expenses. Depletion of oil and gas properties as a percentage of oil and gas revenues was 21% in fiscal 2003 compared to 27% in fiscal 2002. 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 oil and gas. Higher gas and oil prices caused depletion as a percentage of oil and gas revenues to decrease in fiscal 2003 as compared to fiscal 2002. Year Ended September 30, 2002 Compared to Year Ended September 30, 2001 Our natural gas revenues were $25.4 million in fiscal 2002, a decrease of $6.6 million (21%) from $31.9 million in fiscal 2001. The decrease was due to a 29% decrease in the average sales price of natural gas partially offset by a 12% increase in production volumes. The $6.6 million decrease in gas revenues consisted of $9.3 million attributable to price decreases, partially offset by $2.7 million attributable to volume increases. Natural gas volume increases resulted from new wells drilled for our partnerships, partially offset by the natural production decline inherent in the life of a well. Our oil revenues were $3.5 million in fiscal 2002, a decrease of $1.0 million (22%) from $4.5 million in fiscal 2001. The decrease resulted from a 20% decrease in the average sales price of oil and a 3% decrease in production volumes. The $1.0 million decrease in oil revenues consisted of $906,000 attributable to price decreases, and $96,000 attributable to volume decreases. The decrease in oil volumes is a result of the natural production decline inherent in the life of a well. This decline was not offset by new wells added, as the majority of the wells we have drilled during the past several years targeted gas reserves. Our well drilling gross margin was $7.3 million in fiscal 2002, an increase of $431,000 (6%) from $6.9 million in fiscal 2001 due to an increase in the number of wells drilled ($241,000) and the gross profit per well ($190,000), during fiscal 2002 as compared to fiscal 2001. Both the average revenue and cost per well increased $44,000 in fiscal 2002 as compared to fiscal 2001. Both the revenue and cost per well are affected by changes in oil and gas prices and competition for drilling equipment and services. Demand for drilling equipment and services increased in the fiscal year ended September 30, 2002 as compared to fiscal 2001 as a result of increases in the prices obtainable for natural gas in fiscal 2001, resulting in an increase in the cost to us of obtaining such equipment and services. In fiscal 2002, we changed the structure of our drilling contracts to a cost-plus basis from a turnkey basis. Cost-plus contracts protect us in an inflationary environment while limiting our profit margin. 34 Our well services revenues decreased $1.1 million (12%) in fiscal 2002 to $7.9 million as compared to $8.9 million in fiscal 2001 primarily as a result of a decrease in gas marketing revenues. We sold our gas marketing operation in fiscal 2000, and, while we maintained a small in-house gas marketing operation in 2001, we significantly reduced our activities in this area in fiscal 2002. The decrease was partially offset by an increase in fee income due to an increase in the number of wells we operate as a result of marketing revenues from new partnership wells drilled during fiscal 2002 and 2001. Our well service expenses decreased 5% in fiscal 2002 as compared to the prior year. The decrease in fiscal 2002 also resulted from our decreased gas marketing activities, partially offset by an increase in labor costs due to an increase in the number of wells we service. Our transportation revenues, which derive from our natural gas transportation agreements with partnerships we sponsor, decreased $326,000 (6%) in fiscal 2002 to $5.4 million from $5.7 million in fiscal 2001. The decrease was a result of a decrease in the average prices received for natural gas transported by our pipelines, upon which our transportation contracts are based. While we reduced our average production cost from $.84 per Mcf in fiscal 2001 to $.82 per Mcf in fiscal 2002, our production costs increased $508,000 (8%) to $6.7 million in fiscal 2002 from $6.2 million in fiscal 2001 as a result of an increase in the number of wells in which we have an interest and transportation expenses associated with the increased volumes we produced to our interest. Our non-direct expenses were $6.9 million in fiscal 2002, a decrease of $2.5 million (27%) from $9.4 million in fiscal 2001. These expenses include, among other things, salaries and benefits not allocated to a specific energy activity, costs of running our energy corporate office, partnership syndication activities and outside services. These expenses were partially offset by fees we earned from our partnership management activities, resulting from an increase in the number of wells drilled and managed during the year as compared to the prior year. In addition, we more closely allocated direct costs associated with our other energy activities to those activities, thereby reducing non-direct expenses. Depletion of oil and gas properties as a percentage of oil and gas revenues was 27% in fiscal 2002 compared to 17% in fiscal 2001. 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 oil and gas. Lower gas prices caused depletion as a percentage of oil and gas revenues to increase in fiscal 2002 as compared to fiscal 2001. Results of Operations: Real Estate Finance During fiscal 2003, 2002 and 2001, our real estate finance operations were affected by three principal trends or events: - We determined to selectively resolve the loans in our existing portfolio through repayments, sales, refinancings, restructurings and foreclosures. - In fiscal 2002 to seek growth in our real estate business through the sponsorship of real estate investment partnerships in which we are also an investor. - In fiscal 2003, we adopted FIN 46. The principal effects of the first two factors has been to reduce the number of our real estate loans, while increasing our interests in real property and, as a result of repayments, sales, refinancings and restructurings, increasing our cash flow from loan resolutions. The principal effect of FIN 46 has been to consolidate in our financial statements the assets and liabilities of a number of borrowers (although not affecting our creditor-debtor legal relationship with these borrowers and not causing these assets and obligations to become our legal assets or obligations). Our FIN 46 assets and liabilities were $300.9 million and $186.7 million, respectively, at September 30, 2003. The adoption of FIN 46 also resulted in a $13.9 million non-cash after-tax cumulative effect adjustment in the fourth quarter of fiscal 2003. For a more detailed discussion of FIN 46, you should read "Cumulative Effect of Change in Accounting Principle" and Note 3 to the Notes to the Consolidated Financial Statements. 35 The following table sets forth information relating to the revenues recognized and costs and expenses incurred in our real estate finance operations during the periods indicated:
Years Ended September 30, --------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (in thousands) Revenues: Interest on loans...................................................... $ 6,103 $ 9,907 $ 9,251 Accreted discount (net of collection of interest) on loans............. 1,962 3,212 5,923 Gains on resolutions of loans and loan payments in excess of the carrying value of loans........................................ 1,024 2,398 1,612 Fee income from sponsorship of partnerships............................ 3,062 - - Rental properties...................................................... 997 611 442 FIN 46 revenues........................................................ 948 - - Equity in earnings (loss) of equity investees.......................... 239 454 (329) ---------- ---------- ---------- $ 14,335 $ 16,582 $ 16,899 ========== ========== ========== Cost and expenses: Real estate general and administrative................................. $ 3,880 $ 2,423 $ 1,504 Rental properties...................................................... 854 - - FIN 46 expenses........................................................ 730 - - ---------- ---------- ---------- $ 5,464 $ 2,423 $ 1,504 ========== ========== ==========
Year Ended September 30, 2003 Compared to Year Ended September 30, 2002 Revenues from our real estate finance operations decreased $2.3 million (14%) from $16.6 million in fiscal 2002 to $14.3 million in fiscal 2003. We attribute these changes to the following: - A decrease in interest income and accreted discount of $5.1 million (38%) in fiscal 2003 as compared to fiscal 2002, primarily resulting from the following: - The sale or repayment of three loans in fiscal 2003 which decreased interest income by $1.3 million in fiscal 2003 as compared to fiscal 2002. - The completion of accretion of discount on one loan, which decreased interest income by $1.6 million in fiscal 2003 as compared to fiscal 2002. - A decrease in our average accretion rate, resulting in a decrease in interest income of $84,000 in fiscal 2003 as compared to fiscal 2002. - The early adoption of FIN 46 on July 1, 2003 resulted in our consolidating 14 entities and resulted in a decrease in interest income of $2.1 million. - A decrease of $1.4 million (57%) in gains on resolutions of loans and loan payments in excess of carrying value in fiscal 2003 as compared to fiscal 2002, resulting primarily from the following: - In fiscal 2003, we received repayments of $10.7 million on three loans having aggregate book values of $9.7 million, resulting in gains of $1.0 million. - In fiscal 2002, we sold one loan having a book value of $1.0 million to RAIT for $1.8 million, resulting in a gain of $757,000. - In fiscal 2002, we received repayments of $24.9 million on two loans having an aggregate book value of $23.3 million, resulting in gains of $1.6 million. 36 - An increase of $3.1 million in fee income in fiscal 2003, as compared to fiscal 2002. This increase resulted primarily from fees we earned for services provided to the real estate investment partnership which we sponsored. These fees relate to the purchase and third party financing of four partnership properties. We anticipate earning additional fees from this partnership and any future real estate investment partnerships which we may sponsor. Gains on resolutions of loans and loan payments in excess of the carrying value of loans (if any) and the amount of fees received (if any) vary from transaction to transaction and there may be significant variations in our gains on resolutions and fee income from period to period. Costs and expenses of our real estate finance operations increased $3.0 million (126%) from $2.4 million in fiscal 2002 to $5.4 million in fiscal 2003. Primarily resulting from the following: - An increase in wages and benefits of $532,000 due to the addition of personnel in connection with of our sponsorship and management of our real estate investment partnerships. - An increase in insurance and professional services fees of $716,000 due to an increase in insurance rates in general and additional activity associated with the management of our loan portfolio and investment partnership. - Rental property expenses represent expenses associated with two properties which we acquired in fiscal 2003 through foreclosure. - FIN 46 expenses associated with 14 real estate entities consolidated upon adoption on July 1, 2003 of FIN 46 (see Note 3 to our consolidated financial statements). Year Ended September 30, 2002 Compared to Year Ended September 30, 2001 - An increase of $786,000 (49%) in gains from resolution of loans and loan repayments in excess of carrying values in fiscal 2002 as compared to fiscal 2001, resulting primarily from the following: - In fiscal 2002, we sold one loan having a book value of $1.0 million to RAIT for $1.8 million, resulting in a gain of $757,000, and we sold a second loan having a book value of $22.4 million for $24.0 million, resulting in a gain of $1.6 million. - In fiscal 2001, we sold five loans having aggregate book values of $23.6 million for $25.1 million, resulting in gains of $1.5 million. - In fiscal 2001, we received repayments on two loans having aggregate book values of $130,000, for $225,000, resulting in gains of $95,000. - An increase of $783,000 in our equity earnings in one real estate joint venture in which we own a 50% equity interest. - An increase in net rental and fee income of $169,000 to $611,000 in fiscal 2002 from $442,000 in fiscal 2001, primarily resulting from the receipt of a consulting fee from another real estate joint venture in which we own a 25% equity interest. Gains on resolutions of loans and loan payments in excess of the carrying value of loans (if any) and the amount of fees received (if any) vary from transaction to transaction and there may be significant variations in our gains on resolutions and fee income from period to period. Costs and expenses of our real estate finance operations were $2.4 million in fiscal 2002, an increase of $919,000 (61%) from $1.5 million in the same period of the prior fiscal year. The increase primarily resulted from an increase in professional fees of $577,000 associated with litigation settled in fiscal 2002 regarding two of our real estate loans. In addition, wages and benefits increased $308,500 in fiscal 2002 as a result of the addition of a new president and other personnel in our real estate subsidiary to manage our existing portfolio of commercial loans and real estate joint ventures and to expand our real estate operations through the sponsorship of real estate investment partnerships. One real estate partnership sponsored in fiscal 2002 was in its offering phase in that year and, as a consequence, did not generate fees or other revenues for us. 37 Results of Operations: Financial Services Our equity in the earnings of the Trapeza entities were $1.4 million in fiscal 2003, an increase of $1.3 from $185,000 in fiscal 2002. The increase in fiscal 2003 reflects our equity earnings subsequent to completion of the funding and investment stages of three of the Trapeza CDO issuers we sponsored. Results of Operations: Leasing In fiscal 2002 we began to pursue expansion of our equipment leasing operations through sponsorship of equipment leasing programs. Our first such program commenced operations in March 2003. We intend to further develop our equipment leasing operations through the sponsorship of subsequent equipment leasing programs. In addition, in April 2003, we entered into a multi-year agreement to originate and service leases on behalf of Merrill Lynch Equipment Finance LLC. The following table sets forth certain information relating to the revenue recognized and costs and expenses incurred in our equipment leasing operations during the periods indicated:
Years Ended September 30, ------------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (in thousands) Revenues: Partnership management................. $ 3,416 $ 954 $ 1,066 Leasing................................ 491 262 - Other.................................. 164 30 - ---------- ---------- ---------- $ 4,071 $ 1,246 $ 1,066 ========== ========== ========== Costs and expenses......................... $ 5,883 $ 745 $ 695 ========== ========== ==========
Year Ended September 30, 2003 Compared to Year Ended September 30, 2002 Our leasing revenues were $4.1 million in fiscal 2003, an increase of $2.9 million from $1.2 million in fiscal 2002, primarily due to management fees and leasing income associated with our new leasing investment programs. Our leasing expenses were $5.9 million in fiscal 2003, an increase of $5.1 million from $745,000 in fiscal 2002, primarily due to expenses associated with the expansion of our operations in connection with our new leasing programs. Year Ended September 30, 2002 Compared to Year Ended September 30, 2001 Our leasing revenues were $1.2 million in fiscal 2002, an increase of $180,000 from $1.1 million in fiscal 2001, primarily due to lease income and fees associated with the commencement of our new leasing operations. Our leasing expenses were $745,000 in fiscal 2002, an increase of $50,000 from $695,000 in fiscal 2001, primarily due to expenses associated with the startup of our new leasing operations. 38 Results of Operations: Other Revenues, Costs and Expenses Our interest, dividends, gains and other income was $7.4 million in fiscal 2003, an increase of $1.9 million (36%) as compared to $5.5 million in fiscal 2002. The following table sets forth information relating to interest and other income during the periods indicated:
Years Ended September 30, ---------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (in thousands) Dividend income............................... $ 2,628 $ 3,276 $ 2,170 Interest income............................... 671 1,242 3,199 Gains on sale of RAIT shares.................. 4,036 - - Other......................................... 82 941 853 ---------- ---------- ---------- $ 7,417 $ 5,459 $ 6,222 ========== ========== ==========
Year Ended September 30, 2003 Compared to Year Ended September 30, 2002 Dividend income decreased $648,000 (20%) to $2.6 million in fiscal 2003 from $3.3 million in fiscal 2002. The decrease was due to the sale of RAIT Investment Trust shares during the year ended September 30, 2003, thus lowering our dividends received. Interest income decreased $571,000 (46%) to $671,000 in fiscal 2003 from $1.2 million in fiscal 2002. This decrease was the result of a decrease in funds invested and as well as interest rates earned on those funds. Gains on sale of RAIT shares for the year ended September 30, 2003 were $4.0 million. There were no such sales in the year ended September 30, 2002. Other income decreased $859,000 to $82,000 in fiscal 2003 from $941,000 in fiscal 2002 due to gains associated with the sale of certain gas and oil assets in fiscal 2002 which were not located within the Appalachian basin and thus did not fit our business model. Our general and administrative expenses decreased $964,000 (12%) to $6.9 million in fiscal 2003 from $7.9 million in fiscal 2002. This decrease primarily resulted from the allocation of greater amounts of salaries and benefits to our energy and leasing segments, which reflects management time spent on these segments as a result of their growth and a decrease in our pension costs. These decreases were partially offset by an increase in professional services associated with a proposed offering of debt securities that we terminated prior to completion. Our provision for possible losses increased $455,000 (33%) to $1.8 million in fiscal 2003 as compared to $1.4 million in fiscal 2002. This increase resulted primarily from estimated reductions in future cash flows from a property underlying one of our loans. In the year ended September 30, 2003, we foreclosed on the property underlying this loan and three other loans. In addition, in the year ended September 30, 2002, we recovered $117,000 previously written off due to the bankruptcy filing of an energy customer, thus reducing our expense in the prior period. Our provision for legal settlement represents the estimated cost associated with the settlement of an action filed by the former chairman of TRM Corporation as described in Note 15 of our consolidated financial statements. To the extent that our actual cost (because of insurance recovery) is less than the provision, it will be recorded as a reduction to our expenses in the period so determined. 39 We own 39% of the partnership interests in Atlas Pipeline Partners through both our general partner interest and the subordinated units we received at the closing of Atlas Pipeline Partners' public offering. During the year ended September 30, 2003, our ownership interest in Atlas Pipeline decreased from 51% to 39% as the result of the completion by Atlas Pipeline of an offering of limited partner common units. Because we control the operations of Atlas Pipeline Partners, we include it in our consolidated financial statements and show the ownership by the public as a minority interest. The minority interest in Atlas Pipeline Partners earnings was $4.4 million for the year ended September 30, 2003, as compared to $2.6 million for the twelve months September 30, 2002, an increase of $1.8 million (70%). This increase was the result of an increase in Atlas Pipeline Partners' net income principally caused by increases in transportation volumes and rates received and the increase in the percentage interest of common unitholders. Atlas Pipeline Partners' transporation rates vary, to a significant extent, with the price of natural gas which, on average, was higher in fiscal 2003 than fiscal 2002. Our effective tax rate increased to 32% in fiscal 2003 as compared to 29% in fiscal 2002 as a result of a reduction in statutory depletion and certain tax credits, partially offset by a decrease in state income taxes. Year Ended September 30, 2002 Compared to Year Ended September 30, 2001 Our dividend income from RAIT in fiscal 2002, increased due to the purchase in December 2001 of an additional 125,000 RAIT shares; additionally, the amount of dividends declared by RAIT increased. Interest income decreased $2.0 million in fiscal 2002 to $1.2 million from $3.2 million due to the continued decrease in our cash balances from the level at September 30, 2000 which was a result of the sale of our small ticket leasing subsidiary in August 2000, as well as to lower rates on those funds invested. During fiscal 2002 and 2001, such funds were used to invest in our drilling partnerships and to repurchase our common stock. Gains on sales of property and equipment increased primarily due to the sale of certain gas and oil assets which were not located within the Appalachian basin and thus did not fit our business model for our exploration and production operations. Our general and administrative expenses increased $2.2 million (39%) to $7.9 million in fiscal 2002, from $5.7 million in fiscal 2001. This increase primarily resulted from increases in salaries and benefits, including health insurance, and increases in the costs of our professional services. Our interest expense was $12.8 million in fiscal 2002, a decrease of $1.9 million (13%) from $14.7 million in fiscal 2001. This decrease primarily resulted from our repurchase of senior notes during fiscal 2002, which reduced interest by $1.2 million in as compared to fiscal 2001. In addition, in energy and real estate finance, our interest expense decreased $867,000 due to decreases in short-term interest rates in fiscal 2002 as compared to fiscal 2001 which reduced rates under our credit facilities. Our provision for possible losses was $1.4 million in fiscal 2002, an increase of $530,000 (61%) from $863,000 in fiscal 2001. The increase resulted from a $910,000 increase in the allowance for possible losses associated with the write-down of one real estate loan which was sold during fiscal 2002 and an increase in the general allowance for possible losses, offset by the recovery in fiscal 2002 of $117,000 from an account previously written off due to the bankruptcy filing of an energy customer. Our provision for legal settlement represents the maximum amount of our out-of-pocket liability for the settlement of an amended class action complaint instituted in October 1998. To the extent that our actual cost is less than the provision, we will recognize income. In fiscal 2002 and 2001, we owned 51% of the partnership interests in Atlas Pipeline Partners through both our general partners' interest and the subordinated units we received at the closing of Atlas Pipeline Partners' public offering. The minority interest in Atlas Pipeline Partners is the interest of Atlas Pipeline Partners' common unitholders. Because we owned more than 50% of Atlas Pipeline Partners, we included it in our consolidated financial statements for fiscal 2002 and 2001 and showed the ownership by the public as a minority interest. The minority interest in Atlas Pipeline Partners earnings was $2.6 million for the twelve months ended September 30, 2002, as compared to $4.1 million for the twelve months ended September 30, 2001, a decrease of $1.5 million (36%). This decrease was the result of a decrease in Atlas Pipeline Partners' net income principally caused by decreases in transportation fees received. These fees vary with the price of natural gas, which on average was lower in fiscal 2002 than fiscal 2001. 40 Our effective tax rate decreased to 29% in fiscal 2002 as compared to 31% in fiscal 2001 as a result of differences between book and taxable income related to permanently non-deductible goodwill amortization and excess employee remuneration in 2001 and an increase in 2002 in statutory depletion, were partially offset by an increase in 2002 in state income taxes. Discontinued Operations Year Ended September 30, 2003 Compared to Year Ended September 30, 2002 In accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long Lived Assets," our decision in fiscal 2002 to dispose of Optiron Corporation, our former energy technology subsidiary, resulted in the presentation of Optiron as a discontinued operation for the three years ended September 30, 2003. We had held a 50% equity interest in Optiron; as a result of the disposition, we currently hold a 10% equity interest in Optiron. The plan of disposal required Optiron to pay to the Company 10% of Optiron's revenues if such revenues exceeded $2.0 million in the twelve month period following the closing of the transaction. As a result, Optiron became obligated to pay us $295,000. The payment is due in March 2004. Year Ended September 30, 2002 Compared to Year Ended September 30, 2001 On August 1, 2000, we sold our small ticket equipment leasing subsidiary, Fidelity Leasing, Inc., 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. In addition, $10.0 million was placed in escrow as security for our indemnification obligations to the purchasers. The successor in interest to the purchaser, made a series of claims with respect to our indemnification obligations and representations which were settled in December 2002. Under the settlement, we and the successor were released from certain terms and obligations of the original purchase agreements and from claims arising from circumstances known at the settlement date. In addition, we (i) released to the successor the $10.0 million escrow fund; (ii) paid the successor $6.0 million; (iii) guaranteed that the successor will receive payments of $1.2 million from a note, secured by FLI lease receivables, delivered at the close of the FLI sale; and (iv) delivered two promissory notes to the successor, each in the principal amount of $1.75 million, bearing interest at the two-year treasury rate plus 500 basis points, and due on December 31, 2003 and 2004, respectively. We recorded a loss from discontinued operations, net of taxes, of $9.4 million in connection with the settlement. Cumulative Effect of Change in Accounting Principle The cumulative effect of change in accounting principle in fiscal 2002 relates to Optiron which adopted SFAS 142 on January 1, 2002, and as a result of this adoption, realized an impairment and write-down on its books of goodwill associated with the on-going viability of the product with which the goodwill was associated. This impairment resulted in a cumulative effect adjustment of $1.9 million on Optiron's books, and as a result, we recorded our 50% share of this adjustment. 41 In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable Interest Entities". This interpretation changed the method of determining whether certain entities called variable interest entities ("VIE") should be included in our consolidated financial statements. The analysis of whether an entity is a VIE and a result, must be consolidated is based on an analysis of risks and rewards, not control, and represents a significant and complex modification of previous accounting principles. Under FIN 46, VIE is an entity that has (1) equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) equity investors that cannot make significant decisions about the entity's operations, or that do not absorb the expected losses or receive the expected residual returns of the entity. A VIE must be consolidated by its primary beneficiary, which is the party involved with the VIE that has exposure to a majority of the expected losses or a majority of the expected residual returns or both. All other entities are evaluated for consolidation in accordance with SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries" ("SFAS 94"). FIN 46 is applicable to VIEs created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. For VIEs in which an enterprise holds a interest that it acquired before February 1, 2003, FIN 46 is applicable for financial statements issued for the first period ending after December 15, 2003. For any VIEs that must be consolidated under FIN 46, the assets, liabilities and non-controlling interest of the VIE are initially measured at their carrying amounts, as defined in FIN 46, with any difference between the net amount added to the balance sheet and the value at which the primary beneficiary carried its interest in the VIE prior to the adoption of FIN 46 being recognized as a cumulative effect of a change in accounting principle. If determining the carrying amounts is not practicable, the fair value at the date of adoption may be used to measure the assets, liabilities and non-controlling interests of the VIE. We have determined that it was not practicable to determine the carrying values of the VIE's as of the date of the qualifying event and accordingly, have used the fair values at the date of adoption, July 1, 2003. As encouraged by the pronouncement, we early-adopted FIN 46 on July 1, 2003. Consequently, certain entities relating to our real estate finance business have been consolidated in its financial statements for the first time. Several factors that distinguish these entities from others included in our consolidated statements follow: - The assets and liabilities, revenues and expenses of the consolidated VIEs are included in our financial statements. The investments in real estate loans and accreted interest income thereon, which were our variable interests in the VIEs, have been removed from the financial statements. - We consolidated the VIEs because we determined that we were the primary beneficiary of these entities within the meaning of FIN 46. - The assets and liabilities of the VIEs that are now included in our consolidated financial statements are neither our assets nor our liabilities. Liabilities of the VIE can only be satisfied from the VIE's assets, not our assets, nor can we use the VIE's assets to satisfy our obligations. As of July 1, 2003, the date of adoption, the consolidation of FIN 46 entities resulted in the addition of $296.5 million in assets, $185.5 million in liabilities to our consolidated balance sheet and in a $13.9 million after-tax cumulative effect adjustment in our fourth fiscal quarter. In addition, because we classified certain of our FIN 46 assets as being held for sale, the operations of those assets are recognized in our consolidated statement of operations as income (loss) from discontinued operations. We recognized $1.0 million of such income (net of income taxes) in fiscal 2003. FIN 46 has been the subject of significant continuing interpretation by the FASB, and changes to its complex requirements are possible. Currently, it is not possible to conclude whether such changes would be likely to affect the amounts we have recorded. 42 Liquidity and Capital Resources General. Our major sources of liquidity have been funds generated by operations, funds raised and fees earned from investor partnerships, resolutions of real estate loans, borrowings under our existing energy, real estate finance, leasing and corporate credit facilities and the sale of our RAIT Investment Trust shares. We have employed these funds principally in the expansion of our energy operations, the repurchase of our senior notes and common stock, the repayment of our energy credit facility and the acquisition of senior lien interests relating to our real estate loans. The following table sets forth our sources and uses of cash for the periods indicated:
Years Ended September 30, ----------------------------------------- 2003 2002 2001 ----------- ----------- ----------- (in thousands) Provided by continuing operations.................. $ 43,007 $ 6,467 $ 19,058 Used in investing activities....................... (13,978) (24,504) (28,020) Used in financing activities....................... (8,012) (3,477) (58,385) Used in discontinued operations.................... (5,624) (1,398) (1,112) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents... $ 15,393 $ (22,912) $ (68,459) =========== =========== ===========
Our liquidity is affected by national, regional and local economic trends and uncertainties as well as trends and uncertainties more particular to us, including natural gas prices, interest rates and our ability to raise funds through our sponsorship of investment partnerships. While the current favorable natural gas pricing and interest rate environment have been positive contributors to our liquidity, and lead us to believe that we will be able to refinance, or renew, our indebtedness as it matures, there are numerous risks and uncertainties involved. We describe factors affecting our liquidity, as well as the risks and uncertainties relating to our ability to generate this liquidity, in Item 1, "Business - Risk Factors" and in this item in "Results of Operations," "Changes in Prices and Inflation," and "-Contractual Obligations and Commercial Commitments." In fiscal 2004, our liquidity will be affected by our redemption of our senior notes, as described in Item 1, Business - General." Year Ended September 30, 2003 Compared to Year Ended September 30, 2002 We had $41.1 million in cash and cash equivalents on hand at September 30, 2003 as compared to $25.7 million at September 30, 2002. Our ratio of earnings (from continuing operations before income taxes, minority interest and interest expense) to fixed charges was 2.5 to 1.0 in the fiscal year ended September 30, 2003 as compared to 2.1 to 1.0 in the fiscal year ended September 30, 2002. Our working capital at September 30, 2003 was $30.3 million, an increase of $28.2 million from $2.1 million at September 30, 2002. This increase primarily resulted from the classification of $81.2 million of our FIN 46 assets (net of related liabilities) as held for sale, partially offset by the classification of the outstanding $54.0 million principal amount of our senior notes as current liabilities due to their August 1, 2004 maturity date. Our long-term debt (including current maturities) to total capital ratio at September 30, 2003 was 59% as compared to 66% at September 30, 2002. Cash flows from operating activities. Cash provided by operations is an important source of short-term liquidity for us. Net cash provided by operating activities increased $36.5 million in fiscal 2003, as compared to fiscal 2002, primarily due to the following: - Operating assets and liabilities increased $28.4 million primarily as a result of an increase in deferred revenues on drilling contracts at September 30, 2003 as compared to September 30, 2002, due to the timing of investor funds raised and the subsequent use of those funds in our drilling programs. - Gas and oil production revenues increased $9.7 million primarily attributable to a 38% increase in the average price we received for our natural gas production. 43 - Offsetting these increases in operating cash flow was a decrease in collections of interest of $4.1 million associated with our real estate finance segment due in part to our adoption of FIN 46. Cash flows from investing activities. Net cash used in our investing activities decreased $10.5 million in fiscal 2003 as compared to fiscal 2002, primarily due to the following: - A realization of net proceeds of $12.0 million from sale of RAIT shares in fiscal 2003 as compared to a use of $1.9 million to acquire RAIT shares in fiscal 2002. - A decrease of $13.9 million in investments in real estate loans and real estate in fiscal 2003 as compared to 2002. - A decrease of $4.6 million in cash spent on other assets due principally to investments with the commencement of the Trapeza entities and our equipment leasing operation in fiscal 2002, - Offsetting these items was a decrease of $15.2 million in principal payments on notes receivable and proceeds from sale of assets. - An increase in capital expenditures of $6.6 million associated with the expansion of our energy operations. Cash flows from financing activities. Net cash used in our financing activities increased $4.5 million in fiscal 2003 as compared to fiscal 2002, primarily due to the following - An increase in net repayments of debt of $28.3 million in fiscal 2003 as compared to fiscal 2002. - An increase in purchases of treasury stock of $3.1 million in fiscal 2003 as compared to fiscal 2002. - Offsetting these increases were net proceeds of $25.2 million from Atlas Pipeline's public offering in fiscal 2003. - An increase in proceeds from issuance of stock of $2.9 million in fiscal 2003 as compared to fiscal 2002. Year Ended September 30, 2002 Compared to Year Ended September 30, 2001 We had $25.7 million in cash and cash equivalents on hand at September 30, 2002 as compared to $48.6 million at September 30, 2001. Our ratio of earnings (from continuing operations before income taxes, minority interest and interest expense) to fixed charges was 2.1 to 1.0 in the fiscal year ended September 30, 2002 as compared to 2.7 to 1.0 in the fiscal year ended September 30, 2001. Our working capital at September 30, 2002 was $2.1 million, a decrease of $23.8 million from $25.9 million at September 30, 2001 primarily as a result of our use of the proceeds received from the sale of our equipment leasing subsidiary. Our long-term debt (including current maturities) to total capital ratio at September 30, 2002 was 67% as compared to 64% at September 30, 2001. Cash flows from operating activities. Net cash provided by operating activities decreased $12.6 million in fiscal 2002, as compared to fiscal 2001, primarily due to the following: - Gas and oil production revenues decreased $7.6 million, primarily attributable to a 29% and 20% decrease in the price we received for our natural gas and oil production, respectively. - The timing of investor funds raised and the subsequent use of those funds in our drilling activities, decreased operating cash flow by $14.0 million in fiscal 2002 as compared to fiscal 2001. A larger amount of funds were received at September 30, 2001, but not spent on our drilling activities until fiscal 2002. - Prepaid expenses by our equipment leasing operations increased $1.9 million in fiscal 2002 compared to fiscal 2001. This increase was attributable to costs incurred by us which are reimbursable from a public partnership that is currently in its offering stage, depending upon the funds raised by that partnership. 44 - Offsetting these decreases in operating cash flow was an increase of $10.1 million due to lesser amounts owed and paid for income taxes for fiscal 2002 as compared to fiscal 2001. Cash flows from investing activities. Net cash used in our investing activities decreased $3.5 million in fiscal 2002 as compared to fiscal 2001. Our investing activities primarily consisted of capital expenditures for developmental drilling, expansion of Atlas Pipeline Partners' gas gathering facilities and investments in our real estate loans. The decrease in fiscal 2002 was due to $2.4 million decrease in payments received on a note issued in conjunction with the sale of our small ticket leasing subsidiary and a $2.2 million decrease in payments received from our real estate investments. Payments received on real estate investments are normally dependent on third party refinancing or from the sale of a loan and vary from period to period. Cash flows from financing activities. Net cash used in our financing activities decreased $54.9 million in fiscal 2002 as compared to fiscal 2001. The decrease in fiscal 2002 was primarily due to our repurchase of $54.7 million of our common stock in fiscal 2001 through our dutch auction tender offer. Capital Requirements During fiscal 2003, our capital requirements related primarily to our investments in our drilling partnerships and pipeline extensions. In fiscal 2003, we invested approximately $26.6 million in our drilling partnerships and pipeline extensions as compared to $21.3 million in fiscal 2002. We funded these capital expenditures through cash on hand, borrowings under our credit facilities, and from operations. We obtained an increase in our borrowing base on our Wachovia credit facility to $54.2 million in fiscal 2003. Atlas Pipeline also increased its credit facility to $20.0 million to fund its growth and expansion. We have a wide degree of discretion in the level of capital expenditures we must devote in our energy operations on an annual basis and the timing of those expenditures. The amount of our expenditures depends upon the level of funds raised through investment partnerships. We believe cash flow from operations and amounts available under our credit facilities will be adequate to fund our contributions to these partnerships. The level of our capital expenditures will vary in the future depending on commodity market conditions, among others things. We continuously evaluate acquisitions of gas and oil and pipeline assets. If we make any acquisitions, we believe we will be required to access outside capital either through debt or equity placements or through joint venture operations with other energy companies. There can be no assurance that we will be successful in our efforts to obtain outside capital. Pending Acquisition As described in Note 16 to our consolidated financial statements, Atlas Pipeline Partners has agreed to acquire Alaska Pipeline Company for $95.0 million. Atlas Pipeline Partners anticipates that expenses in connection with the transaction will be approximately $4.0 million. The acquisition is contingent upon the satisfaction of certain conditions, principally approval of the transaction by the Regulatory Commission of Alaska and the expiration of waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act. If, as we believe will be the case, Atlas Pipeline Partners obtains these approvals and consummate the transaction, it intends to fund the acquisition price and expenses as follows: - Atlas Pipeline Company will borrow all of the $20.0 million available under its existing credit facility. It will use this amount, plus $4.0 million of working capital, to make a common equity contribution to the SPV. - Friedman, Billings, Ramsey Group, Inc. ("FBR") has committed to make a $25.0 million preferred equity investment in a special purpose vehicle ("the SPV"), which will be jointly owned and controlled by FBR and Atlas Pipeline; such entity will be the acquirer of Alaska Pipeline Company. - The SPV has received a commitment for a $50.0 million credit facility to be administered by Wachovia Bank. It will borrow $50.0 million under this facility. 45 All of this funding will be consolidated in our financial statements as indebtedness. Atlas Pipeline Partner's may seek to replace or repay the funding from Friedman, Billings, Ramsey Group and some portion of either or both of the Wachovia Bank credit facilities with equity capital obtained through an offering of Atlas Pipeline Partner's common units. If Atlas Pipeline Partner's determines not to make an offering of our common units or seek other alternative financing, the debt and preferred equity financings will remain in place. Although the continuation of these financings may reduce our capacity for further borrowing and reduce the amount of cash from operations that would otherwise be available from the combination of Atlas Pipeline Partner's operations with those of Alaska Pipeline Company, we believe that our remaining liquidity and capital resources would be more than sufficient to meet our post-acquisition operational needs. Changes in Prices and Inflation Our revenues, the value of our assets, our ability to obtain bank loans or additional capital on attractive terms and our ability to finance our drilling activities through investment partnerships have been and will continue to be affected by changes in oil and gas prices. Natural gas and oil prices are subject to significant fluctuations that are beyond our ability to control or predict. During fiscal 2003, we received an average of $4.92 per Mcf of natural gas and $26.91 per barrel of oil as compared to $3.56 per Mcf of natural gas and $20.45 per Bbl of oil in fiscal 2002 and $5.04 per Mcf of natural gas and $25.56 per Bbl of oil in fiscal 2001. Although certain of our costs and expenses are affected by general inflation, inflation has not normally had a significant effect on us. However, inflationary trends may occur if the price of natural gas were to increase since such an increase may increase the demand for acreage and for energy equipment and services, thereby increasing the costs of acquiring or obtaining such equipment and services. Environmental Regulation To date, compliance with environmental laws and regulations has not had a material impact on our capital expenditures, earnings or competitive position. We cannot assure you 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. Dividends In the years ended September 30, 2003, 2002 and 2001, we paid dividends of $2.3 million, $2.3 million and $2.4 million, respectively. We have paid regular quarterly dividends since August 1995. The determination of the amount of future cash dividends, if any, is at 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. While we were subject to restrictions on our payment of dividends imposed by the indenture under which our senior notes were issued, these restrictions will lapse upon completion of the redemption of our senior notes. See "Business - General." 46 Contractual Obligations and Commercial Commitments The following tables set forth our obligations and commitments as of September 30, 2003.
Payments Due By Period (in thousands) ---------------------------------------------------------------- Contractual cash obligations: Less than 1 - 3 4 - 5 After 5 Total 1 Year Years Years Years ----------- ----------- ----------- ----------- --------- Long-term debt........................... $ 133,167 $ 59,471 $ 73,660 $ 36 $ - Secured revolving credit facilities...... 7,168 7,168 - - - Capital lease obligations................ - - - - - Operating leases......................... 3,910 1,217 1,792 900 1 Unconditional purchase obligations....... - - - - - Other long-term obligations.............. - - - - - ----------- ----------- ----------- ----------- --------- Total contractual cash obligations....... $ 144,245 $ 67,856 $ 75,452 $ 936 $ 1 =========== =========== =========== =========== =========
Amount of Commitment Expiration Per Period (in thousands) ---------------------------------------------------------------- Other commercial commitments: Less than 1 - 3 4 - 5 After 5 Total 1 Year Years Years Years ----------- ----------- ------------ ----------- --------- Lines of credit........................ $ - $ - $ - $ - $ - Standby letters of credit.............. 1,945 1,275 420 250 - Guarantees............................. 1,161 1,161 - - Standby replacement commitments........ 6,363 1,732 4,631 - - Other commercial commitments........... 257,090 3,211 62,398 66,033 125,448 ----------- ----------- ------------ ----------- --------- Total commercial commitments........... $ 266,559 $ 7,379 $ 67,449 $ 66,283 $ 125,448 =========== =========== ============ =========== =========
Critical Accounting Policies The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues, costs and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, deferred tax assets and liabilities, goodwill and identifiable intangible assets, and certain accrued liabilities. We base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the following policies as critical to our business operations and the understanding of our results of operations. Accounts Receivable and Investments in Real Estate Loans, Ventures and Allowance for Possible Losses. Through our business segments, we engage in credit extension, monitoring, and collection. 47 In energy, in evaluating our allowance for possible losses, we perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current creditworthiness, as determined by our review of our customer's credit information. We extend credit on an unsecured basis to many of our energy customers. At September 30, 2003, our credit evaluation indicated that we have no need for an allowance for possible losses for our oil and gas receivables. In real estate finance, in evaluating the carrying value of our investments and our allowance for possible losses, we consider general and local economic conditions, neighborhood values, competitive overbuilding, casualty losses and other factors which may affect the value of our loans. The value of our investments may also be affected by factors such as the cost of compliance with regulations and liability under applicable environmental laws, changes in interest rates and the availability of financing. Income from a property will be reduced if a significant number of tenants are unable to pay rent or if available space cannot be rented on favorable terms. We reduce our investment in real estate loans by an allowance for amounts that may become unrealizable in the future. Such allowance can be either specific to a particular loan or venture or general to all loans or ventures. As of September 30, 2003 and 2002, we had investments in real estate loans and real estate of $68.9 million and $202.4 million, net of an allowance for possible losses of $1.4 million and $3.5 million, respectively. We believe our allowance for possible losses is adequate at September 30, 2003. However, an adverse change in the facts and circumstances with regard to one of our larger loans or ventures could cause us to experience a loss in excess of our allowance. In equipment leasing, in evaluating our allowance for possible losses, we consider our contractual delinquencies, economic conditions and trends, industry statistics, lease portfolio characteristics and management's prior experience with similar lease assets. At September 30, 2003, our credit evaluation indicated that we have no need for an allowance for possible losses for our lease assets. We believe that our allowance for possible losses is reasonable based on our experience and our analysis of the net realizable value of our receivables at September 30, 2003. Reserve Estimates Our estimates of our proved natural gas and oil reserves and future net revenues from them are based upon reserve analyses that rely upon various assumptions, including those required by the SEC, as to natural gas and oil prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Any significant variance in these assumptions could materially affect the estimated quantity of our reserves. As a result, our estimates of our proved natural gas and oil reserves are inherently 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 and may affect our ability to pay amounts due under our credit facilities or cause a reduction in our energy credit facilities. 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. Impairment of Oil and Gas Properties We review our producing oil and gas properties for impairment on an annual basis and whenever events and circumstances indicate a decline in the recoverability of their carrying values. We estimate the expected future cash flows from our oil and gas properties and compare such future cash flows to the carrying amount of the oil and gas properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, we will adjust the carrying amount of the oil and gas properties to their fair value in the current period. The factors used to determine fair value include, but are not limited to, estimates of reserves, future production estimates, anticipated capital expenditures, and a discount rate commensurate with the risk associated with realizing the expected cash flows projected. Because of the complexities associated with oil and gas reserve estimates and the history of price volatility in the oil and gas markets, events may arise that will require us to record an impairment of our oil and gas properties. Any such impairment may affect or cause a reduction in our energy credit facilities. 48 Dismantlement, Restoration, Reclamation and Abandonment Costs On an annual basis, we estimate the costs of future dismantlement, restoration, reclamation and abandonment of our natural gas and oil-producing properties. We also estimate the salvage value of equipment recoverable upon abandonment. On October 1, 2002 we adopted SFAS 143, as discussed in Note 2 to our consolidated financial statements. As of September 30, 2002 and 2001, our estimate of salvage values was greater than or equal to our estimate of the costs of future dismantlement, restoration, reclamation and abandonment. A decrease in salvage values or an increase in dismantlement, restoration, reclamation and abandonment costs from those we have estimated, or changes in our estimates or costs, could reduce our gross profit from energy operations. Goodwill and Other Long-Lived Assets As of January 1, 2002, the accounting for goodwill has changed; in prior years, goodwill was amortized. As of January 1, 2002, goodwill and other intangibles with an indefinite useful life are no longer amortized, but instead are assessed for impairment at least annually. We have recorded goodwill of $37.5 million in connection with several acquisitions of assets. In assessing impairment of goodwill, we use estimates and assumptions in estimating the fair value of reporting units. If under these estimates and assumptions we determine that the fair value of a reporting unit has been reduced, the reduction can result in an "impairment" of goodwill. However, future results could differ from the estimates and assumptions we use. Events or circumstances which might lead to an indication of impairment of goodwill would include, but might not be limited to, prolonged decreases in expectations of long-term well servicing and/or drilling activity or rates brought about by prolonged decreases in natural gas or oil prices, changes in government regulation of the natural gas and oil industry or other events which could affect the level of activity of exploration and production companies. In assessing impairment of long-lived assets other than goodwill, where there has been a change in circumstances indicating that the carrying amount of a long-lived asset may not be recoverable, we have estimated future undiscounted net cash flows from the use of the asset based on actual historical results and expectations about future economic circumstances, including natural gas and oil prices and operating costs. Our estimate of future net cash flows from the use of an asset could change if actual prices and costs differ due to industry conditions or other factors affecting our performance. Intangible Assets In connection with a review of our financial statements by the staff of the Securities and Exchange Commission, we have been made aware that an issue has arisen within the industry regarding the application of provisions of Statement of Financial Accounting Standards No. 141, "Business Combinations," and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), to companies in the extractive industries, including gas and oil companies. The issue is whether SFAS No. 142 requires companies to reclassify costs associated with mineral rights, including both proved and unproved leasehold acquisition costs, as intangible assets in the balance sheet, apart from other capitalized gas and oil property costs. Historically, we and other gas and oil companies have included the cost of these gas and oil leasehold interests as part of gas and oil properties. Also under consideration is whether SFAS No. 142 requires companies to provide the additional disclosures prescribed by SFAS No. 142 for intangible assets for costs associated with mineral rights. If it is ultimately determined that SFAS No. 142 requires us to reclassify costs associated with mineral rights from property and equipment to intangible assets, the amounts that would be reclassified would be immaterial to our financial position. The reclassification of these amounts would not affect the method in which such costs are amortized or the manner in which we assess impairment of capitalized costs. As a result, our cash flows and results of operations would not be affected by the reclassification. 49 Recently Issued Financial Accounting Standards In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" was issued. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 did not have a material effect on our financial position or results of operations. In April 2003, the FASB issued SFAS No. 149 ("SFAS 149") "Amendment of Statement 133 on Derivative Instruments and Hedging Activates." SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and amends and clarifies financial accounting and reporting for derivative instruments. The adoption of SFAS 149 did not have a material effect on our financial position or results of operations. In May 2003, the FASB issued Statement No. 150 ("SFAS 150") "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 requires that certain instruments that were previously classified as equity on a company's statement of financial position now be classified as liabilities. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS did not have a material impact on our results of operations or financial position. In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the requirements of FASB Statement of Financial Accounting Standards No. 5, Accounting for Contingencies ("SFAS 5") relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 provides for additional disclosure requirements related to guarantees which were effective for financial periods ending after December 15, 2002. Additionally, FIN 45 outlines provisions for initial recognition and measurement of the liability incurred in providing a guarantee. We adopted the initial recognition and measurement requirements for all guarantees as of January 1, 2003. The initial adoption of the recognition and measurement requirements of FIN 45 did not have a significant impact on our results of operations or financial position. 50 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term "market risk" refers to the risk of loss arising from adverse changes in interest rates and oil and gas prices. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonable possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk sensitive instruments were entered into for purposes other than trading. General We are exposed to various market risks, principally fluctuating interest rates and changes in commodity prices. These risks can impact our results of operations, cash flows and financial position. We manage these risks through regular operating and financing activities and periodically use derivative financial instruments such as forward contracts and interest rate cap and swap agreements. The following analysis presents the effect on our earnings, cash flows and financial position as if hypothetical changes in market risk factors occurred on September 30, 2003. Only the potential impacts of hypothetical assumptions are analyzed. The analysis does not consider other possible effects that could impact our business. Energy Interest Rate Risk. At September 30, 2003, the amount outstanding under a revolving loan attributable to our energy operations had decreased to $31.0 million from $43.7 million at September 30, 2002. The weighted average interest rate for this facility decreased from 3.86% at September 30, 2002 to 2.90% at September 30, 2003 due to a decrease in market index rates used to calculate the facility's interest rates. Holding all other variables constant, if interest rates hypothetically increased or decreased by 10%, our net income would change by approximately $61,000. Commodity Price Risk. Our major market risk exposure in commodities is fluctuating prices for our natural gas and oil production. Realized pricing is primarily driven by the prevailing worldwide prices for crude oil and spot market prices applicable to United States natural gas production. Pricing for gas and oil production has been volatile and unpredictable for many years. To limit our exposure to changing natural gas prices we use hedges. Through our hedges, we seek to provide a measure of stability in the volatile environment of natural gas prices. Our risk management objective is to lock in a range of pricing for expected production volumes. This allows us to forecast future earnings within a predictable range. We have a natural gas supply contract with First Energy Solutions Corporation that allows us from time to time to "lock in" the sales price for some of our natural gas production volumes to be delivered in either the current month or in future months, rather than selling those same production volumes at contract prices in the month produced. We also negotiate with certain purchasers for delivery of a portion of natural gas we will produce for the upcoming twelve months. Most of these contracts are index-based and the price we receive for our natural gas changes as the underlying index changes. Throughout the year, at our discretion, we are permitted to designate a portion of our negotiated production volumes to be purchased at the prevailing contract price at that time for delivery in either the current month or in future production months. For the fiscal year ending September 30, 2004, we estimate in excess of 50% of our produced natural gas volumes will be sold in this manner, leaving our remaining production to be sold at contract prices in the month produced or at spot market prices. Considering those volumes already designated for the fiscal year ending September 30, 2004, and current indices, a theoretical 10% upward or downward change in the price of natural gas would result in approximately a 5% change in our projected natural gas revenues. 51 We periodically enter into financial hedging activities with respect to a portion of our projected natural gas production. We recognize gains and losses from the settlement of these hedges in gas revenues when the associated production occurs. The gains and losses realized as a result of hedging are substantially offset in the market when we deliver the associated natural gas. We do not hold or issue derivative instruments for trading purposes. We determine gains or losses on open and closed hedging transactions as the difference between the contract price and a reference price, generally closing prices on NYMEX. Net losses relating to these hedging contracts in fiscal 2003, 2002 and 2001 were $1.1 million, $59,000 and $599,000, respectively. We had no open hedge transactions in place as of September 30, 2003. Real Estate Finance Portfolio Loans and Related Senior Liens. We believe that none of the ten loans held in our portfolio as of September 30, 2003 (including loans treated in our consolidated financial statements as FIN 46 assets and liabilities) are sensitive to changes in interest rates since: - 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; - the senior lien interests are at fixed rates and are thus not subject to interest rate fluctuation that would affect payments to us; and - 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 due, as originally underwritten. Debt. The interest rates on our real estate revolving lines of credit, which are at the prime rate minus 1% for the outstanding $6.4 million under our line at Hudson United Bank and at the prime rate for the outstanding $18.0 million and $5.0 million lines of credit at Sovereign Bank, decreased during the year ended September 30, 2003 because there were three decreases in the defined prime rate. This defined prime rate was the "prime rate" as reported in The Wall Street Journal (4.00% at September 30, 2003). A hypothetical 10% change in the average interest rate applicable to these lines of credit would change our net income by approximately $76,000. Financial Services LEAF Financial Corporation, our equipment-leasing subsidiary, entered into a $10.0 million secured revolving credit facility with National City Bank which terminates December 31, 2003. We guarantee this facility, outstanding loans bear interest at one of two rates, elected at our option; (i) the lender's prime rate plus 200 basis points, or (ii) LIBOR plus 300 basis points. As of September 30, 2003, the balance outstanding was $2.5 million at an average interest rate of 4.12%. LEAF Financial Corporation also has a $10.0 million secured credit facility with Commerce Bank. The facility has the same interest rate structure as the National City Bank facility and expires May 27, 2004. As of September 30, 2003, the balance outstanding was $4.7 million at an average interest rate of 4.10%. A hypothetical 10% change in the average interest rate on these facilities would change our net income by approximately $20,000. Other In June 2002, we established a $5.0 million revolving line of credit with Commerce Bank. The facility expires in May 2005 and bears interest at one of two rates, elected at the borrower's option; (i) the prime rate, or (ii) LIBOR plus 250 basis points; both of which are subject to a floor of 5.5% and a ceiling of 9.0%. As of September 30, 2003, $5.0 million was outstanding under this facility. A hypothetical 10% change in the average interest rate on this facility would not affect our net income. 52 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. (a Delaware corporation) and subsidiaries as of September 30, 2003 and 2002, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2003. These financial statements and Schedules I, III and IV are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2003 and 2002, and the consolidated results of their operations and cash flows for each of the three years in the period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, effective October 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, and changed its method of accounting for its plugging and abandonment liability related to its oil and gas wells and associated pipelines and equipment. As discussed in Note 3 to the consolidated financial statements, effective July 1, 2003, the Company adopted FASB Interpretation 46, Consolidation of Variable Interest Entities, and changed its method of accounting for certain investments in real estate loans. As discussed in Note 4 to the consolidated financial statements, effective October 1, 2001, the Company changed its method of accounting for goodwill for the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. We have also audited Schedules I, III and IV as of September 30, 2003. In our opinion, these schedules, considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be set forth therein. Cleveland, Ohio December 5, 2003 53 RESOURCE AMERICA, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2003 AND 2002
2003 2002 ----------- ---------- (in thousands, except share data) ASSETS Current assets: Cash and cash equivalents.................................................... $ 41,129 $ 25,736 Accounts receivable and prepaid expenses..................................... 30,416 18,756 FIN 46 entities' and other assets held for sale.............................. 222,677 5,488 ---------- ---------- Total current assets....................................................... 294,222 49,980 Investments in real estate loans and real estate................................ 68,936 202,423 FIN 46 entities' assets......................................................... 78,247 - Investment in RAIT Investment Trust............................................. 20,511 29,580 Property and equipment, net..................................................... 143,410 119,177 Other assets.................................................................... 19,509 19,278 Intangible assets............................................................... 8,476 9,589 Goodwill........................................................................ 37,471 37,471 ---------- ----------- $ 670,782 $ 467,498 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt............................................ $ 59,471 $ 4,320 Secured revolving credit facilities - leasing................................ 7,168 2,421 Accounts payable............................................................. 19,065 12,378 FIN 46 entities' and other liabilities associated with assets held for sale.. 141,473 11,317 Accrued liabilities.......................................................... 14,626 11,568 Estimated income taxes....................................................... - 893 Liabilities associated with drilling contracts............................... 22,158 4,948 ---------- ---------- Total current liabilities.................................................. 263,961 47,845 Long-term debt: Senior....................................................................... - 65,336 Other........................................................................ 73,696 83,433 ---------- ---------- 73,696 148,769 Liabilities associated with assets held for sale................................ - 3,144 Deferred revenue and other liabilities.......................................... 3,633 1,074 FIN 46 entities' liabilities.................................................... 45,184 - Deferred income taxes........................................................... 12,878 13,733 Minority interest in Atlas Pipeline Partners, L.P............................... 43,976 19,394 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................... 255 250 Additional paid-in capital................................................... 227,211 223,824 Less treasury stock, at cost................................................. (78,860) (74,828) Less ESOP loan receivable.................................................... (1,137) (1,201) Accumulated other comprehensive income....................................... 5,611 5,911 Retained earnings............................................................ 74,374 79,583 ---------- ---------- Total stockholders' equity................................................. 227,454 233,539 ---------- ---------- $ 670,782 $ 467,498 ========== ==========
See accompanying notes to consolidated financial statements 54 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
2003 2002 2001 ---------- ---------- ---------- (in thousands, except per share data) REVENUES Energy....................................................................... $ 105,262 $ 97,912 $ 94,806 Real estate finance.......................................................... 14,335 16,582 16,899 Leasing...................................................................... 4,071 1,246 1,066 Equity in earnings in Trapeza entities....................................... 1,444 185 - Interest, dividends, gains and other......................................... 7,417 5,459 6,222 ---------- ---------- ---------- 132,529 121,384 118,993 COSTS AND EXPENSES Energy....................................................................... 67,215 69,580 59,976 Real estate finance.......................................................... 5,464 2,423 1,504 Leasing...................................................................... 5,883 745 695 General and administrative................................................... 6,925 7,889 5,672 Depreciation, depletion and amortization..................................... 12,148 11,161 11,038 Interest..................................................................... 13,092 12,816 14,736 Provision for possible losses................................................ 1,848 1,393 863 Provision for legal settlement............................................... 1,185 1,000 - Minority interest in Atlas Pipeline Partners, L.P............................ 4,439 2,605 4,099 ---------- ---------- ---------- 118,199 109,612 98,583 ---------- ---------- ---------- Income from continuing operations before income taxes and cumulative effect of change in accounting principle..................... 14,330 11,772 20,410 Provision for income taxes................................................... 4,586 3,414 6,327 ---------- ---------- ---------- Income from continuing operations before cumulative effect of change in accounting principle......................... 9,744 8,358 14,083 Income (loss) on discontinued operations, net of income taxes of $(658), $5,944 and $2,439................................................ 1,222 (11,040) (4,254) Cumulative effect of change in accounting principle, net of income taxes of $7,474 and $336............................................. (13,881) (627) - ---------- ---------- ---------- Net (loss) income............................................................ $ (2,915) $ (3,309) $ 9,829 ========== ========== ========== Net income (loss) per common share - basic: From continuing operations................................................... $ .57 $ .48 $ .78 Discontinued operations...................................................... .07 (.63) (.23) Cumulative effect of change in accounting principle.......................... (.81) (.04) - ---------- ---------- ---------- Net income (loss) per common share - basic................................... $ (.17) $ (.19) $ .55 ========== ========== ========== Weighted average common shares outstanding................................... 17,172 17,446 17,962 ========== ========== ========== Net income (loss) per common share - diluted: From continuing operations................................................... $ .55 $ .47 $ .76 Discontinued operations...................................................... .07 (.62) (.23) Cumulative effect of change in accounting principle.......................... (.79) (.04) - --------- ---------- ---------- Net (loss) income per common share - diluted................................. $ (.17) $ (.19) $ .53 ========= ========== ========== Weighted average common shares outstanding................................... 17,568 17,805 18,436 ========= ========== ==========
See accompanying notes to consolidated financial statements 55 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
2003 2002 2001 ----------- ---------- ----------- (in thousands) Net (loss) income........................................................... $ (2,915) $ (3,309) $ 9,829 Other comprehensive (loss) income: Unrealized gain on investment in RAIT Investment Trust, net of taxes of $1,040, $2,305 and $1,350................................ .............. 2,211 4,475 2,622 Less: reclassification adjustment for gains realized in net income, net of taxes of $1,291................................................... (2,744) - - ----------- ---------- ---------- (533) 4,475 2,622 Unrealized holding losses on natural gas futures arising during the period net of taxes of $245, $118 and $181............................... (520) (263) (404) Less: reclassification adjustment for losses realized in net income, net of taxes of $355, $17 and $186........................................... 753 42 413 ----------- ---------- ----------- 233 (221) 9 ----------- ---------- ----------- Comprehensive (loss) income................................................. $ (3,215) $ 945 $ 12,460 =========== ========== ===========
See accompanying notes to consolidated financial statements 56 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 2003, 2002, AND 2001 (in thousands, except share data)
Common Stock Additional Treasury Stock ESOP --------------------- Paid-In ----------------------- Loan Shares Amount Capital Shares Amount Receivable ------------------------------------------------------------------------ Balance, September 30, 2000.............. 24,621,962 $ 246 $ 221,361 (1,029,982) $ (15,778) $ (1,393) Treasury shares issued................... (407) 33,916 804 Issuance of common stock................. 318,075 3 2,758 Cancellation of shares issued............ (153,526) (1,305) Purchase of treasury shares.............. (6,349,021) (57,801) Other comprehensive income............... Cash dividends ($.13 per share).......... Repayment of ESOP loan................... 96 Net income............................... - ------------------------------------------------------------------------------------------------------------------- Balance, September 30, 2001.............. 24,940,037 $ 249 $ 223,712 (7,498,613) $ (74,080) $ (1,297) Treasury shares issued................... (429) 31,537 769 Issuance of common stock................. 104,029 1 297 Tax benefit from employee stock options.. 244 Purchase of treasury shares.............. (156,122) (1,517) Other comprehensive income............... Cash dividends ($.13 per share).......... Repayment of ESOP loan................... 96 Net loss................................. - ------------------------------------------------------------------------------------------------------------------- Balance, September 30, 2002.............. 25,044,066 $ 250 $ 223,824 (7,623,198) $ (74,828) $ (1,201) Treasury shares issued................... (373) 29,666 622 Issuance of common stock................. 419,579 5 3,352 Tax benefit from employee stock options.. 408 Purchase of treasury shares.............. (519,968) (4,654) Other comprehensive loss................. Cash dividends ($.13 per share).......... Repayment of ESOP loan................... 64 Net loss................................. - ------------------------------------------------------------------------------------------------------------------- Balance, September 30, 2003.............. 25,463,645 $ 255 $ 227,211 (8,113,500) $ (78,860) $ (1,137) ============ ========= ========== ========== ========== ========== Accumulated Other Totals Comprehensive Retained Stockholders' Income (Loss) Earnings Equity --------------------------------------- Balance, September 30, 2000.............. $ (974) $ 77,753 $ 281,215 Treasury shares issued................... 397 Issuance of common stock................. 2,761 Cancellation of shares issued............ (1,305) Purchase of treasury shares.............. (57,801) Other comprehensive income............... 2,631 2,631 Cash dividends ($.13 per share).......... (2,364) (2,364) Repayment of ESOP loan................... 96 Net income............................... 9,829 9,829 - ---------------------------------------------------------------------------------- Balance, September 30, 2001.............. $ 1,657 $ 85,218 $ 235,459 Treasury shares issued................... 340 Issuance of common stock................. 298 Tax benefit from employee stock options.. 244 Purchase of treasury shares.............. (1,517) Other comprehensive income............... 4,254 4,254 Cash dividends ($.13 per share).......... (2,326) (2,326) Repayment of ESOP loan................... 96 Net loss................................. (3,309) (3,309) - ---------------------------------------------------------------------------------- Balance, September 30, 2002.............. $ 5,911 $ 79,583 $ 233,539 Treasury shares issued................... 249 Issuance of common stock................. 3,357 Tax benefit from employee stock options.. 408 Purchase of treasury shares.............. (4,654) Other comprehensive loss................. (300) (300) Cash dividends ($.13 per share).......... (2,294) (2,294) Repayment of ESOP loan................... 64 Net loss................................. (2,915) (2,915) - ---------------------------------------------------------------------------------- Balance, September 30, 2003.............. $ 5,611 $ 74,374 $ 227,454 ============= ========= ===========
See accompanying notes to consolidated financial statements 57 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
2003 2002 2001 ---------- ---------- ---------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income.......................................................... $ (2,915) $ (3,309) $ 9,829 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation, depletion and amortization................................ 11,944 11,161 11,038 Accretion of asset retirement obligation discount....................... 204 - - Amortization of discount on senior notes and deferred finance costs..... 1,762 1,095 1,005 Provision for possible losses........................................... 1,848 1,393 863 Minority interest in Atlas Pipeline Partners, LP........................ 4,439 2,605 4,099 Equity in (earnings) loss of equity investees........................... (1,683) (639) 329 (Income) loss on discontinued operations................................ (1,222) 11,040 4,254 Deferred income taxes................................................... 1,616 (7,413) (885) Accretion of discount................................................... (1,962) (3,212) (5,923) Collection of interest.................................................. 1,130 5,243 1,207 Non-cash compensation................................................... 250 341 396 Cumulative effect of change in accounting principle..................... 13,881 627 - Gain on asset dispositions.............................................. (4,775) (2,507) (1,738) Property impairments and abandonments................................... 24 24 207 Changes in operating assets and liabilities................................. 18,466 (9,982) (5,623) ---------- ---------- ---------- Net cash provided by operating activities of continuing operations......... 43,007 6,467 19,058 CASH FLOWS FROM INVESTING ACTIVITIES: Net cash paid in asset acquisitions........................................ - - (7,875) Capital expenditures....................................................... (28,568) (21,967) (14,210) Principal payments on notes receivable and proceeds from sale of assets.... 10,053 25,220 29,610 Proceeds from sale (purchase) of RAIT Investment Trust shares.............. 12,044 (1,890) (6,405) Increase in other assets................................................... (1,586) (6,008) (3,745) Investments in real estate loans and real estate........................... (5,921) (19,859) (25,395) ---------- ---------- ---------- Net cash used in investing activities of continuing operations............. (13,978) (24,504) (28,020) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings................................................................. 96,937 173,753 135,021 Principal payments on borrowings........................................... (120,135) (168,619) (129,272) Net proceeds from Atlas Pipeline Partners, L.P. public offering............ 25,182 - - Distributions paid to minority interest of Atlas Pipeline Partners, L.P.... (4,233) (3,623) (3,783) Dividends paid............................................................. (2,294) (2,326) (2,364) Purchase of treasury stock................................................. (4,654) (1,517) (57,801) Repayment of ESOP loan..................................................... 64 96 96 Increase in other assets................................................... (1,812) (1,258) (702) Proceeds from issuance of stock............................................ 2,933 17 420 ---------- ---------- ---------- Net cash used in financing activities of continuing operations............. (8,012) (3,477) (58,385) Net cash used in discontinued operations................................... (5,624) (1,398) (1,112) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents........................... 15,393 (22,912) (68,459) Cash and cash equivalents at beginning of year............................. 25,736 48,648 117,107 ---------- ---------- ---------- Cash and cash equivalents at end of year................................... $ 41,129 $ 25,736 $ 48,648 ========== ========== ==========
See accompanying notes to consolidated financial statements 58 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS Resource America, Inc. (the "Company") is a specialized asset management company that uses industry specific expertise to generate and administer investment opportunities for the Company and for outside investors in the energy, real estate finance, financial services and equipment leasing sectors. In energy, the Company drills for and sells natural gas and, to a significantly lesser extent, oil in the Appalachian Basin. Through Atlas Pipeline Partners, L.P. ("Atlas Pipeline"), a master limited partnership of which a subsidiary of the Company is the general partner and in which the Company has a 39% interest; 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 energy 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 and, principally as a result of loan restructurings or foreclosures, interests in real property. In fiscal 2002, the Company sought to expand its operations through the sponsorship of real estate investment partnerships. It has sponsored two such investment partnerships, one of which has commenced operations and the other of which was in the offering stage as of September 30, 2003. In financial services, the Company has acted as the co-sponsor of four limited liability companies that invest in trust preferred securities of banks, bank holding companies and similar financial institutions. Three of the limited liability companies have commenced operations; the fourth was in the offering stage as of September 30, 2003. In equipment leasing, the Company has sponsored one publicly-held equipment leasing partnership which commenced operations in March 2003 and, as of September 30, 2003, continues to be in its offering stage. In April 2003, the Company entered into an agreement with a third party under which the Company originates equipment leases and sells them to the third party. Under the agreement, the Company retains management and servicing rights for the leases sold. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reclassifications Certain reclassifications have been made to the fiscal 2002 and fiscal 2001 consolidated financial statements to conform with the fiscal 2003 presentation. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned except for Atlas Pipeline. In addition, commencing with the adoption of FASB Interpretation 46, "Consolidation of Variable Interest Entities" ("FIN 46") on July 1, 2003, the Company has consolidated certain variable interest entities ("VIEs") as to which the Company has determined that the Company is the primary beneficiary. The Company also owns individual interests in the assets, and is separately liable for its share of the liabilities of energy partnerships, whose activities include only exploration and production activities. In accordance with established practice in the oil and gas industry, the Company also includes its pro-rata share of income and costs and expenses of the energy partnerships in which the Company has an interest. All material intercompany transactions have been eliminated. 59 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Use of Estimates Preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting period. Actual results could differ from these estimates. Impairment of Long Lived Assets The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that an asset's estimated future cash flows will not be sufficient to recover its carrying amount, an impairment charge will be recorded to reduce the carrying amount for that asset to its estimated fair value. Stock-Based Compensation The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees ("APB 25"), and related interpretations. Compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company adopted the disclosure requirement of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation, ("SFAS 123") as amended by the required disclosures SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." (See Note 11 for required pro forma disclosures.) Comprehensive Income (Loss) Comprehensive income (loss) includes net income (loss) 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 (loss), are referred to as "other comprehensive income" and for the Company include changes in the fair value, net of taxes, of marketable securities and unrealized hedging gains and losses. Accumulated other comprehensive income is related to the following: At September 30, ---------------------- 2003 2002 ---------- ---------- (in thousands) Marketable securities - unrealized gains............... $ 5,611 $ 6,144 Unrealized hedging losses.............................. - (233) ---------- ---------- $ 5,611 $ 5,911 ========== ========== 60 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Property and Equipment Property and equipment consists of the following: At September 30, ----------------------- 2003 2002 ----------- ---------- (in thousands) Mineral interest in properties: Proved properties................................. $ 844 $ 843 Unproved properties............................... 563 584 Wells and related equipment........................... 184,226 152,225 Support equipment..................................... 2,189 1,422 Other................................................. 9,136 8,390 ----------- ---------- 196,958 163,464 Accumulated depreciation, depletion, amortization and valuation allowances: Oil and gas properties............................ (50,170) (41,893) Other............................................. (3,378) (2,394) ----------- ---------- (53,548) (44,287) ----------- ---------- $ 143,410 $ 119,177 =========== ========== 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 or, if this determination cannot be made, within twelve months of completion of drilling. 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 the costs of exploratory drilling are charged to expense as incurred. Oil and gas properties include mineral rights with a cost of $1.4 million before accumulated depletion. In connection with a review of the Company's financial statements by the staff of the Securities and Exchange Commission, the Company has been made aware that an issue has arisen within the industry regarding the application of provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 141, "Business Combinations," to companies in the extractive industries, including gas and oil companies. The issue is whether SFAS No. 142 requires companies to reclassify costs associated with mineral rights, including both proved and unproved leasehold acquisition costs, as intangible assets in the balance sheet, apart from other capitalized gas and oil property costs. Historically, the Company and other gas and oil companies have included the cost of these gas and oil leasehold interests as part of gas and oil properties. Also under consideration is whether SFAS No. 142 requires companies to provide the additional disclosures prescribed by SFAS No. 142 for intangible assets for costs associated with mineral rights. If it is ultimately determined that SFAS No. 142 requires the Company to reclassify costs associated with mineral rights from property and equipment to intangible assets, the amounts would be immaterial to the Company's financial position. The reclassification of these amounts would not affect the method in which such costs are amortized or the manner in which the Company assesses impairment of capitalized costs. As a result, net income would not be affected by the reclassification. 61 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Property and Equipment - (Continued) Oil and Gas Properties - (Continued) The Company assesses unproved and proved properties periodically to determine whether there has been a decline in value and, if a decline is indicated, a loss is recognized. The assessment of significant unproved properties for impairment is on a property-by-property basis. The Company considers whether a dry hole has been drilled on a portion of, or in close proximity to, the property, the Company's intentions of further drilling, the remaining lease term of the property, and its experience in similar fields in close proximity. The Company assesses unproved properties whose costs are individually insignificant in the aggregate. This assessment includes considering the Company's experience with similar situations, the primary lease terms, the average holding period of unproved properties and the relative proportion of such properties on which proved reserves have been found in the past. The Company compares the carrying value of its proved developed gas and oil producing properties to the estimated future cash flow 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, 2003. Upon the sale or retirement of a complete or partial unit of a proved property, the cost and related accumulated depletion are eliminated from the property accounts, and the resultant gain or loss is recognized in the statement of operations. Upon the sale of an entire interest in an unproved property where the property had been assessed for impairment individually, a gain or loss is recognized in the statement of operations. If a partial interest in an unproved property is sold, any funds received are accounted for as a reduction of the cost in the interest retained. 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 September 30, 2003, the Company's estimate of equipment salvage values was greater than or equal to the estimated costs of future dismantlement, restoration, reclamation, and abandonment. On October 1, 2002, the Company adopted SFAS No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143") as discussed further in this footnote. Depreciation, Depletion and Amortization The Company amortizes proved gas and oil properties, which include intangible drilling and development costs, tangible well equipment and leasehold costs, on the unit-of-production method using the ratio of current production to the estimated aggregate proved developed gas and oil reserves. The Company computes depreciation on property and equipment, other than gas and oil properties, using the straight-line method over the estimated economic lives, which range from three to 39 years. 62 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Asset Retirement Obligations Effective October 1, 2002, the Company adopted SFAS 143 which requires the Company to recognize an estimated liability for the plugging and abandonment of its oil and gas wells and associated pipelines and equipment. Under SFAS 143, the Company must currently recognize a liability for future asset retirement obligations if a reasonable estimate of the fair value of that liability can be made. The present values of the expected asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS 143 requires the Company to consider estimated salvage value in the calculation of depletion, depreciation and amortization. Consistent with industry practice, historically the Company had determined the cost of plugging and abandonment on its oil and gas properties would be offset by salvage values received. The adoption of SFAS 143 resulted in (i) an increase of total liabilities because retirement obligations are required to be recognized, (ii) an increase in the recognized cost of assets because the retirement costs are added to the carrying amount of the long-lived assets and (iii) a decrease in depletion expense, because the estimated salvage values are now considered in the depletion calculation. The estimated liability is based on historical experience in plugging and abandoning wells, estimated remaining lives of those wells based on reserves estimates, external estimates as to the cost to plug and abandon the wells in the future, and federal and state regulatory requirements. The liability is discounted using an assumed credit-adjusted risk-free interest rate. Revisions to the liability could occur due to changes in estimates of plugging and abandonment costs or remaining lives of the wells, or if federal or state regulators enact new plugging and abandonment requirements. The adoption of SFAS 143 as of October 1, 2002 resulted in a cumulative effect adjustment to record (i) a $1.9 million increase in the carrying values of proved properties, (ii) a $1.5 million decrease in accumulated depletion and (iii) a $3.4 million increase in non-current plugging and abandonment liabilities. The cumulative and pro forma effects of the application of SFAS 143 were not material to the Company's consolidated statements of operations. The Company has no assets legally restricted for purposes of settling asset retirement obligations. Except for the item previously referenced, the Company has determined that there are no other material retirement obligations associated with tangible long-lived assets. A reconciliation of the Company's liability for well plugging and abandonment costs for the year ended September 30, 2003 is as follows (in thousands): Asset retirement obligations, September 30, 2002...... $ - Adoption of SFAS 143.................................. 3,380 Liabilities incurred.................................. 93 Liabilities settled................................... (52) Revision in estimates................................. (494) Accretion expense..................................... 204 --------- Asset retirement obligations, September 30, 2003...... $ 3,131 ========= The above accretion expense is included in depreciation, depletion and amortization in the Company's consolidated statements of operations and the asset retirement obligation liabilities are included in deferred revenue and other liabilities in the Company's consolidated balance sheet. 63 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Investment in RAIT Investment Trust The Company accounts for its investment in RAIT Investment Trust ("RAIT") in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This investment is classified as available-for-sale and as such is carried at fair market value based on market quotes. Unrealized gains and losses, net of taxes, are reported as a separate component of stockholders' equity. The cost of securities sold is based on the specific identification method. The following table discloses the pre-tax unrealized gains relating to the Company's investment in RAIT at the periods indicated: At September 30, ---------------------- 2003 2002 ---------- ---------- (in thousands) Cost................................................... $ 12,260 $ 20,268 Unrealized gains....................................... 8,251 9,312 ---------- ---------- Estimated fair value................................... $ 20,511 $ 29,580 ========== ========== In fiscal 2003, the Company sold 542,600 common shares of RAIT for $12.0 million and realized gains of $4.0 million (see Note 5). Fair Value of Financial Instruments The Company used the following methods and assumptions in estimating the fair value of each class of financial instruments for which it is practicable to estimate fair value. For cash and cash equivalents, receivables and payables, the carrying amounts approximate fair value because of the short maturity of these instruments. For 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. For secured revolving credit facilities - leasing, the carrying amount approximates fair value because of the short maturity of these instruments. The following table provides information on other financial instruments:
At September 30, 2003 At September 30, 2002 ------------------------ ----------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ---------- ----------- ---------- ---------- (in thousands) Energy non-recourse debt.......... $ 31,194 $ 31,194 $ 49,345 $ 49,345 Real estate finance debt.......... 19,469 19,469 33,214 33,214 Senior debt....................... 54,027 55,648 65,336 67,623 Other debt........................ 28,477 28,477 7,615 7,615 ---------- ----------- ---------- ---------- $ 133,167 $ 134,788 $ 155,510 $ 157,797 ========== =========== ========== ==========
64 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Fair Value of Financial Instruments - (Continued) For all debt except the senior debt, the carrying value approximates fair value because of the short term maturity of these instruments and the variable interest rates in the debt agreements. The fair value of the senior debt was based upon the most recent purchase price of the debt by the Company. 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, 2003, the Company had $50.2 million in deposits at various banks, of which $47.7 million is over the insurance limit of the Federal Deposit Insurance Corporation. No losses have been experienced on such investments. Environmental Matters The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations, to identify potential environmental exposures and to comply with regulatory policies and procedures. The Company accounts for environmental contingencies in accordance with SFAS No. 5 "Accounting for Contingencies." Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or clean-ups are probable, and the costs can be reasonably estimated. The Company maintains insurance which may cover in whole or in part certain environmental expenditures. For the three years ended September 30, 2003, the Company had no environmental matters requiring specific disclosure or requiring recording of a liability. Revenue Recognition Energy The Company conducts certain energy activities through, and a portion of its revenues are attributable to, sponsored energy limited partnerships. These energy partnerships raise capital from investors to drill gas and oil wells. The Company serves as general partner of the energy partnerships and assumes customary rights and obligations for them. As the general partner, the Company is liable for partnership the 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 sold by a partnership. The Company contracts with the energy partnerships to drill partnership wells. The contracts require that the energy partnerships must pay the Company the full contract price upon execution. The income from a drilling contract is recognized as the services are performed. The contracts are typically completed in less than 60 days. On an uncompleted contract, the Company classifies the difference between the contract payments it has received and contract costs previously incurred as a current liability. The Company recognizes transportation revenues at the time the natural gas is delivered to the purchaser. The Company recognizes field services revenues at the time the services are performed. 65 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Revenue Recognition - (Continued) Energy - (Continued) The Company is entitled to receive management fees according to the respective partnership agreements. The Company recognizes such fees as income when earned and includes them in energy revenues. The Company sells interests in gas and oil wells and retains a working interest and/or overriding royalty. The Company records the income from the working interests and overriding royalties when the gas and oil are sold. Real Estate Finance The Company accretes the difference between its cost basis in a real estate loan and the sum of projected cash flows from that loan into interest income over the estimated life of the loan using the interest method which recognizes a level interest rate over the life of the loan. The Company reviews projected cash flows, which include amounts realizable from the underlying properties, on a regular basis. Changes to projected cash flows, which can be based upon updated property appraisals, changes to the property and changes to the real estate market in general, reduce or increase the amounts accreted into interest income over the remaining life of the loan. The Company recognizes gains or losses on the partial sale of a real estate loan based on an allocation of the Company's cost basis between the portions of the loan sold and the portion retained based upon the fair value of those respective portions on the date of sale. Gains or losses on the refinancing of a real estate loan only arise if the proceeds received by the Company when a property owner refinances the property exceed the cost of the loan financed. The Company credits any gain or losses recognized on a sale of a senior lien interest or a refinancing to income at the time of such sale or refinancing. The Company sponsored and manages one real estate partnership which was organized to invest in multi-family residential properties. The Company receives acquisition fees equal to 2% of the net purchase price of properties acquired and an additional 2% fee for debt placement related to the properties acquired. The Company recognizes these fees upon acquisition of the properties and obtaining the related financing. The Company also receives a fee equal to 5% of the gross operating revenues from the partnership's properties, payable monthly. The Company recognizes this fee as the partnership revenues are earned. Additionally, the Company receives an annual investment management fee, payable monthly, equal to 2% of the gross offering proceeds, for its services. The payment of this fee may be deferred if partnership net operating revenues are not sufficient to pay the fee for a particular period. These fees are recognized as services are performed. Equipment Leasing The Company, through its wholly owned subsidiary, LEAF Financial Corporation ("LEAF"), is a specialized asset manager of investments in the commercial equipment leasing sector. As such, LEAF serves as the general partner and manager and holds limited partnership interests in four active public equipment leasing partnerships (the "Leasing Partnerships"). At September 30, 2003, the Company is the sponsor and general partner of an additional public partnership, LEAF I LP. Limited Partnership units of LEAF I LP are sold through a select network of broker dealers throughout the United States. LEAF I LP invests in equipment leases originated by the Company. 66 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Revenue Recognition - (Continued) Equipment Leasing - (Continued) In April 2003, LEAF, through certain of its subsidiaries, entered into a Purchase, Sale and Contribution Agreement ("the Agreement") with certain subsidiaries of Merrill Lynch ("ML"). In accordance with the Agreement, LEAF may sell and ML will purchase up to $300 million of leases originated by LEAF. Direct Financing Leases. The Company's lease transactions are generally classified as direct financing leases (as distinguished from sales-type or operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. A lease is a direct financing lease if the creditworthiness of the lessee ("customer") and the collectibility of lease payments are reasonably certain and it meets one of the following criteria: (i) the lease transfers ownership of the equipment to the customer at the end of the lease term; (ii) the lease contains a bargain purchase option; (iii) the lease term at inception is at least 75% of the estimated economic life of the leased equipment; or (iv) the present value of the minimum lease payments is at least 90% of the fair market value of the leased equipment at inception of the lease. The Company's investment in leases consists of the sum of the total future minimum lease payments receivable and the estimated unguaranteed residual value of leased equipment, less unearned lease income. Unearned lease income, which is recognized as revenue over the term of the lease by the effective interest method, represents the excess of the total future minimum lease payments plus the estimated unguaranteed residual value expected to be realized at the end of the lease term over the cost of the related equipment. The Company discontinues the recognition of revenue for leases for which payments are more than 90 days past due. As of September 30, 2003 and 2002, no leases were 90 days or more past due. Initial direct costs incurred in consummating a lease are capitalized as part of the investment in leases and amortized over the lease term as a reduction in the yield. Management Fees. The Company receives management fees from the leasing partnerships and LEAF I LP (collectively "the Partnerships") for administrative and management services performed on their behalf. These management fees range from 3% to 6% of gross rental payments on operating leases and 2% to 3% of gross rental payments on direct financing leases. Income from Investments in Partnerships. The Company receives 1% to 3.5% of cash distributions paid by the Partnerships for its investment as the general partner in the Partnerships. Acquisition Expense Reimbursements. The Company receives a reimbursement of 2% of the cost of lease equipment acquired for LEAF I LP and ML. This reimbursement is recognized at the time of the sale of the related equipment leases to these third parties. 67 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Supplemental Cash Flow Information The Company considers temporary investments with 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, --------------------------------------- 2003 2002 2001 ---------- ----------- ---------- (in thousands) Cash paid during the years for: Interest............................................................... $ 11,666 $ 11,683 $ 13,976 Income taxes (refunded) paid........................................... $ (1,067) $ 3,243 $ 13,393 Non-cash activities include the following: Real estate received in exchange for notes upon foreclosure on loans... $ 14,235 $ - $ - Receipt of a note in connection with the sale of a real estate loan.... $ 1,350 $ - $ - Cancellation of shares issued in contingency settlement................ $ - $ - $ 1,305 Shares issued in contingency settlement................................ $ - $ - $ 2,089 Atlas Pipeline units issued in exchange for gas gathering and transmission facilities............................................... $ - $ - $ 2,250 Buyer's assumption of liabilities upon sale of real estate loan........ $ - $ - $ 460 Tax benefit from employee stock option exercise........................ $ 408 $ 244 $ - Assumption of debt upon foreclosure of real estate loans............... $ 5,560 $ - $ - Asset retirement obligations........................................... $ 3,380 $ - $ - Treasury stock issued for employee compensation........................ $ 249 $ 340 $ 397 Common stock issued under stock option plans, net of cash proceeds..... $ 424 $ 281 $ 252 Details of acquisitions: Fair value of assets acquired....................................... $ - $ - $ 10,555 Atlas Pipeline units issued in exchange for gas gathering and transmission facilities............................................ - - (2,250) Liabilities assumed................................................. - - (430) ---------- ----------- ---------- Net cash paid.................................................... $ - $ - $ 7,875 ========== =========== ==========
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. 68 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Earnings (Loss) Per Share Basic earnings (loss) per share is determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Earnings (loss) per share - diluted is computed by dividing net income (loss) 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 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. The components of basic and diluted earnings (loss) per share for each year were as follows:
Years Ended September 30, ---------------------------------------- 2003 2002 2001 ----------- ----------- ---------- (in thousands) Income from continuing operations...................... $ 9,744 $ 8,358 $ 14,083 Income (loss) from discontinued operations............. 1,222 (11,040) (4,254) Cumulative effect of change in accounting principle.... (13,881) (627) - ----------- ----------- ---------- Net (loss) income.................................. $ (2,915) $ (3,309) $ 9,829 =========== =========== ========== Weighted average common shares outstanding-basic....... 17,172 17,446 17,962 Dilutive effect of stock option and award plans........ 396 359 474 ----------- ----------- ---------- Weighted average common shares-diluted................. 17,568 17,805 18,436 =========== =========== ==========
Recently Issued Financial Accounting Standards In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" was issued. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 did not have a material effect on the Company's financial position or results of operations. In April 2003, the FASB issued SFAS No. 149 ("SFAS 149") "Amendment of Statement 133 on Derivative Instruments and Hedging Activates." SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and amends and clarifies financial accounting and reporting for derivative instruments. The adoption of SFAS 149 did not have a material effect on the Company's financial position or results of operations. In May 2003, the FASB issued Statement No. 150 ("SFAS 150") "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 requires that certain instruments that were previously classified as equity on a Company's statement of financial position now be classified as liabilities. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the Company's results of operations or financial position. 69 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Recently Issued Financial Accounting Standards - (Continued) In May 2003, the FASB issued Statement No. 150 ("SFAS 150") "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 requires that certain instruments that were previously classified as equity on a Company's statement of financial position now be classified as liabilities. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the Company's results of operations or financial position. In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the requirements of FASB No. 5, "Accounting for Contingencies" ("SFAS 5") relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 provides for additional disclosure requirements related to guarantees in financial statements for financial periods ending after December 15, 2002. Additionally, FIN 45 outlines provisions for initial recognition and measurement of the liability incurred upon the issuance of new guarantees or the modification of existing guarantees subsequent to December 31, 2002. The adoption of the recognition and measurement requirements of FIN 45 on January 1, 2003, did not have a significant impact on the results of operations or equity of the Company. NOTE 3 - ADOPTION OF FASB INTERPRETATION 46 ("FIN 46") In January 2003, the FASB issued FIN 46. This interpretation changes the method of determining whether certain entities should be included in the Company's consolidated financial statements. FIN 46's consolidation criteria are based on analyses of risks and rewards, not control, and represent a significant and complex modification of previous accounting principles. Under FIN 46 a variable interest entity ("VIE") is one that has (1) equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) equity investors that cannot make significant decisions about the entity's operations, or that do not absorb the expected losses or receive the expected returns of the entity. These entities must be consolidated by its primary beneficiary, which is the party involved with the VIE that has exposure to a majority of the expected losses or a majority of the expected residual returns or both. All other entities are evaluated for consolidation in accordance with SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries" ("SFAS 94"). The provisions of the interpretation were to be applied immediately to VIEs created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. For VIEs in which an enterprise held a variable interest that it acquired before February 1, 2003, FIN 46 is applicable for financial statements issued for the first period ending after December 15, 2003. For any VIEs that must be consolidated under FIN 46, the assets, liabilities and non-controlling interest of the VIE would be initially measured at their carrying amounts, as defined in FIN 46. If determining the carrying amounts is not practicable, the fair value at the date FIN 46 first applies may be used to measure the assets, liabilities and non-controlling interests of the VIE. Any difference between the net amount added to the balance sheet and the value at which the primary beneficiary carried its interest in the VIE prior to the adoption of FIN 46 is recognized as a cumulative effect of a change in accounting principle. The Company has determined that it was not practicable to determine the carrying values of the VIE's assets and liabilities and accordingly, has used the fair values at the date of adoption. The Company, as encouraged by the pronouncement, early-adopted FIN 46 on July 1, 2003. Consequently, certain entities relating to the Company's real estate finance business, have been consolidated in the Company's financial statements for the first time. Several factors that distinguish these entities from others included in its consolidated statements follow: - The assets and liabilities of the consolidated VIEs are included in the Company's financial statements and the investments in real estate loans, which were the Company's variable interests in the VIEs, have been removed from the financial statements. - These VIEs are consolidated because the Company has been determined to be the primary beneficiary of these entities as defined in FIN 46. 70 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 3 - ADOPTION OF FASB INTERPRETATION 46 - (Continued) - The assets and liabilities of the VIE's that are now included in the consolidated financial statements are not the Company's. The liabilities will be satisfied from the cash flows of the VIE's consolidated assets, not from the assets of the Company, which has no legal obligation to satisfy those liabilities. As of July 1, 2003, the date of adoption, the consolidation of FIN 46 entities resulted in the addition of $296.5 million in assets, $185.5 million in liabilities and a $13.9 million after-tax accounting cumulative effect charge in the company's fourth fiscal quarter. FIN 46 has been the subject of significant continuing interpretation by the FASB, and changes to its complex requirements are possible. Currently, it is not possible to conclude whether such changes, if any, would be likely to affect the amounts the Company has recorded. The following tables provide supplemental information about revenues, expenses, assets and liabilities associated with entities that were consolidated effective July 1, 2003 in accordance with FIN 46 and not classified as held for sale. Operating information is for the period July 1, 2003 through September 30, 2003 and balance sheet information is as of September 30, 2003 (in thousands): Operating Information - included in real estate finance: Revenues.............................................. $ 948 Expenses.............................................. 730 ----------- Operating income................................... $ 218 =========== Assets: Cash.................................................. $ 1,689 Accounts receivables.................................. 451 Real estate assets, net............................... 76,035 Other................................................. 72 ----------- Total assets....................................... $ 78,247 =========== Liabilities: Mortgage loans on real estate......................... $ 37,620 Other................................................. 7,564 ----------- Total liabilities.................................. $ 45,184 =========== 71 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 3 - ADOPTION OF FASB INTERPRETATION 46 - (Continued) The following tables provide supplemental information about revenues, expenses, assets and liabilities associated with entities that were consolidated effective July 1, 2003 in accordance with FIN 46 but classified as held for sale at September 30, 2003 (See Note 14). Operating information is for the period July 1, 2003 through September 30, 2003 and balance sheet information is as of September 30, 2003 (in thousands): Income from Discontinued Operations: Revenues................................... $ 5,431 Expenses................................... 3,347 ------------- Operating income........................... 2,084 Income tax provision....................... (729) ------------- Income from discontinued operations..... $ 1,355 ============= Assets: Cash....................................... $ 3,960 Accounts receivables....................... 2,988 Real estate assets, net.................... 213,026 Other...................................... 2,703 ------------- Total assets held for sale.............. $ 222,677 ============= Liabilities: Mortgage loans on real estate.............. $ 130,687 Other...................................... 10,786 ------------- Total liabilities held for sale......... $ 141,473 ============= The mortgage loans on real estate shown above are secured by the underlying properties. Interest rates range from 6% to 10%, and the loans mature at various dates through 2014. Maturities for the next five years, assuming loans associated with assets held for sale will be paid within the next year are as follows: 2004 - $131.5 million; 2005 - $909,000; 2006 - $3.6 million; 2007 - $905,000; and 2008 - $962,000. 72 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 4 - OTHER ASSETS, INTANGIBLE ASSETS AND GOODWILL Other Assets The following table provides information about other assets at the dates indicated. At September 30, ----------------------- 2003 2002 ---------- ---------- (in thousands) Deferred financing costs, net of accumulated amortization of $5,504 and $3,742................ $ 2,105 $ 2,122 Equity method investments in Trapeza entities..... 4,802 3,085 Investments at lower of cost or market............ 6,185 6,137 Other............................................. 6,417 7,934 ---------- ---------- $ 19,509 $ 19,278 ========== ========== Deferred financing costs are amortized over the terms of the related loans (two to seven years) Investments in Trapeza entities are accounted for using the equity method of accounting because the Company, as a 50% owner of the general partner of these entities, has the ability to exercise significant influence over their operating and financial decisions. The Company's combined general and limited partner interests in these entities range from 15% to 18%. Investments at the lower of cost or market include non-marketable investments in entities in which the Company has less than a 20% ownership interest, and in which it does not have the ability to exercise significant influence. These investments include approximately 10% of the outstanding shares of The Bancorp, Inc. ("TBI"), a related party as disclosed in Note 5. Intangible Assets Partnership management and operating contracts and the Company's equipment leasing operating system, or leasing platform, were acquired through acquisitions recorded at fair value on their acquisition dates. The Company amortizes contracts acquired on a declining balance method, over their respective estimated lives, ranging from five to thirteen years. The leasing platform is amortized on the straight-line method over seven years. Amortization expense for the years ended September 30, 2003, 2002 and 2001 was $1.1 million, $1.2 million and $1.5 million, respectively. The aggregate estimated annual amortization expense is approximately $1.1 million for each of the succeeding five years. The following table provides information about intangible assets at the dates indicated: At September 30, ----------------------- 2003 2002 ---------- ---------- (in thousands) Partnership management and operating contracts...... $ 14,343 $ 14,343 Leasing platform.................................... 918 918 ---------- ---------- 15,261 15,261 Accumulated amortization............................ (6,785) (5,672) ---------- ---------- Intangible assets, net.............................. $ 8,476 $ 9,589 ========== ========== 73 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 4 - OTHER ASSETS, INTANGIBLE ASSETS AND GOODWILL - (Continued) Goodwill On October 1, 2001, the Company early-adopted SFAS 142 "Goodwill and Other Intangible Assets," which requires that goodwill no longer be amortized, but instead tested for impairment at least annually. At that time, the Company had unamortized goodwill of $31.4 million. The transitional impairment test required upon adoption of SFAS 142, which involved the use of estimates related to the fair market value of the business operations associated with the goodwill, did not indicate an impairment loss. The Company will continue to evaluate its goodwill at least annually and will reflect the impairment of goodwill, if any, in operating income in the statement of operations in the period in which the impairment is indicated. All goodwill recorded on the Company's balance sheets is related to the Company's energy segments. Changes in the carrying amount of goodwill for the periods indicated are as follows:
Years Ended September 30, --------------------------------------- 2003 2002 2001 ----------- ---------- ------------ (in thousands) Goodwill at beginning of period, (less accumulated amortization of $4,209, $4,063 and $2,612)............................................... $ 37,471 $ 31,420 $ 28,434 Additions to goodwill related to asset acquisitions.......................... 15 4,387 Amortization expense......................................................... - - (1,451) Atlas Pipeline goodwill amortization, whose fiscal year began January 1, 2002, at which time it adopted SFAS 142.......................... - (22) - Leasing platform transferred from goodwill to other assets in accordance with SFAS 142 (net of accumulated amortization of $587)..................... - (331) - Syndication network reclassified from other assets in accordance with SFAS 142 (net of accumulated amortization of $711).......................... - 6,389 - ----------- ---------- ------------ Goodwill at end of period (net of accumulated amortization of $4,209, $4,209 and $4,063).......................................................... $ 37,471 $ 37,471 $ 31,420 =========== ========== ============
Adjusted net income from continuing operations for the year ended September 30, 2001 would have been $15.1 million, excluding goodwill amortization, net of taxes, using the Company's effective tax rate in fiscal 2001 of 31%. Adjusted basic income per share from continuing operations for the year ended September 30, 2001 would have been $.84. Adjusted diluted income per share from continuing operations for the year ended September 30, 2001 would have been $.82. 74 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 5 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS In the ordinary course of its business operations, the Company has ongoing relationships with several related entities: Relationship with Brandywine Construction & Management, Inc. ("BCMI"). BCMI manages the properties underlying 21 of the Company's real estate loans and real estate and FIN 46 assets. Adam Kauffman ("Kauffman"), President of BCMI, or an entity affiliated with him, has also acted as the general partner, president or trustee of seven of the borrowers. Edward E. Cohen ("E. Cohen"), the Company's chairman and chief executive officer, is the chairman of BCMI and holds approximately 8% of its common stock. In September 2001, the Company sold a wholly-owned subsidiary to BCMI for $4.0 million, recognizing a gain of $356,000. Relationship with RAIT Investment Trust ("RAIT"). Organized by the Company in 1997, RAIT is a real estate investment trust in which, as of September 30, 2003, the Company owned approximately 4% of the shares of benefical interests. Betsy Z. Cohen ("B. Cohen"), Mr. E. Cohen's spouse, is the chief executive officer of RAIT, and Jonathan Z. Cohen ("J. Cohen"), a son of E. and B. Cohen and the president and chief operating officer of the Company, is the vice chairman and a trustee of RAIT. Scott F. Schaeffer, a former officer and director of the Company, is RAIT's president and chief operating officer. Since October 1, 2000, the Company and RAIT have engaged in the following transactions: - In June 2002, the Company sold a mortgage loan having a book value of $1.0 million to RAIT for $1.8 million, recognizing a gain of $757,000. Mr. Schaeffer was an officer and director of the general partner of the borrower. - In March 2002, RAIT provided the initial financing, which has since been repaid, on the Company's purchase for $2.7 million of an interest in a real estate venture. - In June 2001, the Company sold to an unrelated person a $1.6 million first mortgage loan having a book value of $1.1 million, resulting in a gain of $459,000. RAIT provided acquisition financing to the unrelated purchaser. - In March 2001, the Company sold a mortgage loan to RAIT for $20.2 million, recognizing a gain of $335,000. - In March 2001, the Company consolidated its position in two loans in which it had held subordinated interests since 1998 and 1999, respectively, by purchasing from RAIT the related senior lien interests at face value for $13.0 million and $8.6 million, respectively. Relationship with TBI. The Company owns 9.7% of the outstanding common stock of TBI. In 2001, the Company acquired 70,400 shares of TBI's convertible preferred stock (9.7%) for approximately $704,000 pursuant to a rights offering to TBI's stockholders. B. Cohen and D. Cohen are officers and directors of TBI. Daniel G. Cohen ("D. Cohen"), is a son of E. and B. Cohen and is a former officer and director of the Company. Relationship with Ledgewood. Until April 1996, E. Cohen was of counsel to Ledgewood Law Firm ("Ledgewood"). The Company paid Ledgewood $1.2 million, $839,000 and $975,000 during fiscal 2003, 2002 and 2001, respectively, for legal services rendered to the Company. E. Cohen receives certain debt service payments from Ledgewood related to the termination of his affiliation with Ledgewood and its redemption of his interest. 75 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 5 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS - (Continued) Relationship with Retirement Trusts. Upon his retirement, E. Cohen is entitled to receive payments from a Supplemental Employee Retirement Plan ("SERP"). The Company has established two trusts to fund the SERP. The 1999 Trust purchased 100,000 shares of the common stock of TBI. The 2000 Trust holds 42,633 shares of convertible preferred stock of TBI and a loan to a limited partnership of which E. Cohen and D. Cohen own the beneficial interests. This loan was acquired for its outstanding balance of $720,167 by the 2000 Trust in April 2001 from a corporation of which E. Cohen is chairman and J. Cohen is the president. In addition, the 2000 Trust invested $1.0 million in Financial Securities Fund, an investment partnership which is managed by a corporation of which D. Cohen is the principal shareholder and a director. The fair value of the 1999 Trust is approximately $1.1 million at September 30, 2003. This trust and its assets are not included in the Company's consolidated balance sheet. However, its assets are considered in determining the amount of the Company's liability under the SERP. The carrying value of the assets in the 2000 Trust is approximately $3.6 million at September 30, 2003 and, because it is a "Rabbi Trust" its assets are included in Other Assets in the Company's consolidated balance sheets and the Company's liability under the SERP has not been reduced by the value of those assets. Relationships with Cohen Bros & Company. During fiscal 2003, 2002 and 2001, the Company purchased 26,450, 125,095 and 67,500 shares of its common stock at a cost of $212,100, $1.1 million and $737,000, respectively, from Cohen Bros. & Company, of which D. Cohen is the principal owner. In 2002, the Company repurchased $1.5 million principal amount of its senior notes at a cost of $1.6 million from Cohen Bros. & Company. Cohen Bros. & Company acted as a principal D. Cohen is the principal owner of the corporate parent of Cohen Bros. & Company. Relationships with 9 Henmar. The Company owns 50% interest in the Trapeza entities that have sponsored collateralized debt obligation issuers ("CDO issuers") and manage pools of trust preferred securities acquired by the CDO issures. The Trapeza entities and CDO issuers were originated and developed in large part by D. Cohen. The Company has agreed to pay his company, 9 Henmar LLC ("9 Henmar"), 10% of the fees the Company receives in connection with Trapeza entities one through four and their management of the trust preferred securities held by the CDO issuers. In fiscal 2003, the Company paid 9 Henmar $93,400 in such fees. In addition, the Company made advances of $1.4 million and $48,600 in fiscal 2003 and 2002, respectively to 9 Henmar for its expenses in connection with originating and developing the Trapeza entities and the CDO issuers. All of such advances were reimbursed to the Company by the CDO issuers, by September 30, 2003. Relationships with Certain Borrowers. The Company has from time to time purchased loans in which affiliates of the Company were or have become affiliates of the borrowes. In 2002, D. Cohen acquired beneficial ownership of a property on which the Company had held a loan interest since 1998. At September 30, 2003, the Company's receivable was $6.6 million and the book value of the loan was $2.3 million. In 2000, to protect the Company's interest, the property securing a loan held by the Company since 1994 was purchased by a limited partnership owned in equal parts by Messrs. Schaeffer, Kauffman, E. Cohen and D. Cohen. In September 2003, in furtherance of its position, the Company foreclosed on the property In 1998, the Company acquired a defaulted loan in the original principal amount of $91.0 million for a cost of $90.6 million. In September 2000, in connection with a refinancing and to protect the Company's interest, a newly-formed limited liability company owned in equal parts by Messrs. Schaeffer, Kauffman, E. Cohen and D. Cohen assumed equity title to the property. 76 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 5 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS - (Continued) In 1998, the Company acquired a loan under a plan of reorganization in bankruptcy for a cost of $95.6 million. An order of the bankruptcy court required that legal title to the property underlying the loan be transferred. In order to comply with that order, to maintain control of the property and to protect the Company's interest, an entity whose general partner is a subsidiary of the Company and whose limited partners are Messrs. Schaeffer, Kauffman, D. Cohen and E. Cohen (with a 94% beneficial interest), assumed title to the property. Relationships with Certain Lienholders. In 1997, the Company acquired a first mortgage lien with a face amount of $14.0 million and a book value of $4.5 million on a hotel property owned by a corporation in which, on a fully diluted basis, J. Cohen and E. Cohen would have a 19% interest. The corporation acquired the property through foreclosure of a subordinate loan. In May 2003, the Company acquired this property through further foreclosures proceedings and recorded write-downs of $2.7 million associated with this property in fiscal 2003. NOTE 6 - INVESTMENTS IN LEASE RECEIVABLES Components of the investment in direct financing leases at September 30, 2003 and 2002 are as follows: At September 30, ---------------------- 2003 2002 ---------- --------- (in thousands) Total future minimum lease payments receivable...... $ 7,982 $ 2,908 Initial direct costs, net of amortization........... 122 58 Unguaranteed residual............................... 51 50 Unearned lease income............................... (1,326) (504) Unearned residual income............................ (12) (17) ---------- --------- Investment in lease receivables.................. $ 6,817 $ 2,495 ========== ========= Although the lease terms extend over many years as indicated in the table below, the investment in lease receivables is included in accounts receivable and prepaid expenses in the Company's consolidated balance sheets, since the Company routinely sells them to third parties shortly after their orgination. The contractual future minimum lease payments receivable for each of the five succeeding fiscal years ended September 30. and thereafter, are as follows (in thousands): 2004................... $ 2,438 2005................... 2,024 2006................... 1,282 2007................... 1,055 2008................... 816 Thereafter............. 367 ---------- $ 7,982 ========== 77 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 7 - INVESTMENTS IN REAL ESTATE LOANS AND REAL ESTATE The Company focuses primarily on the management and resolution of income-producing real estate loans. The Company records as income the accretion of a portion of the difference between its cost basis in a loan 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 $2.0 million, $3.2 million and $5.9 million during the years ended September 30, 2003, 2002, and 2001, respectively. As the Company sells senior lien interests or receives funds from refinancings of its loans by the borrower, 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. The Company has also adopted the cost recovery method for certain loans due to unanticipated events such as the loss of a major tenant of an underlying property, the declaration of bankruptcy and voiding of the lease by a sole tenant and, for a hotel property underlying a loan, the severe effects of the post-9/11 travel slump. At September 30, 2003 and 2002, the Company held real estate loans having aggregate face values of $186.9 million and $610.0 million, respectively, after the removal of $132.7 million of carrying value upon the adoption of FIN 46 on July 1, 2003 as discussed in Note 3. Amounts receivable, net of senior lien interests and deferred costs, were $96.4 million and $349.3 million at September 30, 2003 and 2002, respectively. The following is a summary of the changes in the carrying value of the Company's investments in real estate loans and real estate for the years ended September 30, 2003 and 2002.
September 30, ----------------------- 2003 2002 ---------- ---------- (in thousands) Loan balance, beginning of year.............................. $ 187,542 $ 192,263 New loans.................................................... 1,350 - Addition to existing loans................................... 4,855 17,185 Loan write-downs............................................. (1,448) (559) Accretion of discount (net of collection of interest)........ 1,962 3,212 Loans reclassified as FIN 46 entities' assets................ (132,312) - Foreclosures transferred to real estate...................... (11,404) - Collections of principal..................................... (10,129) - Cost of loans resolved....................................... - (24,559) ---------- ---------- Loan balance, end of year.................................... 40,416 187,542 Real estate ventures......................................... 14,131 14,029 Real estate owned, net of accumulated depreciation of $640 and $432 (see Note 8)....................................... 15,806 4,332 Allowance for possible losses................................ (1,417) (3,480) ---------- ---------- Balance, end of year......................................... $ 68,936 $ 202,423 ========== ==========
78 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 7 - INVESTMENTS IN REAL ESTATE LOANS AND REAL ESTATE - (Continued) In determining the Company's allowance for possible losses related to its real estate loans and real estate, the Company considers general and local economic conditions, neighborhood values, competitive overbuilding, casualty losses and other factors which may affect the value of loans and real estate. The value of loans and real estate may also be affected by factors such as the cost of compliance with regulations and liability under applicable environment laws, changes in interest rates and the availability of financing. Income from property will be reduced if a significant number of tenants are unable to pay rent or if available space cannot be rented on favorable terms. In addition, the Company continuously monitor collections and payments from its borrowers and maintains an allowance for estimated losses based upon its historical experience and its knowledge of specific borrower collection issues identified. The Company reduces its investment in real estate loans and real estate by an allowance for amounts that may become unrealizable in the future. Such allowance can be either specific to a particular loan or property or general to all loans and real estate. 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, 2003 and 2002: September 30, ------------------------ 2003 2002 ---------- ---------- (in thousands) Balance, beginning of year................. $ 3,480 $ 2,529 Provision for possible losses.............. 1,848 1,510 Transfers upon foreclosure................. (2,339) - Write-downs associated with foreclosure.... (1,572) (559) ----------- ---------- Balance, end of year....................... $ 1,417 $ 3,480 ========== ========== NOTE 8 - REAL ESTATE LEASING ACTIVITIES The following table provides information about the Company's investments in real estate owned at September 30, 2003 (in thousands): Land.............................. $ 630 Leasehold interest................ 4,800 Office building................... 3,596 Apartment buildings............... 3,380 Hotel............................. 4,040 ---------- 16,446 Less accumulated depreciation..... (640) ---------- Total.......................... $ 15,806 ========== Minimum future rental income on non-cancelable operating leases associated with the real estate investments that have terms in excess of one year for each of the five succeeding fiscal years ended September 30, are as follows (in thousands): 2004 - $255; 2005 - $255; 2006 - $185; 2007 - $29 and 2008 - $20. 79 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 9 - DEBT Debt other than secured revolving credit facilities-leasing consists of the following: At September 30, ------------------------ 2003 2002 ---------- ---------- (in thousands) Senior debt.......................... $ 54,027 $ 65,336 Non-recourse debt: Energy: Revolving credit facilities.... 31,000 49,345 Real estate finance: Revolving credit facility...... 18,000 18,000 Other.......................... 1,663 875 ---------- ---------- Total non-recourse debt..... 50,663 68,220 Other debt........................... 28,477 19,533 ---------- ---------- 133,167 153,089 Less current maturities.............. 59,471 4,320 ---------- ---------- $ 73,696 $ 148,769 ========== ========== Following is a description of borrowing arrangements in place at September 30, 2003 and 2002: 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, 2003, the Company was in compliance with such provisions. Energy-Revolving Credit Facilities. In July 2002, Atlas America, the Company's energy subsidiary, entered into a $75.0 million credit facility led by Wachovia Bank. The revolving credit facility has a current borrowing base of $54.2 million which may be increased subject to growth in the Company's oil and gas reserves. The facility permits draws based on the remaining proved developed non-producing and proved undeveloped natural gas and oil reserves attributable to Atlas America's wells and the projected fees and revenues from operation of the wells and the administration of energy partnerships. Up to $10.0 million of the facility may be in the form of standby letters of credit. The facility is secured by Atlas America's assets. The revolving credit facility has a term ending in July 2005 and bears interest at one of two rates (elected at the borrower's option) which increase as the amount outstanding under the facility increases: (i) Wachovia prime rate plus between 25 to 75 basis points, or (ii) LIBOR plus between 175 and 225 basis points. The Wachovia credit facility requires Atlas America to maintain specified net worth and specified ratios of current assets to current liabilities and debt to EBITDA, and requires the Company to maintain a specified interest coverage ratio. In addition, the facility limits sales, leases or transfers of assets and the incurrence of additional indebtedness. The facility limits the dividends payable by Atlas America to the Company, on a cumulative basis, to 50% of Atlas America's net income from and after April 1, 2002 plus $5.0 million. In addition, Atlas America is permitted to repay intercompany debt to the Company only up to the amount of the Company federal income tax liability attributable to Atlas America and accrued interest on the senior notes. The facility terminates in July 2005, when all outstanding borrowings must be repaid. At September 30, 2003 and 2002, $32.3 million and $45.0 million, respectively, were outstanding under this facility, including $1.3 million each year under letters of credit. The interest rates ranged from 2.88% to 2.90% at September 30, 2003. 80 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 9 - DEBT - (Continued) In September 2003, Atlas Pipeline amended and increased its revolving credit facility with Wachovia Bank to provide for maximum borrowings of $20.0 million. Up to $3.0 million of the facility may be used for standby letters of credit. Borrowings under the facility are secured by a lien on and security interest in all the property of Atlas Pipeline and its subsidiaries, including pledges by Atlas Pipeline of the issued and outstanding units of its subsidiaries. The revolving credit facility has a term ending in December 2005 and bears interest at one of two rates, elected at Atlas Pipeline's option: (i) the Base Rate plus the Applicable Margin or (ii) the Euro Rate plus the Applicable Margin. As used in the facility agreement, the Base Rate is the higher of (a) Wachovia Bank's prime rate or (b) the sum of the federal funds rate plus 50 basis points. The Euro Rate is the average of specified LIBOR rates divided by 1.00 minus the percentage prescribed by the Federal Reserve Board for determining the reserve requirements for euro currency funding. The Applicable Margin varies with Atlas Pipeline's leverage ratio from between 150 to 250 basis points (for the Euro Rate option) or 0 to 75 basis points (for the Base Rate option). Draws under any letter of credit bear interest as specified under (i), above. The credit facility contains financial covenants, including the requirement that Atlas Pipeline maintain: (a) a leverage ratio not to exceed 3.0 to 1.0, (b) an interest coverage ratio greater than 3.5 to 1.0 and (c) a minimum tangible net worth of $14.0 million. In addition, the facility limits, among other things, sales, leases or transfers of property by Atlas Pipeline, the incurrence by Atlas Pipeline of other indebtedness and certain investments by Atlas Pipeline. There were no outstanding borrowings on this facility at September 30, 2003 and $5.6 million at September 30, 2002. Real Estate Finance-Revolving Credit Facility. The Company has an $18.0 million revolving line of credit with Sovereign Bank. Interest is payable monthly at The Wall Street Journal prime rate (4.0% at September 30, 2003) and principal is due upon expiration in July 2005. 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, 2003 and 2002, $18.0 million had been advanced under this line. The more significant components of Other Debt are described as follows: Real Estate Finance-Other Debt. The Company, through certain operating subsidiaries, has a $6.8 million term note with Hudson United Bank for its commercial real estate loan operations. At September 30, 2003 and 2002, $6.4 million was outstanding on this note. The credit facility bears interest at The Wall Street Journal prime rate minus one percent (3.0% at September 30, 2003) and is secured by the borrowers' interests in certain commercial loans and by a pledge of their outstanding capital stock. The Company has guaranteed repayment of the credit facility. The facility is due on October 1, 2004. The Company, through certain operating subsidiaries, has a $10.0 million term loan with The Marshall Group. The loan bears interest at the three month LIBOR rate plus 350 basis points (4.92% at September 30, 2003), adjusted annually. Principal and interest are payable monthly based on a five-year amortization schedule maturing October 31, 2006. The loan is secured by the Company's interest in certain portfolio loans and real estate. At September 30, 2003 and 2002, $5.8 million and $7.9 million, respectively, was outstanding on this loan. The Company has a $5.0 million revolving line of credit with Sovereign Bank, which expires August 2005. Interest accrues at The Wall Street Journal prime rate (4.0% at September 30, 2003) 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 secured by a pledge of 425,000 common shares of RAIT held by the Company. Credit availability, which was $5.0 million at September 30, 2003, is based upon the value of those shares. Advances under this facility must be used to repay bank debt, to acquire commercial real estate or interests therein, fund or purchase loans secured by commercial real estate or interests therein, or reduce indebtedness on loans or interests which the Company owns or holds and for other general corporate purposes. At September 30, 2003 and 2002, $5.0 million had been advanced under the line. The Company maintains a line of credit with Commerce Bank for $5.0 million. The facility is secured by a pledge of 440,000 common shares of RAIT held by the Company. Credit availability is 60% of the value of those shares, and was $5.0 million at September 30, 2003. The loans bear interest, at the Company's election, at either The Wall Street Journal prime rate or LIBOR plus 250 basis points, with a minimum rate of 5.5% and a maximum rate of 9.0%. The facility terminates in May 2005, subject to extension. The facility requires the Company to maintain a specified net worth and ratio of liabilities to tangible net worth, and prohibits transfer of the collateral. At September 30, 2003, $5.0 million had been advanced under this line of credit. No amounts had been advanced under this line of credit at September 30, 2002. 81 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 9 - DEBT - (Continued) During the year ended September 30, 2002, the Company issued convertible notes payable in the amount of $11,000 to two executive officers of its subsidiary, LEAF. The notes accrue interest at a rate of 8% per annum, and mature in 2012. No payment of accrued interest or principal is due until 2007, at which time accrued interest is due. Thereafter, monthly interest payments are required until the notes mature. The notes can be converted into 11.5% of the subsidiary's common stock at the earlier of August 1, 2004 or the date of legal defeasance of the senior debt. Annual debt principal payments over the next five fiscal years ending September 30 are as follows: (in thousands): 2004............................. $ 59,471 2005............................. $ 71,728 2006............................. $ 1,932 2007............................. $ 25 2008............................. $ 11 Secured revolving credit facilities-leasing. In June 2002, the Company and LEAF I LP (the "Borrowers") entered into a warehouse credit line with National City Bank that has an aggregate borrowing limit of up to $10.0 million, consisting of revolving credit and term loan components. The Borrowers are jointly, severally and directly liable for the full and prompt payment of each loan under the warehouse credit line. Interest on the facility is calculated at LIBOR plus three percent per annum at the time of borrowing. Interest rates on the debt outstanding at September 30, 2003 ranged from 4.10% to 4.18%. Borrowings under the facility are collateralized by the leases being financed and the underlying equipment being leased. Obligations under this facility are guaranteed by the Company. The agreement contains certain covenants pertaining to the Borrowers, including the maintenance of certain financial ratios and restrictions on changes in the Borrower's ownership. Outstanding borrowings at September 30, 2003 were approximately $2.5 million. The facility expires in December 2003. In May 2003, the Company and LEAF I LP (the "Borrowers") entered into a revolving credit facility with Commerce Bank that has an aggregate borrowing limit of up to $10.0 million. The Borrowers are jointly, severally and directly liable for the full and prompt payment of each loan under the revolving credit facility. Interest on the facility is calculated at the Borrower's option, at the bank's prime rate plus 1 percent or the bank's LIBOR rate plus 3 percent. The interest rate on outstanding borrowings at September 30, 2003 was 4.12%. Borrowings under the facility are collateralized by the leases being financed and the underlying equipment being leased. Obligations under this facility are guaranteed by the Company. The agreement contains certain covenants pertaining to the Borrowers, including the maintenance of certain financial ratios. As of September 30, 2003, approximately $4.7 million was outstanding on the facility. The facility expires in May of 2004. At September 30, 2003, the Company has complied with all financial covenants in its debt agreements. 82 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 10 - INCOME TAXES The following table details the components of the Company's income tax expense from continuing operations for the fiscal years 2003, 2002 and 2001. Years Ended September 30, ------------------------------------ 2003 2002 2001 ---------- ---------- ---------- (in thousands) Provision (benefit) for income taxes: Current: Federal.......................... $ 341 $ 6,365 $ 6,023 State............................ 24 (619) 158 Deferred............................ 4,221 (2,332) 146 ---------- ---------- ---------- $ 4,586 $ 3,414 $ 6,327 ========== ========== ========== A reconciliation between the statutory federal income tax rate and the Company's effective income tax rate is as follows:
Years Ended September 30, -------------------------- 2003 2002 2001 ---- ---- ---- Statutory tax rate..................................... 35% 35% 35% Statutory depletion.................................... (2) (4) (3) Non-conventional fuel and low income housing credits... - (3) (3) Excessive employee remuneration........................ - - 2 Goodwill............................................... - - 1 Tax-exempt interest.................................... (2) (2) (2) State income tax....................................... 1 3 1 ---- --- ---- 32% 29% 31% ==== === ====
The components of the net deferred tax liability are as follows: September 30, ---------------------------- 2003 2002 ----------- ----------- (in thousands) Deferred tax assets related to: Tax credit carryforwards................... $ - $ 28 FIN 46 assets.............................. 8,858 - Interest receivable on real estate loans... 6,480 688 Stock option exercises..................... 558 - Accrued expenses........................... 6,057 7,335 Provision for possible losses.............. 674 1,185 ----------- ----------- $ 22,627 $ 9,236 ----------- ----------- Deferred tax liabilities related to: Property and equipment bases differences... (29,065) (17,447) Investments in real estate ventures........ (3,812) (2,491) Unrealized gain on investments............. (2,628) (2,899) ESOP benefits.............................. - (132) ----------- ----------- (35,505) (22,969) ----------- ----------- Net deferred tax liability.................... $ (12,878) $ (13,733) =========== =========== 83 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 10 - INCOME TAXES - (Continued) Generally accepted accounting principles require 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 assets will not be realized. No valuation allowance was needed at September 30, 2003 or 2002. NOTE 11 - 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 September 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 ESOP loan receivable (a reduction in stockholders' equity) is reduced by the amount of any loan principal reduction resulting from contributions by the Company to the ESOP. The common stock purchased by the ESOP 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. As of September 30, 2003, there were 269,800 shares allocated to participants, and 105,000 unallocated shares in the plan. Compensation expense related to the plan amounted to $159,800, $182,200 and $151,200 for the years ended September 30, 2003, 2002 and 2001, 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. Prior to March 1, 2002, the Company matched up to 100% of each employee's contribution, subject to certain limitations; thereafter, up to 50%. Included in general and administrative expenses are $283,700 $335,200 and $363,800 for the Company's contributions for the years ended September 30, 2003, 2002 and 2001, respectively. Stock Options. The following table summarizes certain information about the Company's equity compensation plans, in the aggregate, as of September 30, 2003.
(a) (b) (c) -------------------------- ---------------------------- ------------------------------- Number of securities remaining Number of securities to be available for future issuance issued upon exercise of Weighted-average exercise under equity compensation plans outstanding options, price of outstanding excluding securities reflected Plan category warrants and rights options, warrants and rights in column (a) - ----------------------------- -------------------------- ---------------------------- ------------------------------- Equity compensation plans approved by security holders 1,918,986 $ 10.39 288,599 Equity compensation plans not approved by security holders 36,554 $ .11 - Total 1,955,540 $ 10.21 288,599
The Company has four existing employee stock option plans, those of 1989, 1997, 1999 and 2002. No further grants may be made under the 1989 and 1997 plans. Options under all 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. 84 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 11 - EMPLOYEE BENEFIT PLANS - (Continued) The 1989 plan authorized 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"). The 1997 Key Employee Stock Option Plan authorized the granting of up to 825,000 shares of the Company's common stock in the form of ISO's, non-qualified stock options and SAR's. No options were issued under this plan during fiscal 2003. In fiscal 2002 and 2001, options for 4,000 and 55,000 shares were issued under this plan, respectively. The 1999 Key Employee Stock Option Plan authorized the granting of up to 1,000,000 shares of the Company's common stock in the form of ISO's, non-qualified stock options and SAR's. No options were issued under this plan during fiscal 2003. In fiscal 2002 and 2001, options for 62,533 and 371,000 shares, respectively, were issued under this plan. In April 2002, stockholders approved the Resource America, Inc. 2002 Key Employee Stock Option Plan. This plan, for which 750,000 shares were reserved, provides for the issuance of ISO's, non-qualified stock options and SAR's. In fiscal 2003 and 2002, options for 5,000 shares and 664,967, respectively, were issued under this plan. 85 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 11 - EMPLOYEE BENEFIT PLANS - (Continued) Transactions for the four employee stock option plans are summarized as follows:
Years Ended September 30, ----------------------------------------------------------------------------------------- 2003 2002 2001 --------------------------- --------------------------- --------------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price --------- -------------- --------- -------------- --------- -------------- Outstanding - beginning of year.. 2,375,504 $ 9.86 1,892,447 $ 10.27 1,642,967 $ 9.38 Granted....................... 5,000 $ 11.50 731,500 $ 8.24 424,000 $ 11.06 Exercised..................... (385,281) $ 7.61 (222,682) $ 7.93 (155,947) $ 2.68 Forfeited..................... (145,969) $ 10.67 (25,761) $ 11.06 (18,573) $ 13.33 --------- --------- --------- Outstanding - end of year..... 1,849,254 $ 10.26 2,375,504 $ 9.86 1,892,447 $ 10.27 ========= ============== ========= ============== ========= ============== Exercisable, at end of year...... 1,053,843 $ 11.29 1,036,006 $ 10.36 743,213 $ 9.64 ========= ============== ========= ============== ========= ============== Available for grant.............. 227,688 86,719 42,458 ========= ========== ========= Weighted average fair value per share of options granted during the year................. $ 8.07 $ 5.10 $ 8.73 ============== ============== ==============
The following information applies to employee stock options outstanding as of September 30, 2003:
Outstanding Exercisable ---------------------------------------------- ---------------------------- Weighted Average Weighted Weighted Range of Contractual Average Average Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price - --------------- ------------ ------------ -------------- ---------- -------------- $ 2.73 80,057 2.22 $ 2.73 80,057 $ 2.73 $ 7.47 - $ 8.08 693,750 7.55 $ 7.65 276,437 $ 7.60 $ 9.19 - $ 9.34 237,500 8.74 $ 9.32 59,375 $ 9.32 $ 11.03 - $ 11.50 394,947 7.36 $ 11.06 194,974 $ 11.06 $ 15.50 443,000 6.64 $ 15.50 443,000 $ 15.50 ------------ ---------- 1,849,254 1,053,843 ============ ==========
In connection with the acquisition of Atlas America, the Company issued options for 120,213 shares at an exercise price of $.11 per share to certain employees of Atlas America who had held options of Atlas America before its acquisition by the Company. Options for 36,554 shares remain outstanding and are exercisable as of September 30, 2003. 86 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 11 - EMPLOYEE BENEFIT PLANS - (Continued) SFAS No. 123 requires the disclosure of pro forma net income (loss) and earnings (loss) per share as if the Company had adopted the fair value method for stock options granted after June 30, 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, 10 years following vesting; stock volatility, 70%, 64% and 68% in fiscal 2003, 2002 and 2001, respectively; risk-free interest rate, 4.0%, 4.4% and 5.5% in fiscal 2003, 2002 and 2001, respectively; dividends were based on the Company's historical rate. The Company accounts for its four existing employee stock option plans under the recognition and measurement principles of APB No. 25 and related interpretations. No stock-based employee compensation cost is reflected in net income (loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.
Years Ended September 30, ----------------------------------------- 2003 2002 2001 ----------- ----------- ----------- (in thousands, except per share data) Net (loss) income, as reported............................ $ (2,915) $ (3,309) $ 9,829 Less total stock-based employee compensation expense determined under the fair value based method for all awards, net of income taxes.............................. (3,100) (3,464) (2,505) ----------- ----------- ----------- Pro forma net (loss) income............................... $ (6,015) $ (6,773) $ 7,324 =========== =========== =========== (Loss) earnings per share: Basic - as reported.................................... $ (.17) $ (.19) $ .55 Basic - pro forma...................................... $ (.35) $ (.39) $ .41 Diluted - as reported.................................. $ (.17) $ (.19) $ .53 Diluted - pro forma.................................... $ (.34) $ (.38) $ .40
Other Plans. In addition to the employee stock option plans, the stockholders approved the Resource America, Inc. 1997 Non-Employee Director Deferred Stock and Deferred Compensation Plan for which a maximum of 75,000 units were reserved for issuance, all of which have been issued. The fair value of the grants awarded (at an average of $13.43 per unit), $1.1 million in total, has been charged to operations over the vesting period. As of September 30, 2003, 57,000 units (average $13.54 per unit) were outstanding and fully vested. During the fiscal year, 3,000 units were forfeited and 15,000 units (at an average of $13.37 per unit) were converted to 15,000 shares of the Company's common stock and issued to a former director who resigned in April 2003. The plan was terminated as of April 30, 2002, as provided by the terms of the plan, except with respect to previously awarded grants. No further grants can be made under this plan. 87 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 11 - EMPLOYEE BENEFIT PLANS - (Continued) In April 2002, the stockholders approved the Resource America, Inc. 2002 Non-Employee Director Deferred Stock and Deferred Compensation Plan for which a maximum of 75,000 units were reserved for issuance. In fiscal 2003, 9,130 units (at anaverage of $8.21 per unit) were issued under this plan. As of September 30, 2003, 12,732 units (at an average of $9.42 per unit) were outstanding under this plan. During the fiscal year, 7,540 units were forfeited and 1,357 units (at an average of $11.05 per unit) were converted to 1,357 shares of the Company's common stock and issued to a former director who resigned in April 2003. The fair value of the grants awarded (at an average of $9.85 per unit), $213,080 in total, has been charged to operations over the vesting period. As of September 30, 2003, 60,911 units are available for issuance under this plan. Under these plans, non-employee directors of the Company are awarded units on an annual basis representing the right to receive one share of the Company's common stock for each unit awarded. In April 2003, the stockholders approved an amendment to each plan concerning the vesting schedule whereby units are now vested on the later of the fifth anniversary of the date of becoming an eligible director and the first anniversary of the grant of units. Units will vest sooner upon a change of control of the Company or death or disability of a director, provided the director has completed at least six months of service. Upon termination of service by a director, all unvested units are forfeited. Under the SERP of E. Cohen, the Company will pay 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 2003, 2002 and 2001, operations were charged $315,000, $1.1 million and $927,000, respectively, with respect to these commitments. NOTE 12 - COMMITMENTS AND CONTINGENCIES The Company leases office space and equipment under leases with varying expiration dates through 2008. Rental expense was $2.6 million, $2.1 million and $1.9 million for the years ended September 30, 2003, 2002 and 2001, respectively. At September 30, 2003, future minimum rental commitments for the next five fiscal years were as follows (in thousands): Leases Subleases Net Commitments -------- ----------- --------------- 2004................... $ 1,400 $ (183) $ 1,217 2005................... 1,251 (182) 1,069 2006................... 884 (161) 723 2007................... 650 (113) 537 2008................... 363 - 363 The Company is the managing general partner of various energy partnerships, and has agreed to indemnify each investor partner from any liability that exceeds such partner's share of partnership assets. Subject to certain conditions, investor partners in certain energy partnerships have the right to present their interests for purchase by the Company, as managing general partner. The Company is not obligated to purchase more than 5% or 10% of the units in any calendar year. Based on past experience, the Company believes that any liability incurred would not be material. The Company may be required to subordinate a part of its net partnership revenues to the receipt by investor partners of cash distributions from the energy partnerships equal to at least 10% of their agreed subscriptions determined on a cumulative basis, in accordance with the terms of the partnership agreements. 88 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 12 - COMMITMENTS AND CONTINGENCIES - (Continued) The Company is party to employment agreements with certain executives that provide for compensation and certain other benefits. The agreements also provide for severance payments under certain circumstances. The Company is a defendant in a proposed class action originally 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 allegedly should have been paid. The Company believes the complaint is without merit and is defending itself vigorously. A real estate investment partnership in which the Company has a general partner interest, has obtained senior lien financing with respect to four properties it acquired. The senior liens are with recourse only to the properties securing them subject to certain standard exceptions, which the Company has guaranteed. These guarantees expire as the related indebtedness is paid down over the next ten years. In addition, property owners have obtained senior lien financing with respect to six of our loans. The senior liens are with recourse only to the properties securing them subject to certain standard exceptions, which we have guaranteed. These guarantees expire as the related indebtedness is paid down over the next six years. The Company is also a 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. NOTE 13 - HEDGING ACTIVITIES The Company, through its energy subsidiaries, from time to time 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. The Company formally documents all relationships between hedging instruments and the items being hedged, including the Company's risk management objective and strategy for undertaking the hedging transactions. This includes matching the natural gas futures and options contracts to the forecasted transactions. The Company assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives are highly effective in offsetting changes in the fair value of hedged items. Historically these contracts have qualified and been designated as cash flow hedges and recorded at their fair values. Gains or losses on future contracts are determined as the difference between the contract price and a reference price, generally prices on NYMEX. Such gains and losses are charged or credited to accumulated other comprehensive income (loss) and recognized as a component of sales revenue in the month the hedged gas is sold. If it is determined that a derivative is not highly effective as a hedge or it has ceased to be a highly effective hedge, due to the loss of correlation between changes in gas reference prices under a hedging instrument and actual gas prices the Company discontinue hedge accounting for the derivative and subsequent changes in fair value for the derivative are recognized immediately into earnings. 89 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 13 - HEDGING ACTIVITIES - (Continued) At September 30, 2003, the Company had no open natural gas futures contracts related to natural gas sales and accordingly, had no unrealized loss or gain related to open NYMEX contracts at that date. Its net unrealized gain was approximately $316,600 at September 30, 2002. The Company recognized a loss of $1.1 million, $59,000 and $599,000 on settled contracts covering natural gas production for the years ended September 30, 2003, 2002 and 2001, respectively. The Company recognized no gains or losses during the three year period ended September 30, 2003 for hedge ineffectiveness or as a result of the discontinuance of cash flow hedges. 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 14 - DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE Discontinued Operations In June 2002, the Company adopted a plan to dispose of Optiron and reduce its interest in Optiron to 10% through a sale to current management which was completed in September 2002. In connection with the sale, the Company forgave $4.3 million out of the $5.9 million of indebtedness owed by Optiron. The remaining $1.6 million of indebtedness was retained by the Company in the form of a promissory note secured by all of Optiron's assets and by the common stock of Optiron's 90% shareholder. The note bears interest at the prime rate plus 1% payable monthly; an additional 1% will accrue until the maturity date of the note in 2022. Under the terms of the plan of disposal, Optiron was obligated to pay to the Company 10% of Optiron's revenues if such revenues exceeded $2.0 million in the twelve month period following the closing of the transaction. As a result, Optiron became obligated to pay the Company $295,000. This payment is due in March 2004. In accordance with SFAS No. 144, the results of operations have been prepared under the financial reporting requirements for discontinued operations, pursuant to which, all historical results of Optiron are included in the results of discontinued operations rather than the results of continuing operations for all periods presented. Summarized operating results of the discontinued Optiron operations are as follows:
Years Ended September 30, ------------------------------------ 2003 2002 2001 ---------- ---------- ---------- (in thousands) Loss from discontinued operations before income taxes........... $ - $ (553) $ (1,493) Income tax benefit.............................................. - 193 463 --------- ---------- ---------- Loss from discontinued operations............................... $ - $ (360) $ (1,030) ========= ========== ========== Income (loss) on disposal of discontinued operations before income taxes.................................................. $ 295 $ (1,971) $ - Income tax (provision) benefit.................................. (103) 690 - ---------- ---------- ---------- Income (loss) on disposal of discontinued operations............ $ 192 $ (1,281) $ - ========= ========== ==========
90 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 14 - DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - (Continued) On August 1, 2000, the Company sold its small ticket equipment leasing subsidiary, Fidelity Leasing, Inc., to European American Bank and AEL Leasing Co., Inc., subsidiaries of ABN AMRO Bank, N.V. The Company received total consideration of $152.2 million, including repayment of indebtedness of Fidelity Leasing to the Company; 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 was payable to the extent that payments were made on a pool of Fidelity Leasing lease receivables and refunds were received with respect to certain tax receivables. In addition, $10.0 million was placed in escrow as security for the Company's indemnification obligations to the purchasers, in connection with the sale. Accordingly, FLI is reported as a discontinued operation for the years ended September 30, 2002 and 2001. The Consolidated Financial Statements reflect the operations of FLI as discontinued operations in accordance with APB Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB No. 30"). The successor in interest to the purchaser, made a series of claims with respect to the Company's indemnification obligations and representations which were settled in December 2002. Under the settlement, the Company and the successor were released from certain terms and obligations of the original purchase agreements, including many of the terms of the Company's non-competition agreement, and from claims arising from circumstances known at the settlement date. In addition, the Company (i) released to the successor the $10.0 million in escrow previously referred to; (ii) paid the successor $6.0 million; (iii) guaranteed that the successor will receive payments of $1.2 million from a note, secured by FLI lease receivables, delivered to the Company at the close of the FLI sale; and (iv) delivered two promissory notes to the successor, each in the principal amount of $1.75 million, bearing interest at the two-year treasury rate plus 500 basis points, due on December 31, 2003 and 2004, respectively. The Company recorded a loss from discontinued operations, net of taxes, of $9.4 million in connection with the settlement. Summarized operating results of the discontinued FLI operations are as follows:
Years Ended September 30, ----------------------------------- 2003 2002 2001 --------- ---------- ---------- (in thousands) (Loss) gain on disposal before income taxes...................... $ - $ (14,460) $ (5,200) Income tax benefit (provision)................................... - 5,061 1,976 --------- ---------- ---------- (Loss) gain on disposal of discontinued operations............... $ - $ (9,399) $ (3,224) ========= =========== ===========
The assets and liabilities of four of the entities that were consolidated under the provisions of FIN 46 in the quarter ended September 30, 2003 have been classified as held for sale in accordance with the Company's intent to sell its interest in the real estate loans underlying those assets and liabilities. In addition, the Company foreclosed on one property in which it held a loan and has classified this property as held for sale. Summarized operating results of the Company's real estate operations held for sale are as follows:
Years Ended September 30, ----------------------------------- 2003 2002 2001 --------- ----------- ---------- (in thousands) Income on discontinued operations before income taxes............ $ 1,584 $ - $ - Income tax provision............................................. (554) - - ---------- ---------- ---------- Income from discontinued operations.............................. $ 1,030 $ - $ - ========= ========== ==========
91 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 14 - DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - (Continued) Summarized results of the discontinued operations Optiron, FLI and real estate are:
Years Ended September 30, ----------------------------------- 2003 2002 2001 --------- ---------- ---------- (in thousands) Income (loss) from discontinued operations....................... $ 1,030 $ (360) $ (1,030) Gain (loss) on disposal of discontinued operations............... 192 (10,680) (3,224) ---------- ----------- ----------- Total discontinued income (loss) ................................ $ 1,222 $ (11,040) $ (4,254) ========== =========== ===========
Cumulative Effect of Change in Accounting Principle Optiron adopted SFAS 142 on January 1, 2002, the first day of its fiscal year. Optiron performed the evaluation of its goodwill required by SFAS 142 and determined that it was impaired due to uncertainty associated with the on-going viability of the product line with which the goodwill was associated. This impairment resulted in a cumulative effect adjustment on Optiron's books of $1.9 million before tax. The Company recorded in its second fiscal quarter of fiscal 2002 year-end, which correlated to Optiron's first quarter, its share of this cumulative effect adjustment in the same manner. As described in Note 3, the Company recorded a $13.9 million cumulative effect adjustment for a change in accounting principle upon the adoption of FIN 46. NOTE 15 - SETTLEMENT OF LAWSUITS The Company settled an action filed in the U.S. District Court for the District of Oregon by the former chairman of TRM Corporation and his children. The Company's chief executive officer and a former director and officer also had been named as defendants. The plaintiffs' claims were for breach of contract and fraud. The Company recorded a charge of $1.2 million, including related legal fees, in the fiscal year ended September 30, 2003. The Company has made a claim under its directors' and officers' insurance policy in connection with this settlement. The Company was a defendant in a class action complaint by stockholders who purchased shares of the Company's common stock between December 17, 1997 and February 22, 1999. Damages were sought in an unspecified amount for losses allegedly incurred as the result of misstatements and omissions allegedly contained in the Company's periodic reports and a registration statement filed with the SEC. To avoid the potential of costly litigation, which would have involved significant time of senior management, the Company settled this matter for a maximum of $7.0 million plus approximately $1.0 million in costs and expenses, of which $6.0 million was paid by two of the Company's directors' and officers' liability insurers. The Company is seeking to obtain the balance of $2.0 million through an action against a third insurer who refused to participate in the settlement. The plaintiffs have agreed to reduce by 50% the amount by which the $2.0 million exceeds any recovery from the insurer. The Company charged operations $1.0 million in the fiscal year ended September 30, 2002, the amount of its maximum remaining exposure. If the Company is successful in receiving reimbursement from the third insurer, future operations will be benefited. 92 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 16 - OPERATIONS OF ATLAS PIPELINE 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 net proceeds of $15.3 million for the gathering systems, and Atlas Pipeline issued to the Company 1,641,026 subordinated units constituting a 51% combined general and limited partner interest in Atlas Pipeline. A subsidiary of the Company is the general partner of Atlas Pipeline and has a 2% partnership interest on a consolidated basis. The Company's subordinated units are a special class of limited partnership interest in Atlas Pipeline under which its 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. The Company's general partner interest also includes a right to receive incentive distributions if the partnership meets or exceeds specified levels of distributions. In May 2003, Atlas Pipeline completed a public offering of 1,092,500 common units of limited partner interest. The net proceeds after underwriting discounts and commissions were approximately $25.2 million. These proceeds were used in part to repay existing indebtedness of $8.5 million. Atlas Pipeline intends to use the balance of these proceeds to fund future capital projects and for working capital. Upon the completion of this offering the Company's combined general and limited partner interest in Atlas Pipeline was reduced to 39%. Because the Company, through its general partner interest, controls the decisions and operations of Atlas Pipeline it is consolidated in the Company's financial statements and results of operations. In connection with the Company's sale of the gathering systems to Atlas Pipeline, the Company entered into agreements that: - Require it 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. - Require it 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. During fiscal 2003, 2002 and 2001, the fee paid to Atlas Pipeline was calculated based on the 16% rate. Through September 30, 2003, the Company has not been required to provide any construction financing. In September 2003, Atlas Pipeline entered into a purchase and sale agreement with SEMCO Energy, Inc. ("SEMCO") pursuant to which Atlas Pipeline or its designee will purchase all of the outstanding equity of SEMCO's wholly-owned subsidiary, Alaska Pipeline Company ("Alaska Pipeline"), which owns an intrastate natural gas transmission pipeline that delivers gas to metropolitan Anchorage (the "Acquisition"). The total consideration, payable in cash at closing, will be approximately $95.0 million, subject to an adjustment based on the amount of working capital that Alaska Pipeline has at closing. Consummation of the Acquisition is subject to a number of conditions, including receipt of governmental and non-governmental consents and approvals and the absence of a material adverse change in Alaska Pipeline's business. Among the required governmental authorizations are approval of the Regulatory Commission of Alaska and expiration, without adverse action, of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. The purchase and sale agreement may be terminated by either Atlas Pipeline or SEMCO if the transaction is not consummated by June 16, 2004. The purchase and sale agreement contains customary representations, warranties and indemnifications. 93 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 16 - OPERATIONS OF ATLAS PIPELINE - (Continued) As part of the Acquisition, at closing, Alaska Pipeline and ENSTAR Natural Gas Company ("ENSTAR"), a division of SEMCO which conducts its gas distribution business in Alaska, will enter into a Special Contract for Gas Transportation pursuant to which ENSTAR will pay a reservation fee for use of all of the pipeline's transportation capacity of $943,000 per month, plus $.075 per thousand cubic feet, or mcf, of gas transported, for 10 years. During 2002, total gas volumes transported on the Alaska Pipeline system averaged 130,000 mcf per day. SEMCO will execute a gas transmission agreement with Alaska Pipeline pursuant to which SEMCO will be obligated to make up any difference if the Regulatory Commission of Alaska reduces the transportation rates payable by ENSTAR pursuant to the Special Contract. Further, Alaska Pipeline will enter into an Operation and Maintenance and Administrative Services Agreement with ENSTAR under which ENSTAR will continue to operate and maintain the pipeline for at least 5 years for a fee of $334,000 per month for the first three years. Thereafter, ENSTAR's fee will be adjusted for inflation. Atlas Pipeline has received a commitment from Friedman, Billings, Ramsey Group, Inc. ("FBR") to make a $25.0 million preferred equity investment in a special purpose vehicle (the "SPV"), to be jointly owned and controlled by FBR and Atlas Pipeline; such entity will be the acquirer of Alaska Pipeline. Under the terms of the FBR commitment, Atlas Pipeline will have the right, during the 18 months following the closing of the Acquisition, to purchase FBR's preferred equity interest in the SPV at FBR's original cost plus accrued and unpaid preferred distributions and a premium. If Atlas Pipeline does not purchase FBR's interest, FBR has the right to require the Company to purchase this interest. The Company will then have the right to require Atlas Pipeline to purchase the equity interest from it. Atlas Pipeline intends to make a $24.0 million common equity investment in the SPV which Atlas Pipeline will fund in part through its existing $20.0 million credit facility. The SPV has received a commitment from Wachovia Bank, National Association and Wachovia Capital Markets, LLC for a $50.0 million credit facility to partially finance the Acquisition. Up to $25.0 million of borrowings under the facility will be secured by a lien on and security interest in all of the SPV's property. In addition, upon the earlier to occur of the termination of Atlas Pipeline's subordination period or the amendment of the restrictions in the partnership agreement on Atlas Pipeline's incurrence of debt, Atlas Pipeline will guarantee all borrowings under the facility, securing the guarantee with a pledge of its interest in the SPV. 94 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 17 - OPERATING SEGMENT INFORMATION AND MAJOR CUSTOMER INFORMATION The Company's operations include five reportable operating segments. In addition to the five reportable operating segments, certain other activities are reported in the "Other energy" and "All other" categories. These operating segments reflect the way the Company manages its operations and makes business decisions. The leasing segment first met the criteria for reportable operating segments in the three months ended June 30, 2003, and accordingly, all prior periods have been restated to reflect these new segments. The Company does not allocate income taxes to its operating segments. Operating segment data for the periods indicated are as follows: Year Ended September 30, 2003 (in thousands):
Production Real Well and Other Estate All Drilling Exploration Energy (a) Finance Leasing Trapeza Other Eliminations Total -------- ----------- ---------- --------- -------- ------- -------- ------------ --------- Revenues from external customers..... $ 52,879 $ 38,639 $ 14,171 $ 14,424 $ 4,140 $ 1,495 $ 7,271 $ (490) $ 132,529 Interest income......... - - 220 83 71 8 484 (195) 671 Interest expense........ - - 1,961 1,703 916 - 8,707 (195) 13,092 Depreciation, depletion and amortization........... - 8,042 3,553 221 196 - 136 - 12,148 Segment profit (loss)... 5,320 21,465 (6,308) 5,188 (2,857) 1,542 (10,020) - 14,330 Other significant items: Segment assets...... 7,844 145,614 78,930 371,735 15,668 4,987 46,004 - 670,782
- ---------- (a) Revenues and expenses from segments below the quantitative thresholds are attributable to two operating segments of the Company. Those segments include well services and transportation. These segments have never met any of the quantitative thresholds for determining reportable segments. Year Ended September 30, 2002 (in thousands):
Production Real Well and Other Estate All Drilling Exploration Energy (a) Finance Leasing Trapeza Other Eliminations Total -------- ----------- ---------- --------- -------- ------- -------- ------------ --------- Revenues from external customers...... $ 55,736 $ 28,916 $ 14,643 $ 16,711 $ 1,388 $ 185 $ 4,058 $ (253) $ 121,384 Interest income.......... - - 686 145 145 - 519 (253) 1,242 Interest expense......... - - 2,200 1,790 44 - 9,035 (253) 12,816 Depreciation, depletion and amortization............ - 7,550 3,286 135 82 - 108 - 11,161 Segment profit (loss).... 6,057 12,708 (5,444) 10,744 518 (15) (12,796) - 11,772 Other significant items: Segment assets....... 7,555 119,125 65,935 204,327 10,793 3,085 56,678 - 467,498
- ---------- (a) Revenues and expenses from segments below the quantitative thresholds are attributable to two operating segments of the Company. Those segments include well services and transportation. These segments have never met any of the quantitative thresholds for determining reportable segments. 95 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 17 - OPERATING SEGMENT INFORMATION AND MAJOR CUSTOMERS - (Continued) Year Ended September 30, 2001 (in thousands):
Production Real Well and Other Estate All Drilling Exploration Energy (a) Finance Leasing Trapeza Other Eliminations Total -------- ----------- ---------- --------- -------- ------- --------- ------------ --------- Revenues from external customers... $ 43,464 $ 36,681 $ 15,746 $ 17,117 $ 1,066 $ - $ 4,974 $ (55) $ 118,993 Interest income....... - - 791 140 - - 2,323 (55) 3,199 Interest expense...... - - 1,714 2,961 - - 10,116 (55) 14,736 Depreciation, depletion and amortization......... 236 6,148 4,400 132 54 - 68 - 11,038 Segment profit (loss). 6,626 22,687 (10,258) 11,852 397 - (10,894) - 20,410 Other significant items: Segment assets.... 5,646 102,756 86,127 207,682 390 - 63,863 - 446,464
- ---------- (a) Revenues and expenses from segments below the quantitative thresholds are attributable to two operating segments of the Company. Those segments include well services and transportation. These segments have never met any of the quantitative thresholds for determining reportable segments. Operating profit (loss) per segment represents total revenues less costs and expenses attributable thereto, including interest, provision for possible losses and depreciation, depletion and amortization, excluding general corporate expenses. The Company's natural gas is sold under contract to various purchasers. For the years ended September 30, 2003, 2002 and 2001, gas sales to First Energy Solutions Corporation accounted for 14%, 13% and 14%, respectively, of our total revenues. No other operating segments had revenues from a single customer or borrower which exceeded 10% of total revenues. NOTE 18 - SUPPLEMENTAL OIL AND GAS INFORMATION Results of operations from oil and gas producing activities:
Years Ended September 30, ------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (in thousands) Revenues....................................................... $ 38,639 $ 28,916 $ 36,681 Production costs............................................... (6,770) (6,693) (6,185) Exploration expenses........................................... (1,715) (1,571) (1,661) Depreciation, depletion and amortization....................... (8,042) (7,550) (6,148) Income taxes................................................... (7,519) (4,005) (7,223) ---------- ---------- ---------- Results of operations from oil and gas producing activities.... $ 14,593 $ 9,097 $ 15,464 ========== ========== ==========
96 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 18 - SUPPLEMENTAL OIL AND GAS INFORMATION - (Continued) 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:
At September 30, ------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (in thousands) Proved properties.............................................. $ 844 $ 843 $ 1,861 Unproved properties............................................ 563 584 481 Wells and related equipment and facilities..................... 184,175 152,174 126,971 Support equipment and facilities............................... 2,189 1,422 1,052 Uncompleted wells equipment and facilities..................... 51 51 38 ---------- ---------- ---------- 187,822 155,074 130,403 Accumulated depreciation, depletion, amortization and valuation allowances.......................................... (50,170) (41,893) (33,129) ---------- ---------- ---------- Net capitalized costs..................................... $ 137,652 $ 113,181 $ 97,274 ========== ========== ==========
Costs Incurred in Oil and Gas Producing Activities. The costs incurred by the Company in its oil and gas activities during fiscal years 2003, 2002 and 2001 are as follows:
Years Ended September 30, ------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (in thousands) Property acquisition costs: Unproved properties.......................................... $ - $ 9 $ 90 Proved properties............................................ $ 224 $ 440 $ 337 Exploration costs............................................ $ 1,715 $ 1,573 $ 1,662 Development costs............................................ $ 26,721 $ 20,648 $ 20,273
The development costs above for the years ended September 30, 2003, 2002 and 2001 were substantially all incurred for the development of proved undeveloped properties. Oil and Gas Reserve Information (Unaudited). The estimates of the Company's proved and unproved gas reserves are based upon evaluations made by management and verified by Wright & Company, Inc., an independent petroleum engineering firm, as of September 30, 2003, 2002 and 2001. All reserves are located within the United States. Reserves are estimated in accordance with guidelines established by the Securities and Exchange Commission and the Financial Accounting Standards Board which require that reserve estimates be prepared under existing economic and operating conditions with no provisions for price and cost escalation except by contractual arrangements. 97 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 18 - SUPPLEMENTAL OIL AND GAS INFORMATION - (Continued) Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e. prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. - Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation tests. The area of a reservoir considered proved includes (a) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (b) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. - Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. - Estimates of proved reserves do not include the following: (a) oil that may become available from known reservoirs but is classified separately as "indicated additional reservoirs"; (b) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics or economic factors; (c) crude oil, natural gas and natural gas liquids, that may occur in undrilled prospects; and (d) crude oil and natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operation methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. There are numerous uncertainties inherent in estimating quantities of proven reserves and in projecting future net revenues and the timing of development expenditures. The reserve data presented represents 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 effects have not been proved. 98 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 18 - SUPPLEMENTAL OIL AND GAS INFORMATION - (Continued) The Company's reconciliation of changes in proved reserve quantities is as follows (unaudited): Gas Oil (Mcf) (Bbls) ----------- --------- Balance September 30, 2000.......................... 113,142,544 1,766,654 Current additions.............................. 19,891,663 68,895 Sales of reserves in-place..................... (88,068) (61) Purchase of reserves in-place.................. 7,159,387 40,881 Transfers to limited partnerships.............. (11,871,230) - Revisions...................................... (3,774,259) 102,136 Production..................................... (6,342,667) (177,437) ----------- --------- Balance September 30, 2001.......................... 118,117,370 1,801,068 Current additions.............................. 19,303,971 55,416 Sales of reserves in-place..................... (510,812) (23,676) Purchase of reserves in-place.................. 280,594 2,180 Transfers to limited partnerships.............. (6,829,047) (45,001) Revisions...................................... (23,057) 260,430 Production..................................... (7,117,276) (172,750) ----------- --------- Balance September 30, 2002.......................... 123,221,743 1,877,667 Current additions.............................. 21,131,997 29,394 Sales of reserves in-place..................... (56,480) (14,463) Purchase of reserves in-place.................. 7,294,727 34,472 Transfers to limited partnerships.............. (8,669,521) (31,386) Revisions...................................... (2,662,812) 119,038 Production..................................... (6,966,899) (160,048) ----------- --------- Balance September 30, 2003.......................... 133,292,755 1,854,674 =========== ========= Proved developed reserves at: September 30, 2003............................. 87,760,113 1,825,280 September 30, 2002............................. 83,995,712 1,846,281 September 30, 2001............................. 80,249,011 1,735,376 99 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 18 - SUPPLEMENTAL OIL AND GAS INFORMATION - (Continued) The following schedule presents the standardized measure of estimated discounted future net cash flows relating to proved oil and gas reserves. The estimated future production is priced at fiscal year-end prices, adjusted only for fixed and determinable increases in natural gas and oil prices provided by contractual agreements. The resulting estimated future cash inflows are reduced by estimated future costs to develop and produce the proved reserves based on fiscal year-end cost levels. The future net cash flows are reduced to present value amounts by applying a 10% discount factor. The standardized measure of future cash flows was prepared using the prevailing economic conditions existing at September 30, 2003, 2002 and 2001 and such conditions continually change. Accordingly such information should not serve as a basis in making any judgment on the potential value of recoverable reserves or in estimating future results of operations (unaudited).
Years Ended September 30, -------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (in thousands) Future cash inflows............................................... $ 709,401 $ 518,118 $ 485,781 Future production costs........................................... (179,758) (147,279) (126,979) Future development costs.......................................... (72,476) (55,644) (50,953) Future income tax expense......................................... (125,398) (79,557) (76,584) ---------- ---------- ---------- Future net cash flows............................................. 331,769 235,638 231,265 Less 10% annual discount for estimated timing of cash flows..... (187,434) (131,512) (132,553) ---------- ---------- ---------- Standardized measure of discounted future net cash flows........ $ 144,335 $ 104,126 $ 98,712 ========== ========== ==========
The future cash flows estimated to be spent to develop proved undeveloped properties in the years ended September 30, 2004, 2005 and 2006 are $27.6 million, $29.3 million and $15.6 million, respectively. 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 (unaudited):
Years Ended September 30, -------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (in thousands) Balance, beginning of year........................................ $ 104,126 $ 98,712 $ 98,599 Increase (decrease) in discounted future net cash flows: Sales and transfers of oil and gas, net of related costs........ (31,869) (22,223) (30,496) Net changes in prices and production costs...................... 44,232 249 (21,530) Revisions of previous quantity estimates........................ (229) 3,787 (4,184) Development costs incurred...................................... 3,689 4,107 4,011 Changes in future development costs............................. (166) (149) (853) Transfers to limited partnerships............................... (3,313) (3,970) (4,177) Extensions, discoveries, and improved recovery less related costs................................................ 24,272 12,057 20,716 Purchases of reserves in-place.................................. 1,730 340 7,984 Sales of reserves in-place, net of tax effect................... (200) (799) (204) Accretion of discount........................................... 13,247 12,726 14,078 Net changes in future income taxes.............................. (18,740) 203 13,636 Other........................................................... 7,556 (914) 1,132 ---------- ---------- ---------- Balance, end of year.............................................. $ 144,335 $ 104,126 $ 98,712 ========== ========== ==========
100 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 19 - QUARTERLY RESULTS (Unaudited)
Dec 31 March 31 June 30 September 30 ---------- ---------- ---------- ------------ (in thousands, except per share data) Year ended September 30, 2003 Revenues............................................... $ 23,387 $ 41,669 $ 30,722 $ 36,751 Costs and expenses..................................... 20,769 37,116 25,775 34,539 ---------- ---------- ---------- ------------ Income from continuing operations before taxes and cumulative effect of change in accounting principle... 2,618 4,553 4,947 2,212 ---------- ---------- ---------- ------------ Discontinued operations................................ - - - 1,222 Cumulative effect of change in accounting principle.... - - - (13,881) ---------- ---------- ---------- ------------ Net income (loss)...................................... $ 1,781 $ 3,095 $ 3,486 $ (11,277) ========== ========== ========== ============ Net income (loss) per common share - basic: From continuing operations.......................... $ .10 $ .18 $ .20 $ .09 Discontinued operations............................. - - - .07 Cumulative effect of change in accounting principle.......................................... - - - (.81) ---------- ---------- ---------- ------------ Net income (loss) per common share - basic............. $ .10 $ .18 $ .20 $ (.65) ========== ========== ========== ============= Net income (loss) per common share - diluted: From continuing operations.......................... $ .10 $ .18 $ .20 $ .07 Discontinued operations............................. - - - .07 Cumulative effect of change in accounting principle. - - - (.79) ---------- ---------- ---------- ------------ Net income (loss) per common share - diluted........... $ .10 $ .18 $ .20 $ (.65) ========== ========== ========== ============
As described in Note 3, on July 1, 2003, the Company adopted FIN 46, the consolidation of FIN 46 entities resulted in a $13.9 million after-tax accounting cumulative effect charge in the Company's fourth fiscal quarter. In addition, subsequent to adoption, the Company classified certain of these entities as held for sale, resulting in income from discontinued operations of $1.2 million in the Company's fourth fiscal quarter. 101 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 19 - QUARTERLY RESULTS (Unaudited)
Dec 31 March 31 June 30 September 30 ---------- ---------- ---------- ------------ (in thousands, except per share data) Revenues............................................... $ 33,782 $ 34,203 $ 24,727 $ 28,672 Costs and expenses..................................... 29,405 29,250 22,923 28,034 ---------- ---------- ---------- ------------ Income from continuing operations before taxes......... 4,377 4,953 1,804 638 ---------- ---------- ---------- ------------ Income from continuing operations before cumulative effect of change in accounting principle.............. 2,930 3,313 1,328 787 ---------- ---------- ---------- ------------ Net income (loss)...................................... $ 2,189 $ 3,138 $ 6 $ (8,642) ========== ========== ========== ============ Net income per common share - basic: Income from continuing operations before cumulative effect of change in accounting principle.......................................... $ .17 $ .19 $ .08 $ .04 ========== ========== ========== ============ Net income (loss) per common share - basic............. $ .13 $ .18 $ - $ .49 ========== ========== ========== ============ Net income per common share - diluted: Income from continuing operations before cumulative effect of change in accounting principle.......................................... $ .17 $ .19 $ .07 $ .04 ========== ========== ========== ============ Net income (loss) per common share - diluted........... $ .12 $ .18 $ - $ .49 ========== ========== ========== ============
As described in Note 14, in June 2002 the Company adopted a plan to dispose of Optiron. Accordingly, the Company's share of Optiron's operations, including the cumulative effect of the impairment of goodwill and the write-off of certain advances to Optiron, have been reported as discontinued operations. The amount of those charges to discontinued operations approximated $700, $200 and $1,300 in the quarters ended December 2001, March 2002 and June 2002, respectively. The amount charged to discontinued operations with respect to Optiron approximated $300 in each of the quarters ended December 2000 and March 2001 and $200 in each of the quarters ended June 2001 and September 2001. Also, as described in Note 14, the Company sold FLI in August 2000. In the quarters ended September 30, 2002 and 2001, the Company charged discontinued operations approximately $9,400 and $3,200, respectively, based upon information that became available during each of those quarters with regard to claims made by the buyer with respect to the Company's indemnification obligations and representations. 102 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures, (as defined in Rules 13a-14 (c) and 15d-14(c)) within 90 days prior to the filing of this report. Based upon this evaluation, these officers believe that our disclosure controls and procedures are effective. Changes in Internal Controls There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of our last evaluation of our internal controls by our Chief Executive Officer and Chief Financial Officer. 103 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT The information required by this item is set forth in our definitive proxy statement with respect to our 2004 annual meeting of stockholders ("2004 proxy statement"), which is incorporated herein by this reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth in our 2004 proxy statement, which is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth in our 2004 proxy statement, which is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth in our 2004 proxy statement, which is incorporated herein by this reference. 104 PART IV ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is set forth in our 2004 proxy statement, which is incorporated herein by this reference. ITEM 15. 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 Operations 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 I - Condensed Financial Information of the Registrant Schedule III - Investments in Real Estate Schedule IV - Investments in Mortgage Loans on Real Estate 105 3. Exhibits Exhibit No. Description ----------- ----------- 3.1 Restated Certificate of Incorporation of Resource America. (1) 3.2 Amended and Restated Bylaws of Resource America. (1) 4.1 Indenture, dated as of July 22, 1997, between Resource America and The Bank of New York(3) 10.1 Employment Agreement between Edward E. Cohen and Resource America, dated March 11, 1997. (2) 10.2 Revolving Credit Loan Agreement dated July 27, 1999 by and between Resource America and Sovereign Bank. (4) 10.2(a) Modification of Revolving Credit Loan Agreement dated September 15, 2003. 10.3 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(4) 10.3(a) Modification of Revolving Credit Loan and Security Agreement dated March 30, 2000. (4) 10.3(b) Second Modification of Revolving Credit and Loan Agreement dated April 30, 2002. 10.3(c) Third Modification of Revolving Credit and Loan Agreement, dated September 15, 2003. 10.4 Employment Agreement between Steven J.Kessler and Resource America, dated October 5, 1999. (1) 10.5 Employment Agreement between Nancy J. McGurk and Resource America, dated October 5, 1999. (1) 10.5 Employment Agreement between Jonathan Z. Cohen and Resource America, dated October 5, 1999. (4) 10.7 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 (now known as Hudson United Bank). (4) 10.6 Revolving Credit Agreement and Assignment between LEAF Financial Corporation and National City Bank, and related guaranty from Resource America, dated June 11, 2002.(5) 10.6(a) Amendment to Revolving Credit Agreement dated March 28, 2003. 10.6(b) Second Amendment to Revolving Credit Agreement dated April 1, 2003. 10.7 Credit Agreement among Atlas America, Inc., Resource America, Inc., Wachovia Bank, National Association, and other banks party thereto, dated July 31, 2002. (5) 10.7(a) First Amendment to Credit Agreement dated September 29, 2003. 10.8 Credit Agreement among Atlas Pipeline Partners, L.P., Wachovia Bank, National Association, and the other parties thereto, dated December 27, 2002. (6) 10.8(b) Second Amendment to Credit Agreement dated March 28, 2003. 10.8(c) Third Amendment to Credit Agreement dated September 15, 2003. 10.9 Revolving Credit Agreement and Assignment among LEAF Financial Corporation, Lease Equity Appreciation Fund I, L.P., LEAF Funding, Inc. and Commerce Bank, National Association dated May 28, 2003. 10.10 Purchase and Sale Agreement between Atlas Pipeline Partners, L.P. and SEMCO Energy, Inc. dated September 16, 2003. 106 10.11 1989 Key Employee Stock Option Plan, as amended.(7) 10.12 1997 Key Employee Stock Option Plan.(8) 10.13 1997 Stock Option Plan for Directors.(8) 10.14 1997 Non-Employee Director Stock Option Plan.(8) 10.15 1999 Key Employee Stock Option Plan.(9) 10.16 Employee Stock Ownership Plan.(10) 10.17 2002 Non-Employee Director Deferred Stock and Deferred Compensation Plan.(11) 10.18 2002 Key Employee Stock Option Plan(12) 12.1 Statement re: computation of ratios 21.1 Subsidiaries of Resource America 31.1 Rule 13a-14(a)/15d-14(a) Certifications 32.1 Section 1350 Certifications (b) Reports on Form 8-K None - ---------- (1) 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. (2) 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. (3) Filed previously as an exhibit to our Registration Statement on Form S-4 (File No. 333-40231) and by this reference incorporated herein. (4) Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended September 30, 2000 and by this reference incorporated herein. (5) Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended September 30, 2002 and by this reference incorporated herein. (6) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2002 and by this reference incorporated herein. (7) Filed previously as an exhibit to our Registration Statement on Form S-1 (File No. 333-03099) and by this reference incorporated herein. (8) 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. (9) Filed previously as an exhibit to our Definitive Proxy Statement on Schedule 14A for the 1999 annual meeting of stockholders and by this reference incorporated herein. (10) Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended September 30, 1989 and by this reference incorporated herein. (11) Filed previously as an exhibit to our Registration Statement on Form S-8 (File No. 333-98507) and by this reference incorporated herein. (12) Filed previously as an exhibit to our Registration Statement on Form S-8 (File No. 333-98505) and by this reference incorporated herein. 107 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 29, 2003 By: /s/ Edward E. Cohen -------------------- Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Edward E. Cohen Chairman of the Board, December 29, 2003 - -------------------------- and Chief Executive Officer EDWARD E. COHEN /s/ Jonathan Z. Cohen Director, President December 29, 2003 - -------------------------- and Chief Operating Officer JONATHAN Z. COHEN /s/ Carlos C. Campbell Director December 29, 2003 - -------------------------- CARLOS C. CAMPBELL /s/ Andrew M. Lubin Director December 29, 2003 - -------------------------- ANDREW M. LUBIN /s/ P. Sherrill Neff Director December 29, 2003 - -------------------------- P. SHERRILL NEFF /s/ John S. White Director December 29, 2003 - -------------------------- JOHN S. WHITE /s/ Steven J. Kessler Senior Vice President December 29, 2003 - -------------------------- and Chief Financial Officer STEVEN J. KESSLER /s/ Nancy J. McGurk Vice President-Finance December 29, 2003 - -------------------------- and Chief Accounting Officer NANCY J. McGURK 108 SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED BALANCE SHEETS SEPTEMBER 30,
2003 2002 ---------- ---------- (in thousands, except share data) ASSETS Current assets: Cash and cash equivalents.......................................... $ 15,757 $ 16,814 Accounts receivable and prepaid expenses........................... 16,922 4,494 FIN 46 entities' and other assets held for sale.................... 222,677 5,488 ---------- ---------- Total current assets............................................. 255,356 26,796 Investments in real estate loans and real estate...................... 68,936 202,423 FIN 46 entities' assets............................................... 78,247 - Property and equipment, net........................................... 1,150 911 Investment in Atlas America, Inc. at equity........................... 86,928 72,783 Indebtedness of Atlas America, Inc.................................... 26,112 31,613 Other................................................................. 34,704 44,754 ---------- ---------- $ 551,433 $ 379,280 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt.................................. $ 59,472 $ 4,160 Secured revolving credit facilities - leasing...................... 7,168 2,421 Accounts payable and other current liabilities..................... 14,876 10,696 FIN 46 entities and other liabilities with assets held for sale.... 141,473 11,317 ---------- ---------- Total current liabilities........................................ 222,989 28,594 Long-term debt........................................................ 42,502 99,424 Other liabilities..................................................... 58,488 17,723 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......... 255 250 Additional paid-in capital......................................... 227,211 223,824 Less treasury stock, at cost....................................... (78,860) (74,828) Less ESOP loan receivable.......................................... (1,137) (1,201) Accumulated other comprehensive income............................. 5,611 5,911 Retained earnings.................................................. 74,374 79,583 ---------- ---------- Total stockholders' equity....................................... 227,454 233,539 ---------- ---------- $ 551,433 $ 379,280 ========== ==========
SEE NOTES TO CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT 1 CONDENSED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30,
2003 2002 2001 ---------- ---------- ---------- (in thousands) REVENUES Equity in earnings of Atlas America, Inc........................... 13,912 7,241 11,412 Other.............................................................. 26,839 22,088 23,104 ---------- ---------- ---------- 40,751 29,329 34,516 COSTS AND EXPENSES Operating expenses................................................. 11,344 3,168 2,199 General and administrative......................................... 6,925 7,889 5,672 Depreciation, depletion and amortization........................... 553 325 256 Interest........................................................... 11,131 10,616 13,022 Provision for possible losses...................................... 1,848 1,510 600 Provision for legal settlement..................................... 1,185 1,000 - ---------- ---------- ---------- 32,986 24,508 21,749 ---------- ---------- ---------- Income from continuing operations before income taxes and cumulative effect of change in accounting principle.............. 7,765 4,821 12,767 Benefit for income taxes.............................................. 2,171 1,269 286 ---------- ---------- ---------- Income from continuing operations..................................... 9,936 6,090 13,053 Discontinued operations: Income (loss) on discontinued operations, net of income taxes of $(658), $5,944 and $2,439..................................... 1,030 (9,399) (3,224) Cumulative effect of change in accounting principle, net of income taxes of $336................................................. (13,881) - - ---------- ---------- ---------- Net (loss) income..................................................... $ (2,915) $ (3,309) $ 9,829 =========== =========== ==========
SEE NOTES TO CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT 2 CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30,
2003 2002 2001 ---------- ---------- ---------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net cash (used in) provided by operating activities of continuing operations..................................................... $ (413) $ 1,200 $ (17,132) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures....................................................... (540) (676) (160) Principal payments on notes receivable and proceeds from sale of assets.... 9,871 24,499 29,510 Proceeds from sale (purchase) of RAIT Investment Trust shares.............. 12,044 (1,890) (6,405) Increase in other assets................................................... (957) (6,355) (1,299) Investments in real estate loans and real estate........................... (5,921) (19,859) (25,395) ---------- ---------- ---------- Net cash provided by (used in) investing activities of continuing operations............................................... 14,497 (4,281) (3,749) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings................................................................. 28,554 14,424 9,250 Principal payments on borrowings........................................... (33,441) (15,351) (23,280) Dividends paid............................................................. (2,294) (2,326) (2,364) Purchase of treasury stock................................................. (4,654) (1,517) (57,801) Repayment of ESOP loan..................................................... 64 96 96 Borrowings from related parties............................................ - (1,546) 8,889 Increase in other assets................................................... (679) (255) (462) Proceeds from issuance of stock............................................ 2,933 17 420 ---------- ---------- ---------- Net cash used in financing activities of continuing operations............. (9,517) (6,458) (65,252) Net cash provided by (used in) discontinued operations..................... (5,624) - 1,417 ----------- ---------- ---------- Increase (decrease) in cash and cash equivalents........................... (1,057) (9,539) (84,716) Cash and cash equivalents at beginning of year............................. 16,814 26,353 111,069 ---------- ---------- ---------- Cash and cash equivalents at end of year................................... $ 15,757 $ 16,814 $ 26,353 ========== ========== ==========
SEE NOTES TO CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT 3 NOTES TO CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT NOTE 1. The condensed financial information of the registrant includes the registrant consolidated with all its subsidiaries except for Atlas America, Inc. and its subsidiaries ("Atlas") which are shown as investment in Atlas America, Inc. at equity. Furthermore, the intercompany receivable from Atlas has not been eliminated in consolidation. The schedule is required based upon limitations on dividends and loan repayments Atlas can make to the registrant under the terms of Atlas' $75.0 million credit facility with Wachovia Bank (see Note 9 to the consolidated financial statements). NOTE 2. Annual debt principal payments over the next five fiscal years ending September 30, excluding the Wachovia debt, are as follows (in thousands): 2004 $ 59,471 2005 40,728 2006 1,932 2007 25 2008 11 NOTE 3. The Company has not received cash dividends from Atlas or any of its subsidiaries during the fiscal years ended September 30, 2003, 2002 or 2001. At September 30, 2003, Atlas can distribute $12.6 million as dividends to the registrant under the terms of the credit facility and can repay $6.1 million of its indebtedness to the registrant. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) September 30, 2003
Column Column Column Column Column A B C D E Gross Amount Cost capitalized at which Initial Cost subsequent carried at close Description Encumbrances to Company to acquisition of period ----------------- ---------------- ------------------ Buildings and Improvements Buildings and Land Land Improvements Carrying Costs Improvements Total Real estate- held for sale Vacant Commercial Retail Space $ 1,512 $ 2,402 $ - $ 2,402 Richmond, VA Real estate Hotel - 4,319 - 4,319 Omaha, NE Multifamily - 3,380 - 3,380 Deerfield Beach, FL Office Building 1,663 3,946 - 3,946 Winston-Salem, NC FIN 46 Assets Held for Sale Office Building - 1,400 - 1,400 Pittsburgh, PA Office Building 5,895 12,504 - 12,504 Washington, DC Office Building 65,728 100,342 - 100,342 Washington, DC Office Building 57,552 96,300 - 96,300 Baltimore, MD FIN 46 Assets Office Building 1,987 3,500 - 3,500 Ambler, PA Office Building - 3,715 - 3,715 Philadelphia, PA Multifamily- Condominiums 3,057 4,916 - 4,916 Concord, NC Multifamily 11,425 12,000 - 12,000 Hartford, CT Multifamily - 14,300 - 14,300 Seabrook, NJ Multifamily 16,856 24,000 - 24,000 Chicago, IL Commercial Retail 1,910 2,300 - 2,300 St. Cloud, MI Commercial Retail 935 1,600 - 1,600 Elkins West, WV Hotel 1,450 10,187 - 10,187 Savannah, GA ------------ ----------------- --------------- ------------------ $ 169,970 $ 301,111 $ - $ 301,111 ============ ================= =============== ==================
Column Column Column Column Column A F G H I Life on which depreciation in Accumulated Date of Date latest income Description Depreciation Construction Acquired is computed Real estate- held for sale Vacant Commercial Retail Space $ - 1980 9/30/2003 n/a Richmond, VA Real estate Hotel 47 1937 5/12/2003 39 years Omaha, NE Multifamily - 1977 9/30/2003 39 years Deerfield Beach, FL Office Building 39 1929 4/30/2003 39 years Winston-Salem, NC FIN 46 Assets Held for Sale Office Building - 1890 7/1/2003 n/a Pittsburgh, PA Office Building - 1920 7/1/2003 n/a Washington, DC Office Building - 1898 7/1/2003 n/a Washington, DC Office Building - 1992 7/1/2003 n/a Baltimore, MD FIN 46 Assets Office Building 9 1972 7/1/2003 40 years Ambler, PA Office Building 15 1924 7/1/2003 40 years Philadelphia, PA Multifamily- Condominiums 20 1840 7/1/2003 40 years Concord, NC Multifamily - 1953 7/1/2003 40 years Hartford, CT Multifamily - 1945 7/1/2003 40 years Seabrook, NJ Multifamily - 1980 7/1/2003 40 years Chicago, IL Commercial Retail 10 1970 7/1/2003 40 years St. Cloud, MI Commercial Retail 6 1963 7/1/2003 40 years Elkins West, WV Hotel 42 1853 7/1/2003 40 years Savannah, GA ------------ $ 188 ============
Balance at October 1, 2002 $ 187,542 Additions during the period: New mortgage loans $ 1,350 Amortization of discount 1,962 Additions of existing loans 4,855 8,167 -------- --------- $ 195,709 Deductions during the period: Collections of principal 10,129 Foreclosed loans 11,404 FIN 46 loans 132,312 Write-downs on loans 1,448 155,293 -------- --------- Balance at September 30, 2003 $ 40,416 ========= RESOURCE AMERICA, INC. & SUBSIDIARIES SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE September 30, 2003 (in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E PERIODIC INTEREST FINAL MATURITY PAYMENT PRIOR DESCRIPTION RATE DATE TERM LIENS SECOND LIEN LOANS Industrial building, Pasadena, CA 2.75% over average cost of funds 5/1/2001 (a) $ 2,273 FSLIC-Insured Office building, Cherry Hill, NJ Fixed interest rate of 9.75% 2/7/2001 (a) 2,258 Apartment building, Hartford, CT Fixed interest rate of 7.5% 1/1/2009 (a) 13,312 Office building, Washington, D.C. Fixed interest rate of 10.64% 1/15/2006 (a) 63,353 Apartment building, Philadelphia, PA Fixed interest at 9.28% 11/1/2022 (a) 2,343 Apartment buildings (2 loans) Prime + 1% & 8% fixed 9/28/2006 & 5/3/2029 (a) 3,310 Philadelphia PA Office buildings (2 loans) 9% & 10%, fixed rates 7/1/2002 & 12/31/2004 (a) 1,664 Philadelphia, PA Retail building, Northridge, CA Fixed interest rate of 9% 12/1/2000 (a) 1,969 ----------- $ 90,482 =========== COLUMN A COLUMN F COLUMN G COLUMN H PRINCIPAL AMOUNT CARRYING OF LOANS SUBJECT TO FACE AMOUNT AMOUNT OF DELINQUENT DESCRIPTION OF MORTGAGES MORTGAGES PRINCIPAL OR INTEREST SECOND LIEN LOANS Industrial building, Pasadena, CA $ 3,000 $ 122 - Office building, Cherry Hill, NJ 4,800 2,322 - Apartment building, Hartford, CT 6,750 7,757 - Office building, Washington, D.C. 92,000 24,331 Apartment building, Philadelphia, PA 3,155 764 - Apartment buildings (2 loans) 3,445 1,577 - Office buildings (2 loans) 2,500 2,322 - Philadelphia, PA Retail building, Northridge, CA 2,271 1,221 - ------------ ---------- ----------- $ 117,921 $ 40,416 $ - ============ ========== =========== (a) All net cash flows from related property Balance at October 1, 2002 $187,542 Additions during the period: New mortgage loans $1,350 Amortization of discount 1,962 Additions of existing loans 4,855 ----------- $8,167 Deductions during the period: Collections of principal 10,129 Foreclosed loans 11,404 FIN 46 loans 132,312 Write-downs on loans 1,448 ----------- 155,293 Balance at September 30, 2003 $40,416 ===========
EX-10 3 exh10-2a.txt EXH10-2A.TXT MODIFICATION OF REVOLVING CREDIT LOAN AND SECURITY AGREEMENT THIS LOAN MODIFICATION AGREEMENT ("Modification") made this 15th day of September, 2003 and effective as of July 27, 2003, by and between RESOURCE AMERICA, INC., with an address of 1818 Market Street, 28th Floor, Philadelphia, PA 19103 (collectively "Borrower") and SOVEREIGN BANK, a national banking association with an address at Two Aldwyn Center, Villanova, PA 19085 ("Bank"). BACKGROUND WHEREAS, Borrower is indebted to Bank as evidenced by a certain Note dated July 27, 1999 in the original principal amount of $5,000,000 (the "Loan") executed by Borrower and payable to the order of Bank (the "Note"), and a Revolving Credit Loan Agreement dated July 27, 1999 (and any extension, renewals or modifications thereto) executed by Borrower and Bank (the "Loan Agreement") and other documents evidencing and securing the Loan (collectively, the "Loan Documents"). WHEREAS, Borrower has requested that Bank further modify the terms of the Note and the Loan Agreement, which Bank has agreed to do, on the terms and conditions more fully set forth herein. AGREEMENT NOW THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Confirmation of Indebtedness. (a) Borrower hereby confirms, acknowledges, and agrees that as of the date of this Modification, all interest on the Note has been paid in full through August 31, 2003 and that the outstanding principal balance of the Note is $5,000,000. Borrower further acknowledges and agrees that the foregoing principal and interest balance from the date stated are validly and duly owing by Borrower to Bank. (b) Borrower hereby ratifies, confirms and acknowledges that the Note and all of the other documents and instruments executed in connection with the Loan are in full force and effect as of the date hereof, constitute valid and legally binding obligations of Borrower, and are enforceable against Borrower and his assets in accordance with the terms thereof. (c) BORROWER CONFIRMS AND AGREES THAT BORROWER HAS NO CLAIM, CAUSE OF ACTION, DEFENSE SET-OFF, COUNTERCLAIM OR CHALLENGE OF ANY KIND OR NATURE WHATSOEVER AGAINST THE PAYMENT OF ANY OF THE SUMS OWING UNDER THE NOTE OR THE TERMS OF THE OTHER LOAN DOCUMENTS OR THE ENFORCEMENT OR VALIDITY OF THE NOTE OR OTHER LOAN DOCUMENTS, AND DOES HEREBY REMISE, RELEASE AND FOREVER DISCHARGE ANY AND ALL SUCH CLAIMS, CAUSES OF ACTION, DEFENSES, SET-OFFS, COUNTERCLAIMS OR CHALLENGES. 1 2. Amendments to the Loan Agreement. The definition of "Expiration Date" in Section 1.1 shall be July 27, 2005. 3. Conditions Precedent. The obligation of Bank to effect the modifications and agreements contained herein is subject to the conditions precedent that: (a) There has been no material adverse change in condition, financial or otherwise, in the financial or operating condition of Borrower since the later of March 30, 2000 or the date of the last submission of the Borrower's financial statements to the Bank. (b) Bank shall have received payment of an extension fee of $25,000. (c) Bank shall have received all of the following documents, each of which shall be in form and substance satisfactory to Bank: (i) Copies, certified in writing by the secretaries or assistant secretaries of Borrower, of (a) resolutions of its boards of directors evidencing approval of this Modification and the other matters contemplated hereby, and (b) each document evidencing other necessary action and approvals, if any, with respect to this Modification; (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, 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, as applicable, 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 30 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; and (vi) Such other documents and instruments as Bank may request under the terms of this Modification or otherwise. (d) Borrower shall have paid Banks' counsel fees incurred in connection with this Modification. 4. Representations and Warranties. In order to induce Bank to enter into this Modification, Borrower represents and warrants to Bank as follows: 2 (a) The execution, delivery and performance by Borrower of this Modification and the other documents and instruments required by Bank for the implementation of this Modification, do not and will not violate any provision of law or any agreement, trust or other indenture or instrument to which Borrower is a party, or by which any of its properties may be bound or affected. (b) There are no actions, suits or proceedings pending or threatened against Borrower, or any of its properties before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to Borrower, would have a material adverse effect on its financial or operating condition. (c) This Modification constitutes, and other documents and instruments required hereby when executed will constitute, the legal, valid and binding obligations of Borrower, enforceable in accordance with their terms. (d) No authorization, consent, approval, license, exemption or any other action by and no registration, qualification or filing with any governmental agency or authority is or will be necessary in connection with the execution, delivery and performance of this Modification or any other document or instrument required hereby by Borrower. (e) On and as of the date of this Modification, there has occurred no default or event of default under the Note, the Loan Agreement or any other Loan Document and no event which with notice or lapse of time or both would, if unremedied, be a default or event of default under the Note or other Loan Document. (f) The representations, warranties, covenants and indemnifications made by Borrower to Bank in the Note, the Loan Agreement and other Loan Documents are true and correct as though made on and as of the date of this Modification except that the following schedules are modified as shown on the revised schedules annexed hereto: (i) Schedule 5.5 (ii) Schedule 6.10 5. Miscellaneous. (a) Except as expressly set forth herein, the terms and conditions the Note, the Loan Agreement and the other 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 Note, as amended by this Modification. (b) Paragraph headings used in this Modification are for convenience only and shall not affect the construction of this Modification. (c) This Modification shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 3 (d) This Modification may be signed in counterparts, all of which when taken together shall constitute one and the same instrument. (e) BORROWER ACKNOWLEDGES THAT THE NOTE, THE LOAN AGREEMENT AND OTHER LOAN DOCUMENTS CONTAIN AUTHORIZATIONS TO CONFESS JUDGMENT AGAINST BORROWER, THAT AT THE TIME BORROWER EXECUTED THE NOTE AND THE OTHER LOAN DOCUMENTS IT CONSULTED, AND IN CONNECTION WITH THE EXECUTION OF THIS MODIFICATION AND THE EXECUTION OF THE DOCUMENTS AND INSTRUMENTS REQUIRED HEREBY IT HAS CONSULTED LEGAL COUNSEL WITH RESPECT THERETO AND THAT BORROWER UNDERSTANDS (AND AT THE TIME IT EXECUTED THE NOTES AND OTHER LOAN DOCUMENTS IT UNDERSTOOD) THAT THE EXERCISE BY BANK OF THE AUTHORIZATIONS WILL RESULT IN THE ENTRY OF A JUDGMENT AGAINST BORROWER AND THE SALE OR ATTACHMENT OF OR EXECUTION UPON BORROWER'S PROPERTY (INCLUDING WITHOUT LIMITATION REAL PROPERTY, PERSONAL PROPERTY AND BANK ACCOUNTS) WITHOUT PRIOR NOTICE OR THE OPPORTUNITY FOR A HEARING. [Intentionally Left Blank] 4 IN WITNESS WHEREOF, the parties hereto have executed this Modification as of the date written above. BORROWER: RESOURCE AMERICA, INC. Witness: By: ----------------------- ------------------------------------- Name: Title: BANK: SOVEREIGN BANK Attest: By: ------------------------ ------------------------------------- Richard J. Narkiewicz, Vice President 5 SCHEDULE 5.5 6 SCHEDULE 6.10 7 EX-10 4 exh10-3b.txt EXH10-3B.TXT SECOND MODIFICATION OF REVOLVING CREDIT LOAN AND SECURITY AGREEMENT AND MODIFICATION OF OTHER LOAN DOCUMENTS THIS MODIFICATION (the "Modification") is made this 30th day of April, 2002 by and among RESOURCE PROPERTIES, INC. ("RPI"); RESOURCE PROPERTIES XXIV, INC., a Delaware corporation ("RPI XXIV"); RESOURCE PROPERTIES XL, INC., a Delaware corporation ("RPI XL"); RESOURCE PROPERTIES 53, INC., a Delaware corporation ("RPI 53") (collectively, the "Original Borrowers"), RESOURCE PROPERTIES XXX, INC., a Delaware corporation ("RPI XXX") and RESOURCE PROPERTIES XXXI, INC., a Delaware corporation ("RP XXXI"), (collectively, the "New Borrowers") and SOVEREIGN BANK (the "Bank"). RECITALS WHEREAS, Original Borrowers and the Bank entered into a certain Revolving Credit Loan and Security Agreement dated July 27, 1999 (the "Original Loan Agreement") wherein the Original Borrowers established a line of credit loan facility with the Bank in the amount of Fifteen Million Dollars ($15,000,000) (the "Loan"). WHEREAS, Original Borrowers and the Bank entered into that certain Modification of Revolving Credit Loan and Security Agreement dated March 30, 2000 (the "First Modification"), whereby, inter alia, the principal amount of the Loan was increased to Eighteen Million Dollars ($18,000,000). RPI 53 has requested that Bank release it from its obligations under the Loan and release certain collateral related to RPI 53's obligations (the "RPI 53 Collateral") and then to substitute the New Borrowers as additional makers under the Note and add additional collateral owned by New Borrowers to the security for the Loan (the "Additional Collateral"), in accordance with the terms herein. Accordingly, Original Borrowers and the Bank now desire to further amend the Modification Agreement to memorialize the release of the RPI 53 from its obligations under the Loan and the release of the RPI 53 Collateral from the security for the Loan, and to memorialize the addition of New Borrowers as makers under the Note and to add collateral owned by New Borrowers to the security for the Loan, in accordance with the terms of this Amendment. Any undefined capitalized terms set forth herein shall have the meaning ascribed to them in the Loan Documents (as such term is defined in the First Modification). 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 the Original Borrowers and the New Borrowers herein set forth, the parties hereto, intending to be legally bound, hereby agree as follows: 1. The Recitals set forth above are hereby incorporated and made part of this Amendment. 1 2. Confirmation of Indebtedness. Borrower hereby confirms, acknowledges, and agrees that as of the date of this Modification, all interest on the Note has been paid in full through March 31, 2002 and that the outstanding principal balance of the Note as of March 31, 2002 is $6,000,000. Borrower further acknowledges and agrees that the foregoing principal and interest balance from the date stated are validly and duly owing by Borrower to Bank. Borrower hereby ratifies, confirms and acknowledges that the Note and all of the other documents and instruments executed in connection with the Loan are in full force and effect as of the date hereof, constitute valid and legally binding obligations of Borrower, and are enforceable against Borrower and his assets in accordance with the terms thereof. BORROWER CONFIRMS AND AGREES THAT BORROWER HAS NO CLAIM, CAUSE OF ACTION, DEFENSE SET-OFF, COUNTERCLAIM OR CHALLENGE OF ANY KIND OR NATURE WHATSOEVER AGAINST THE PAYMENT OF ANY OF THE SUMS OWING UNDER THE NOTE OR THE TERMS OF THE OTHER LOAN DOCUMENTS OR THE ENFORCEMENT OR VALIDITY OF THE NOTE OR OTHER LOAN DOCUMENTS, AND DOES HEREBY REMISE, RELEASE AND FOREVER DISCHARGE ANY AND ALL SUCH CLAIMS, CAUSES OF ACTION, DEFENSES, SET-OFFS, COUNTERCLAIMS OR CHALLENGES. Terms and Definitions. All capitalized terms used herein shall have the meaning assigned to them in the Original Loan Agreement and the First Modification unless otherwise defined in this Amendment. All references in the Original Loan Agreement or in the First Modification or in this Amendment shall refer to the Original Loan Agreement as amended by the First Modification and further amended by this Amendment. (a) "Borrowers" shall mean Original Borrowers with the exception of RPI 53 and including New Borrowers. (b) "Loan Documents" shall mean the Original Loan Agreement, the First Modification, this Amendment, the Note 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, as any or all are amended or modified hereby or in the future. (c) All references to "Resource 53" in the Loan Documents shall be deleted and "New Borrowers"(either individually or jointly) shall be substituted in their place. 3. Security for the Obligations. Exhibit A of the Loan Agreement, which sets forth the Collateral Documents which are security for the Loan pursuant to the Original Loan Agreement, is modified to eliminate those documents pledged as collateral by the RPI 53 and supplemented with Exhibit A attached hereto and made a part hereof. As additional collateral for the Loan, New Borrowers hereby assign the documents described on Exhibit A to Bank. 4. Other Exhibit and Schedule Modifications. (a) Exhibit B of the Loan Agreement shall be as follows: 2 "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" shall be deleted in its entirely, with the following substituted in its place: "1. Three North Columbus Boulevard, Philadelphia, PA Obligor: Headhouse Associates Further, the following shall be added to Exhibit B: "4. State Highway 77, Upper Deerfield, NY Obligor: Seabrook Associates Limited Partnership (b) Schedule 5.13 is hereby amended as follows: "Resource Properties 53, Inc." is hereby removed and "Resource Properties XXX, Inc." and "Resource Properties XXXI, Inc." are hereby added in its place. Any addresses for Resource Properties are hereby amended to reflect the following: 1845 Walnut Street, 10th Floor, Philadelphia, PA, 19103. (c) Schedule 5.22 is hereby amended as follows: "3. Resource Properties XXIV, Inc. 7500-66150" is hereby deleted and the following inserted in its place "3. Resource Properties XXIV, Inc.7500-66150 and 42-27093". "5. Resource Properties 53, Inc. 43-08638" is hereby deleted and the following inserted in its place "5. Resource Properties XXX, Inc. - 80041-56064". Further, the following shall be added to Schedule 5.22: "6. Resource Properties XXXI, Inc. - 42-73095". 3 5.Conditions Precedent. The obligation of bank to effect the modifications and agreements contained herein is subject to the conditions precedent that:there has been no material adverse change in condition, financial or otherwise, of the property or in the financial or operating condition of borrower since the date of the last submission of the borrower's financial statements to the bank. (a) Bank shall have received all of the following documents, each of which shall be in form and substance satisfactory to Bank: (i) A fully executed and acknowledged Modification Agreement from Borrower to Bank, in form and substance satisfactory to Bank; (ii) An endorsement to mortgagee title insurance policy from ________________, at Borrower's expense, bringing down the date of the policy to the date of the Modification, naming Bank as assignee of the insured mortgage(s) and otherwise in form and substance satisfactory to Bank; and (iii) Such other documents and instruments as Bank may request under the terms of this Modification or otherwise required in connection with the modification of the terms and conditions of the Loan. (iv) All conditions to closing set forth in Paragraph 10 of the Loan Agreement have been met or satisfactorily reviewed and accepted by the Bank, including but not limited to those related to the substitution of Borrowers or needing to be amended or modified due to the substitution of Borrowers. 6. Representations and Warranties. Borrowers warrant and affirm that all representations and warranties made in the Original Loan Agreement, as modified by the provisions of herein, are true and correct as of the date hereof. (a) Borrower represent and warrant as of the date hereof that there are no outstanding or uncured defaults of any Borrower (including New Borrowers) with respect to any terms or conditions of the Loan Documents, the Collateral Documents or any indenture, mortgage, deed of trust, franchise, permit, contract or agreement to which any Borrower is a party, 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. (b) New Borrowers represent and warrant that: (i) their sole assets are the Collateral, (ii) they have no material liabilities other than its liabilities to Bank, (iii) the pledge of the Collateral to Bank is not for the purpose of defrauding its creditors, (iv) it has no default on any Mortgage, and (v) they do not commingle its assets with any other entity or any other Borrower, conduct business solely in its name and provides, and will continue to provide, for its own expenses and liabilities from its own funds. New Borrower warrants that it is solvent on the date hereof. 4 (c) The execution and delivery by Borrowers of this Modification, the consummation of the transactions contemplated by this Modification and the fulfillment and compliance with the respective terms, conditions and provisions of this Modification (i) have been duly authorized by all requisite corporate action by Borrowers, (ii) 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 (w) any application statute, law, rule, regulation or ordinance, (x) Borrower's Certificate of Incorporation or Bylaws, (y) any indenture, mortgage, loan or credit agreement or instrument to which Borrowers, either individually or collectively, are parties or by which they may be bound or affected, or (z) any judgment or order of any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, and (iii) 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. (d) This Modification have been duly executed by Borrowers and delivered to Bank and constitute legal, valid and binding obligations of Borrowers, enforceable in accordance with their terms. (e) The representations and warranties made by Original Borrowers to Bank in the Loan Documents are true and correct as though made on and as of the date of this Modification. New Borrowers hereby join into said representations and warranties. 7. Release. RPI 53 hereby releases Bank, its officers, agents and employees from any and all claims, causes of action, liabilities or obligations of any sort or kind, which RPI 53 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 Loans, at any time prior to the date hereof. [INTENTIONALLY LEFT BLANK] 5 IN WITNESS WHEREOF, and intending to be legally bound, the parties hereto have caused this Amendment to be executed by their duly authorized representatives under seal, as of the date first above written. RESOURCE PROPERTIES, INC. Attest: By: ------------------------ -------------------------------------- Title: Name: ------------------------- ------------------------------------ Title: ----------------------------------- RESOURCE PROPERTIES XXIV, INC. Attest: By: ------------------------ -------------------------------------- Title: Name: ------------------------- ------------------------------------ Title: ----------------------------------- RESOURCE PROPERTIES XL, INC. Attest: By: ------------------------ -------------------------------------- Title: Name: ------------------------- ------------------------------------ Title: ----------------------------------- RESOURCE PROPERTIES 53, INC. Attest: By: ------------------------ -------------------------------------- Title: Name: ------------------------- ------------------------------------ Title: ----------------------------------- RESOURCE PROPERTIES XXX, INC. Attest: By: ------------------------ -------------------------------------- Title: Name: ------------------------- ------------------------------------ Title: ----------------------------------- 6 RESOURCE PROPERTIES XXXI, INC. Attest: By: ------------------------ -------------------------------------- Title: Name: ------------------------- ------------------------------------ Title: ----------------------------------- SOVEREIGN BANK Attest: By: ------------------------ -------------------------------------- Title: Name: Richard J. Narkiwicz ------------------------- ------------------------------------ Title: Vice President ----------------------------------- 7 EXHIBIT A 8 EX-10 5 exh10-3c.txt EXH10-3C.TXT THIRD MODIFICATION OF REVOLVING CREDIT LOAN AND SECURITY AGREEMENT THIS LOAN MODIFICATION AGREEMENT ("Modification") made this 15th day of September, 2003 and effective as of July 27, 2003, by and between RESOURCE PROPERTIES, INC., RESOURCE PROPERTIES XXX, INC., RESOURCE PROPERTIES XXXI, INC., RESOURCE PROPERTIES XXIV, INC., and RESOURCE PROPERTIES XL, INC., all with an address of 1818 Market Street, 28th Floor, Philadelphia, PA 19103 (collectively "Borrower") and SOVEREIGN BANK, a national banking association with an address at Two Aldwyn Center, Villanova, PA 19085 ("Bank"). BACKGROUND WHEREAS, Borrower is indebted to Bank as evidenced by a certain Replacement Line Note dated March 30, 2000 in the original principal amount of $18,000,000 (the "Loan") executed by Borrower and payable to the order of Bank (the "Note"), and a Revolving Credit Loan and Security Agreement dated July 27, 1999 (and any extension, renewals or modifications thereto, including but not limited to a certain Modification of Revolving Credit Loan and Security Agreement dated March 30, 2000 and that certain Second Modification of Revolving Credit Loan and Security Agreement dated April 30, 2002) executed by Borrower and Bank (the "Loan Agreement") and other documents evidencing and securing the Loan (collectively, the "Loan Documents"). WHEREAS, Borrower has requested that Bank further modify the terms of the Note and the Loan Agreement, which Bank has agreed to do, on the terms and conditions more fully set forth herein. AGREEMENT NOW THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Confirmation of Indebtedness. (a) Borrower hereby confirms, acknowledges, and agrees that as of the date of this Modification, all interest on the Note has been paid in full through August 31, 2003 and that the outstanding principal balance of the Note is $18,000,000. Borrower further acknowledges and agrees that the foregoing principal and interest balance from the date stated are validly and duly owing by Borrower to Bank. (b) Borrower hereby ratifies, confirms and acknowledges that the Note and all of the other documents and instruments executed in connection with the Loan are in full force and effect as of the date hereof, constitute valid and legally binding obligations of Borrower, and are enforceable against Borrower and his assets in accordance with the terms thereof. (c) BORROWER CONFIRMS AND AGREES THAT BORROWER HAS NO CLAIM, CAUSE OF ACTION, DEFENSE SET-OFF, COUNTERCLAIM OR CHALLENGE OF ANY KIND OR NATURE WHATSOEVER AGAINST THE PAYMENT OF ANY OF THE SUMS OWING UNDER THE NOTE OR THE TERMS OF THE OTHER LOAN DOCUMENTS OR THE ENFORCEMENT OR VALIDITY OF THE NOTE OR OTHER LOAN DOCUMENTS, AND DOES HEREBY REMISE, RELEASE AND FOREVER DISCHARGE ANY AND ALL SUCH CLAIMS, CAUSES OF ACTION, DEFENSES, SET-OFFS, COUNTERCLAIMS OR CHALLENGES. 1 2. Amendments to the Loan Agreement. The definition of "Expiration Date" in Section 1.1 shall be July 27, 2005. 3. Conditions Precedent. The obligation of Bank to effect the modifications and agreements contained herein is subject to the conditions precedent that: (a) There has been no material adverse change in condition, financial or otherwise, in the financial or operating condition of Borrower since the later of March 30, 2000 or the date of the last submission of the Borrower's financial statements to the Bank. (b) Bank shall have received payment of an extension fee of $90,000.00. (c) Bank shall have received all of the following documents, each of which shall be in form and substance satisfactory to Bank: (i) Copies, certified in writing by the secretaries or assistant secretaries of Borrower, of (a) resolutions of its boards of directors evidencing approval of this Modification and the other matters contemplated hereby, and (b) each document evidencing other necessary action and approvals, if any, with respect to this Modification; (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, 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 or April 30, 2002, as applicable, 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 30 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; and (vi) Such other documents and instruments as Bank may request under the terms of this Modification or otherwise. (d) Borrower shall have paid Banks' counsel fees incurred in connection with this Modification. 2 4. Representations and Warranties. In order to induce Bank to enter into this Modification, Borrower represents and warrants to Bank as follows: (a) The execution, delivery and performance by Borrower of this Modification and the other documents and instruments required by Bank for the implementation of this Modification, do not and will not violate any provision of law or any agreement, trust or other indenture or instrument to which Borrower is a party, or by which any of its properties may be bound or affected. (b) There are no actions, suits or proceedings pending or threatened against Borrower, or any of its properties before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to Borrower, would have a material adverse effect on its financial or operating condition. (c) This Modification constitutes, and other documents and instruments required hereby when executed will constitute, the legal, valid and binding obligations of Borrower, enforceable in accordance with their terms. (d) No authorization, consent, approval, license, exemption or any other action by and no registration, qualification or filing with any governmental agency or authority is or will be necessary in connection with the execution, delivery and performance of this Modification or any other document or instrument required hereby by Borrower. (e) On and as of the date of this Modification, there has occurred no default or event of default under the Note, the Loan Agreement or any other Loan Document and no event which with notice or lapse of time or both would, if unremedied, be a default or event of default under the Note or other Loan Document. (f) The representations, warranties, covenants and indemnifications made by Borrower to Bank in the Note, the Loan Agreement and other Loan Documents are true and correct as though made on and as of the date of this Modification except that the following schedules are modified as shown on the revised schedules annexed hereto: (i) Schedule 5.4 (ii) Schedule 5.13 (iii) Schedule 5.22 (iv) Schedule 6.1 (v) Schedule 6.7 5. Miscellaneous. (a) Except as expressly set forth herein, the terms and conditions the Note, the Loan Agreement and the other 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 Note, as amended by this Modification. 3 (b) Paragraph headings used in this Modification are for convenience only and shall not affect the construction of this Modification. (c) This Modification shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. (d) This Modification may be signed in counterparts, all of which when taken together shall constitute one and the same instrument. (e) BORROWER ACKNOWLEDGES THAT THE NOTE, THE LOAN AGREEMENT AND OTHER LOAN DOCUMENTS CONTAIN AUTHORIZATIONS TO CONFESS JUDGMENT AGAINST BORROWER, THAT AT THE TIME BORROWER EXECUTED THE NOTE AND THE OTHER LOAN DOCUMENTS IT CONSULTED, AND IN CONNECTION WITH THE EXECUTION OF THIS MODIFICATION AND THE EXECUTION OF THE DOCUMENTS AND INSTRUMENTS REQUIRED HEREBY IT HAS CONSULTED LEGAL COUNSEL WITH RESPECT THERETO AND THAT BORROWER UNDERSTANDS (AND AT THE TIME IT EXECUTED THE NOTES AND OTHER LOAN DOCUMENTS IT UNDERSTOOD) THAT THE EXERCISE BY BANK OF THE AUTHORIZATIONS WILL RESULT IN THE ENTRY OF A JUDGMENT AGAINST BORROWER AND THE SALE OR ATTACHMENT OF OR EXECUTION UPON BORROWER'S PROPERTY (INCLUDING WITHOUT LIMITATION REAL PROPERTY, PERSONAL PROPERTY AND BANK ACCOUNTS) WITHOUT PRIOR NOTICE OR THE OPPORTUNITY FOR A HEARING. [Intentionally Left Blank] 4 IN WITNESS WHEREOF, the parties hereto have executed this Modification as of the date written above. BORROWER: RESOURCE PROPERTIES, INC. Witness: By: ----------------------- -------------------------------------- Name: Title: RESOURCE PROPERTIES XXX, INC. Witness: By: ----------------------- -------------------------------------- Name: Title: RESOURCE PROPERTIES XXXI, INC. Witness: By: ----------------------- -------------------------------------- Name: Title: RESOURCE PROPERTIES XXIV, INC. Witness: By: ----------------------- -------------------------------------- Name: Title: RESOURCE PROPERTIES XL, INC. Witness: By: ----------------------- -------------------------------------- Name: Title: 5 BANK: SOVEREIGN BANK Attest: By: ------------------------ -------------------------------------- Richard J. Narkiewicz, Vice President 6 SCHEDULE 5.4 Stock Owned by Borrower Resource Properties, Inc. owns 100% of all issued and outstanding stock of: 1. Resource Properties II, Inc. 2. Resource Properties IV, Inc. 3. Resource Properties VIII, Inc. 4. Resource Properties XII, Inc. 5. Resource Properties XIV, Inc. 6. Resource Properties XV, Inc. 7. Resource Properties XVII, Inc. 8. Resource Properties XVIII, Inc. 9. Resource Properties XXIV, Inc. 10. Resource Properties XXV, Inc. 11. Resource Properties XXVI, Inc. 12. Resource Properties XXVII, Inc. 13. Resource Properties XXIX, Inc. 14. Resource Properties XXX, Inc. 15. Resource Properties XXXI, Inc. 16. Resource Properties XXXII, Inc. 17. Resource Properties XXXIII, Inc. 18. Resource Properties XXXIV, Inc. 19. Resource Properties XXXV, Inc. 20. Resource Properties XXXVI, Inc. 21. Resource Properties XXXVIII, Inc. 22. Resource Properties XL, Inc. 23. Resource Properties XLI, Inc. 24. Resource Properties XLII, Inc. 25. Resource Properties XLIV, Inc. 26. Resource Properties XLVI, Inc. 27. Resource Propeties XXLVII, Inc. 28. Resource Properties XLIX, Inc. 29. Resource Properties 50, Inc. 30. Resource Properties 51, Inc. 31. Resource Properties 52, Inc. 32. Resource Properties 53, Inc. 33. Resource Properties 54, Inc. 34. ABB Associates I, Inc. 35. ABB Associates II, Inc. 36. CP/CG, Inc. 37. Chesterfield Mortgage Investors, Inc. 38. ES GP, Inc. 39. RAI Financial, Inc. 40. Resource Commercial Mortgages, Inc. 41. Resource Financial Services, Inc. 7 SCHEDULE 5.4 (Con't) 42. Resource Housing Investors I, Inc. 43. Resource Housing Investors, II, Inc. 44. Resource Housing Investors III, Inc. 45. Resource Housing Investors IV, Inc. 46. Resource Programs, Inc. 47. Resource Rittenhouse, Inc. 48. WS Mortgage Acquisition Corporation 8 SCHEDULE 5.13 Names and Addreses of Bororwer Resource Properties, Inc. Resource Properties XXIV, Inc. Resource Properties XL, Inc. Resource Properties XXX, Inc. Resource Properties XXXI, Inc. 1845 Walnut Street, 10th Floor Philadelphia, PA 19103 9 SCHEDULE 5.22 Permitted Bank Accounts Hudson United Bank 1607 Walnut Street Philadelphia, PA 19103 1. Resource Properties, Inc. 5159-00590 2. Resource Properties, Inc. 43-79934 3. Resource Properties XL, Inc. 42-73834 4. Resource Properties XXIV, Inc. 7500-66150 5. Resource Properties XXX, Inc. ----------- 6. Resource Properties XXXI, Inc. ------------ 10 SCHEDULE 6.1 Permitted Indebtedness Borrower's existing indebtedness is as follows: Resource Properties XXIV, Inc. $875,000 loan from Castine Associates Resource Properties, Inc. $6,800,000 loan from Hudson United Bank Resource Properties, Inc. $10,000,000 loan from Miller & Schroeder 11 SCHEDULE 6.7 Permitted Liens and Security Interests Borrower's liens and security intersts are as follows: Resource Proeprties XXIV, Inc. $875,000 loan from Castine Associates Resource Properties, Inc. $6,800,000 loan from Hudson United Bank Resource Properties, Inc. $10,000,000 loan from Miller & Schroeder 12 EX-10 6 exh10-6a.txt EXH10-6A.TXT AMENDMENT TO REVOLVING CREDIT AGREEMENT AND ASSIGNMENT THIS AMENDMENT TO REVOLVING CREDIT AGREEMENT AND ASSIGNMENT (this "Amendment") made as of March 28, 2003, by and among LEAF FINANCIAL CORPORATION, a Delaware corporation with offices at 1845 Walnut Street, 10th Floor, Philadelphia, Pennsylvania 19103 ("Leaf Financial"), LEASE EQUITY APPRECIATION FUND I, L.P., a Delaware limited partnership with offices at 49 Bancroft Mills, Unit P-15, Wilmington, Delaware 19809 ("Leaf I"), LEAF FUNDING, LLC, a Delaware limited liability company with offices at 110 S. Poplar Street, Suite 101, Wilmington, Delaware 19801 ("Leaf Funding") (each a "Debtor" and together, the "Debtors") and NATIONAL CITY BANK, a national banking association with offices at One South Broad, 13th Floor, Philadelphia, Pennsylvania 19107 ("Secured Party"). BACKGROUND ---------- A. On June 11, 2002, Leaf Financial and Secured Party entered into a Revolving Credit Agreement and Assignment (the "Agreement"), in which Secured Party promised from time to time to make loans to Leaf Financial in exchange for Leaf Financial's grant of a security interest and an assignment to Secured Party of all Leaf Financial's right, title and interest in certain Collateral (as defined in Section 2(a) of the Agreement), pursuant to a Security Agreement of even date therewith between Leaf Financial and Secured Party and an Assignment of even date therewith between Leaf Financial and Secured Party. B. Leaf Financial desires to add Leaf I and Leaf Funding as debtors under the Agreement, and Secured Party has agreed to amend the Agreement to permit such additions. C. Leaf Financial is the sole shareholder of Leaf Asset Management, Inc., which is the general partner of Leaf I. D. Leaf Financial is also the sole member of Leaf Funding. E. Until the Commitment Termination Date (as defined in Section 1(a) of the Agreement), Debtors and Secured Party contemplate that Secured Party will continue to make loans to Debtors (each, a "Loan" and collectively the "Loans") evidenced by a certain Amended and Restated Master Note attached as Exhibit A to this Amendment (the "Note"). F. Leaf Financial intends to transfer the existing collateral to Leaf I, which will then pledge it to Secured Party as collateral for the Loans. In the future, either Leaf Financial, Leaf Funding or Leaf I will hold title to Collateral and all will assign any of its rights in such Collateral to Secured Party. G. Leaf I and Leaf Funding will jointly assign and grant to Secured Party a security interest in the Collateral pursuant to a Security Agreement dated of even date herewith between Leaf I, Leaf Funding and Secured Party and will deliver Assignments in the form of Exhibit B to the Agreement and finally will join into the Note as Makers with Leaf Financial. H. Debtors may repay such Loans with the proceeds of fundings to be made under permanent financing to be undertaken in the near future, which permanent financing may require a transfer and release of the Collateral hereunder. I. All of the requirements of law have been fully complied with and all other acts and things necessary to make this Amendment a valid, binding and legal instrument have been done and performed. NOW THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto agree as follows: A. Consent. Secured Party hereby consents to the addition of Leaf Funding and Leaf I as debtors under the Agreement and waives all prohibitions thereto in the Agreement, including but not limited to Sections 6(d) and (e). Such consent and waiver does not, however, constitute a waiver to any future actions prohibited by the Agreement. B. Amendments. The Agreement is hereby amended in the following respects: 1. The Agreement shall be amended to include Leaf Funding and Leaf I as well as Leaf Financial in the definition of the word "Debtor" throughout the Agreement and any exhibits attached thereto. 2. Section 1(d)(ii) of the Agreement shall be amended by replacing the words "Leaf Financial" with the word "Debtor" throughout the section. 3. Section 4(a) of the Agreement shall be amended by deleting the language in such section in its entirety and replacing it with the following language: (a) Organization and Qualification. Leaf Financial Corporation is a corporation, Leaf Funding, LLC is a limited liability company and Lease Equity Appreciation Fund I, L.P. is a limited partnership, all of which are organized, validly existing and in good standing under the laws of the State of Delaware; and all are duly qualified and in good standing as foreign business entities authorized to do business in each state or jurisdiction where such qualification is necessary, where lack of qualification would have a materially adverse affect on Secured Party's rights and remedies with respect to the Collateral. 2 4. Section 6(p) of the Agreement shall be amended in the following respects: (a) The affirmative covenants of Debtor entitled "Financial Covenants" shall apply to Debtor on a consolidated basis; (b) The definition for "Adjusted Net Worth" shall be amended to read: "Adjusted Net Worth" means the Net Worth of LEAF Financial Corporation, its affiliates and investment partnerships managed by LEAF Financial Corporation plus the non-current portion of Subordinated Debt; and (c) The definition for "Net Worth" shall be amended to read: "Net Worth" means the sum of capital stock, plus retained earnings, plus paid-in-surplus, plus cash in escrow, minus treasury stock. 5. Section 6 of the Agreement shall be amended to add the following language at the end of such section: "Notwithstanding anything to the contrary herein, including but not limited to the negative covenants in subsections 6(c), (d) and (e), the Debtor shall be permitted to transfer the Contracts from Leaf Financial or Leaf Funding to Leaf I without the consent of Secured Party so long as each Debtor which holds any interest in the Collateral has delivered a Security Agreement, Assignment, and UCC Financing Statements to Secured Party to cover the Contracts being transferred to such Debtor and Debtor has notified Secured Party within ten (10) days after such transfer regarding which Contracts were transferred. C. The parties will construe all other provisions of the Agreement to give effect to the provisions hereof. D. The Agreement will continue in full force and effect as amended hereby. [SIGNATURES APPEAR ON FOLLOWING PAGE] 3 IN WITNESS WHEREOF, the parties have executed and delivered this Amendment as of the date first above written. DEBTORS: -------- Address for Notices: LEAF FINANCIAL CORPORATION, a - -------------------- Delaware corporation 1845 Walnut Street, 10th Floor Philadelphia, PA 19103 By: Miles Herman ---------------------- Name: Miles Herman Title: President Address for Notices: LEASE EQUITY APPRECIATION - -------------------- FUND I, L.P., a Delaware limited c/o Leaf Asset Management, Inc. partnership 1845 Walnut Street, 10th Floor Philadelphia, PA 19103 By: Leaf Asset Management, Inc., its general partner By: Miles Herman ---------------------- Name: Miles Herman Title: President Address for Notices: LEAF FUNDING, LLC, a Delaware - -------------------- limited liability company c/o Leaf Financial Corporation By: LEAF Financial Corporation, its 1845 Walnut Street, 10th Floor sole member Philadelphia, PA 19103 By: Miles Herman ---------------------- Name: Miles Herman Title: President SECURED PARTY: -------------- NATIONAL CITY BANK, a national banking association By: Michael Labrum --------------------- Name: Michael Labrum Title: Senior Vice President 4 EXHIBIT A --------- AMENDED AND RESTATED MASTER NOTE $10,000,000.00 March 28, 2003 THIS AMENDED AND RESTATED MASTER NOTE (this "Note") is made this 28th day of March, 2003 by LEAF FINANCIAL CORPORATION, a Delaware corporation with offices at 1845 Walnut Street, 10th Floor, Philadelphia, Pennsylvania 19103 ("Leaf Financial"), LEASE EQUITY APPRECIATION FUND I, L.P., a Delaware limited partnership with offices at 49 Bancroft Mills, Unit P-15, Wilmington, Delaware 19809 ("Leaf I"), and LEAF FUNDING, LLC, a Delaware limited liability company with offices at 110 S. Poplar Street, Suite 101, Wilmington, Delaware 19801 ("Leaf Funding") (collectively, the "Debtor") for the benefit of NATIONAL CITY BANK, a national banking association (together with any other holder hereof, "Lender"). This Note: (i) amends and restates in its entirety that certain Master Note dated June 11, 2002 between Leaf Financial and Lender (the "Original Note"); and (ii) joins into the Original Note Leaf I and Leaf Funding as debtors with Leaf Financial. FOR VALUE RECEIVED, the undersigned Debtor promises to pay to the order of Lender, at its office at One South Broad, 13th Floor, Philadelphia, Pennsylvania 19107, or at such other place as Lender may from time to time designate in writing, without grace, the principal sum of TEN MILLION AND NO/100 DOLLARS ($10,000,000.00) or so much thereof as has been advanced hereunder, together with interest on the unpaid balance of the principal from time to time outstanding at the rate per annum set forth in the Credit Agreement as hereinafter defined. Principal and interest owing under this Note shall be payable as provided in the Credit Agreement. In the event that any payment of principal or interest is not made within five (5) days of the date when due hereunder, whether at its stated maturity, by acceleration or otherwise, it is hereby agreed that Lender shall have the option of collecting, on demand, interest on the unpaid amount of such delinquent payment from the day when due until the day when paid, at a rate equal to three percent (3%) above the "Prime Rate" (as defined in the Agreement), provided however, that in no event shall the rate of interest charged exceed the maximum rate permitted by applicable law. Interest owing under this Note shall be computed on the basis of a 360-day year for the actual number of days elapsed. All payments made hereunder shall at Lender's option be applied first to late charges, then to accrued interest, then to principal. All amounts owing under this Note shall be payable in lawful money of the United States of America which, as at the time of payment, shall be legal tender for the payment of public and private debts and shall be payable without relief or benefit of any valuation, stay, appraisement, extension or redemption laws now or hereafter existing. This Note is secured by: (i) that certain Revolving Credit Agreement and Assignment dated June 11, 2002, as amended by an Amendment to the Credit Agreement of even date herewith between Debtor and Lender (the "Credit Agreement"); (ii) the Security Agreement dated as of June 11, 2002 between Leaf Financial and Lender; (iii) the Security Agreement dated as of even date herewith between Leaf I, Leaf Funding and Lender; (iv) the Guaranty of Payment dated as of June 11, 2002 between Guarantor and Lender; and (v) Assignments issued pursuant to the Credit Agreement, under which a security interest is granted in favor of Lender, which together with all other agreements, instruments and documents delivered in connection therewith and herewith, are hereinafter sometimes referred to as the "Loan Documents". In the event of any default, after applicable notice and cure periods, in the payment or performance of any liability or obligation owing under this Note, under any of the Loan Documents, or under any other instrument, document or agreement executed by or binding on Debtor in favor of Lender, Lender may during the continuation of such default declare this Note, all interest hereunder and all other amounts payable hereunder to be immediately due and payable, without further notice or demand of any kind. In addition, upon the occurrence and during the continuation of any such default, Lender shall have all other rights and remedies existing in Lender's favor at law or in equity or provided for in any of the Loan Documents or in any of such other instruments, documents, or agreements. The rights and remedies of Lender as provided herein, in the Loan Documents, in such other instruments, documents, and agreements, at law and in equity shall be cumulative and concurrent, and may be pursued singularly, successively, or together, at the sole discretion of Lender. No act of omission or commission of Lender, including specifically any failure to exercise any right, remedy or recourse, shall be deemed to be a waiver or release of the same, such waiver or release to be effected only through a written document executed by Lender and then only to the extent specifically recited therein. A waiver or release with reference to any one event shall not be construed as continuing, as a bar to, or as a waiver or release of, any subsequent right, remedy or recourse as to any other event. Voluntary prepayments of this Note are permitted as more fully provided in the Credit Agreement. Mandatory prepayment in full of this Note shall be required to be paid upon the occurrence of certain events and within the times provided in the Credit Agreement. Notwithstanding anything herein to the contrary, in no event shall interest, fees or charges payable under this Note or any Loan Document exceed those permitted by applicable law. Any provision of this Note or of any Loan Document which would otherwise charge or require payment of any interest, fee or charge in excess of the maximum permitted by applicable law shall be hereby amended to charge and require payment of only the maximum interest, fee or charge permitted by applicable law. Debtor waives presentment and demand for payment, dishonor, notice of dishonor, protest and notice of protest of this Note. Debtor agrees to pay all of Lender's reasonable costs and expenses of collection, including reasonable attorneys' and paralegals' fees and expenses. 6 If more than one party shall execute this Note, the term "Debtor" as used herein shall mean all parties signing this Note and each of them, and all such parties shall be jointly and severally obligated hereunder. The provisions of this Note shall be binding upon Debtor and its heirs, personal representatives, successors and assigns and shall inure to the benefit of Lender and its successors and assigns. THE LOAN EVIDENCED HEREBY HAS BEEN MADE, AND THIS NOTE HAS BEEN DELIVERED, AT PHILADELPHIA, PENNSYLVANIA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAWS PROVISIONS) OF THE COMMONWEALTH OF PENNSYLVANIA. DEBTOR HEREBY (I) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN THE COMMONWEALTH OF PENNSYLVANIA OR THE STATE OF OHIO, OVER ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS NOTE OR ANY OF THE LOAN DOCUMENTS; (II) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT DEBTOR MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING; (III) AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW; AND (IV) AGREES NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST LENDER OR ANY OF LENDER'S DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY MATTER ARISING OUT OF OR RELATING TO THIS NOTE OR ANY OF THE LOAN DOCUMENTS IN ANY COURT OTHER THAN ONE LOCATED IN A COUNTY WHERE DEBTOR MAINTAINS AN OFFICE IN PENNSYLVANIA OR OHIO. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR IMPAIR LENDER'S RIGHT TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR LENDER'S RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST DEBTOR OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. DEBTOR WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION ARISING OUT OF THIS NOTE. 7 If this Note is not dated when executed by Debtor, Lender is hereby authorized, without notice to Debtor, to date this Note as of the date when the first loan evidenced hereby is made. Wherever possible each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note. DEBTOR: ------- LEAF FINANCIAL CORPORATION, a Delaware corporation By: Miles Herman ------------------------------- Name: Miles Herman Title: President LEASE EQUITY APPRECIATION FUND I, L.P., a Delaware limited partnership By: Leaf Asset Management, Inc., its general partner By: Miles Herman ------------------------------- Name: Miles Herman Title: President LEAF FUNDING, LLC, a Delaware limited liability company By: LEAF Financial Corporation, its sole member By: Miles Herman ------------------------------- Name: Miles Herman Title: President 8 EXHIBIT B --------- ASSIGNMENT FOR VALUE RECEIVED and pursuant to that certain Revolving Credit Agreement and Assignment dated June 11, 2002, together with that certain Amendment to Revolving Credit Agreement and Assignment dated March 28, 2003 (the "Agreement") between the undersigned and NATIONAL CITY BANK (the "Assignee"), the undersigned hereby grants a security interest in, and collaterally assigns to the Assignee, all of the undersigned's right, title and interest in and to: (i) Contracts. All lease agreements, conditional sale contracts, pay-per-use agreements, notes, security agreements and/or financing documents and agreements described on Schedule A hereto entered into between undersigned as lessor, seller, provider or lender and the entity named therein as lessee, purchaser, user or borrower (together with any guarantors or other parties obligated in respect of the Contracts, an "Obligor" or the "Obligors"), together with any master lease agreements or other documents which relate to the above described documents (collectively the "Contracts"). (ii) Goods. All goods and other property and rights covered by any Contract, together with all accessories, accessions, attachments and appurtenances appertaining or attached to or used in connection with any of such property, whether now owned or hereafter acquired (the "Equipment"). (iii) Obligor Guaranties. All guaranties given to undersigned, or under which undersigned has rights, by any person or entity guaranteeing the payment and/or performance of any Contract (an "Obligor Guaranty"). (iv) Rights and Payments. All right, title and interest of undersigned in, under and to the Contracts, and all rents and other sums due and to become due thereunder, including Any and all extensions or renewals thereof ("Payments"). (v) Software. All software products and license agreements or rights covered under any Contract (to the extent the undersigned has transferable rights in such Software). (vi) Other Security. All instruments, documents of title, accounts, general intangibles or money in each case related to or other property of any kind securing the payment of any Contract. (vii) Substitutions, Renewals, Replacements, Improvements. All enhancements to and substitutions, renewals and replacements of, and improvements to any of the foregoing. (viii) Proceeds. All cash and noncash proceeds of any of the foregoing including insurance proceeds and casualty loss payments. Notwithstanding anything to the contrary herein, undersigned specifically does not grant a security interest in, or collaterally assign to the Assignee, any of the undersigned's right, title and interest in and to any money received from or escrow accounts in which such money received from partners of the undersigned are held. The Aggregate Borrowing Limits of the Contracts assigned hereby is $_________ and the Borrowing Limit attributable to each Contract is listed on the attached Schedule A hereto. Notwithstanding anything herein or in the Agreement to the contrary, the undersigned has not assigned or delegated, and the Assignee has not assumed or promised to perform, any of the undersigned's duties or obligations under the Contract or with respect to any property referred to in or covered by the Contract. The terms and conditions of this Assignment, including, but not limited to, the undersigned's warranties with respect to the Contract and the undersigned's obligations to the Assignee with respect to such Contract, are as provided for in the Agreement, to which reference is hereby made for a statement thereof. The term "Payments" as used in this Assignment shall have the same meaning herein as in the Agreement. This Assignment shall be governed by and construed in accordance with the internal laws (as opposed to the conflicts of law provisions) of the Commonwealth of Pennsylvania. This Assignment shall be binding upon and inure to the benefit of the undersigned and the Assignee and their respective successors and assigns. Dated: March 28, 2003 LEASE EQUITY APPRECIATION FUND I, L.P., a Delaware limited partnership By: Leaf Asset Management, Inc., its general partner By: Miles Herman ----------------------- Name: Miles Herman Title: President 10 EX-10 7 exh10-6b.txt EXH10-6B.TXT SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT AND ASSIGNMENT THIS SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT AND ASSIGNMENT (this "Second Amendment") made as of April 1, 2003, by and among LEAF FINANCIAL CORPORATION, a Delaware corporation with offices at 1845 Walnut Street, 10th Floor, Philadelphia, Pennsylvania 19103 ("Leaf Financial"), LEASE EQUITY APPRECIATION FUND I, L.P., a Delaware limited partnership with offices at 49 Bancroft Mills, Unit P-15, Wilmington, Delaware 19809 ("Leaf I"), LEAF FUNDING, LLC, a Delaware limited liability company with offices at 110 S. Poplar Street, Suite 101, Wilmington, Delaware 19801 ("Leaf Funding, LLC"), LEAF FUNDING, INC., a Delaware corporation with offices at 110 S. Poplar Street, Suite 101, Wilmington, Delaware 19801 ("Leaf Funding, Inc.") and NATIONAL CITY BANK, a national banking association with offices at One South Broad, 13th Floor, Philadelphia, Pennsylvania 19107 ("Secured Party"). BACKGROUND ---------- A. On June 11, 2002, Leaf Financial and Secured Party entered into a Revolving Credit Agreement and Assignment (the "Original Agreement"), in which Secured Party promised from time to time to make loans to Leaf Financial in exchange for Leaf Financial's grant of a security interest and an assignment to Secured Party of all Leaf Financial's right, title and interest in certain Collateral (the "Collateral", as defined in Section 2(a) of the Original Agreement), evidenced by a Master Note of even date therewith between Leaf Financial and Secured Party ("Master Note") and made pursuant to a security agreement and an assignment of even date therewith between Leaf Financial and Secured Party. B. On March 28, 2003, Leaf Financial and Secured Party amended the Original Agreement to add Leaf I and Leaf Funding, LLC as debtors under the Original Agreement (the "First Amendment", together with the Original Agreement, the "Agreement"), a copy of which is attached hereto and made a part hereof as Exhibit "A", evidenced by an amended and restated Master Note (the "Amended and Restated Master Note"), a security agreement (the "Security Agreement") and assignments between Leaf I, Leaf Funding, LLC and Secured Party. C. Leaf Financial is: (i) the sole shareholder of Leaf Asset Management, Inc., which is the general partner of Leaf I; (ii) the sole member of Leaf Funding, LLC; and (iii) the sole shareholder of Leaf Funding, Inc. D. For business purposes, Leaf Funding, LLC has decided to conduct itself in the form of a corporation rather than as a limited liability company. E. Leaf Funding, Inc. desires to assume all the assets, rights, obligations and liabilities of Leaf Funding, LLC under the Agreement and to replace Leaf Funding, LLC as a debtor under the Agreement. F. Upon the replacement of Leaf Funding, LLC with Leaf Funding, Inc. as a debtor under the Agreement, Leaf Funding, LLC will dissolve and Leaf Funding, Inc. will be the successor to Leaf Funding, LLC, assuming all the rights, obligations, assets and liabilities of Leaf Funding, LLC under the Agreement. G. Pursuant to this Second Amendment, Leaf Funding, Inc. will: (i) grant to Secured Party a security interest in the Collateral through an Amendment to the Security Agreement of even date herewith; (ii) assign to Secured Party its security interest through an Assignment of even date herewith; and (iii) replace Leaf Funding, LLC as a debtor under the Amended and Restated Master Note through an amendment thereto of even date herewith. H. All parties hereto desire to further amend the Agreement to replace Leaf Funding, LLC with Leaf Funding, Inc. as a debtor under the Agreement, and Secured Party has agreed to amend the Agreement to permit such replacement. NOW THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree that the Agreement is further amended as follows: A. Consent. Secured Party hereby consents to the replacement of Leaf Funding, LLC with Leaf Funding, Inc. as a debtor under the Agreement and waives all prohibitions thereto in the Agreement. Such consent and waiver does not, however, constitute a waiver to any future actions prohibited by the Agreement. B. Amendment. The Agreement is hereby further amended to provide that "Leaf Funding, Inc." shall replace "Leaf Funding, LLC" throughout the Agreement and any exhibits attached thereto. C. General Provisions. (i) Except as expressly set forth herein, the Agreement remains unmodified and will continue in full force and effect. The parties hereto will construe all other provisions of the Agreement to give effect to the provisions hereof. (ii) This Second Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their nominees, successors and assigns. (iii) This Second Amendment may be executed in any number of counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all parties have not signed the same counterpart. (iv) This Second Amendment shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. [SIGNATURES BEGIN ON FOLLOWING PAGE] 2 IN WITNESS WHEREOF, the parties have executed and delivered this Second Amendment as of the date first above written. DEBTORS: -------- Address for Notices: LEAF FINANCIAL CORPORATION, a - -------------------- Delaware corporation 1845 Walnut Street, 10th Floor Philadelphia, PA 19103 By: Miles Herman ---------------------------- Name: Miles Herman Title: President Address for Notices: LEASE EQUITY APPRECIATION - -------------------- FUND I, L.P., a Delaware limited c/o Leaf Asset Management, Inc. partnership 1845 Walnut Street, 10th Floor Philadelphia, PA 19103 By: Leaf Asset Management, Inc., its general partner By: Miles Herman ----------------------------- Name: Miles Herman Title: President Address for Notices: LEAF FUNDING, LLC, a Delaware - -------------------- limited liability company c/o Leaf Financial Corporation 1845 Walnut Street, 10th Floor Philadelphia, PA 19103 By: LEAF Financial Corporation, its sole member By: Miles Herman ----------------------------- Name: Miles Herman Title: President Address for Notices: LEAF FUNDING, INC., a Delaware - -------------------- corporation c/o Leaf Financial Corporation 1845 Walnut Street, 10th Floor Philadelphia, PA 19103 By: Miles Herman ----------------------------- Name: Miles Herman Title: Senior Vice President [SIGNATURES CONTINUE ON FOLLOWING PAGE] 3 SECURED PARTY: -------------- NATIONAL CITY BANK, a national banking association By: Michael Labrum --------------------------- Name: Michael Labrum Title: Senior Vice President 4 EX-10 8 exh10-8b.txt EXH10-8B.TXT SECOND AMENDMENT TO CREDIT AGREEMENT This Second Amendment to Credit Agreement (this "Amendment") is made as of the 28th day of March, 2003, by and among ATLAS PIPELINE PARTNERS, L.P., a Delaware limited partnership (the "Borrower"); ATLAS PIPELINE PARTNERS GP, LLC, a Delaware limited liability company ("General Partner"); ATLAS PIPELINE NEW YORK, LLC, a Pennsylvania limited liability company ("APL New York"); ATLAS PIPELINE OHIO, LLC, a Pennsylvania limited liability company ("APL Ohio"), ATLAS PIPELINE PENNSYLVANIA, LLC, a Pennsylvania limited liability company ("APL Pennsylvania"), and ATLAS PIPELINE OPERATING PARTNERSHIP, L.P., a Delaware limited partnership ("APL Operating," together with General Partner, APL New York, APL Ohio and APL Pennsylvania, collectively, the "Guarantors" and the Borrower and the Guarantors collectively, the "Obligors"); each of the lenders that is a signatory hereto (individually, together with its successors and assigns, a "Lender" and, collectively, the "Lenders"); WACHOVIA BANK, NATIONAL ASSOCIATION, as administrative agent for the Lenders (in such capacity, together with its successors in such capacity the "Administrative Agent"), and as issuing bank (in such capacity, together with its successors in such capacity, the "Issuing Bank"). R E C I T A L S: A. The parties hereto are parties to the Credit Agreement dated December 27, 2002 (the "Credit Agreement"), pursuant to which the Lenders agreed to loan up to $7,500,000 to Borrower. B. The Credit Agreement was amended by that certain First Amendment to Credit Agreement dated January 31, 2003 (the "First Amendment"), pursuant to which the Lenders agreed to loan up to $10,000,000 to Borrower (the Credit Agreement as amended by the First Amendment is herein called the "Original Agreement"). C. Immediately prior to the effectiveness of this Amendment Wachovia Bank, National Association, as Lender, has assigned to KeyBank National Association under that certain Assignment Agreement of even date herewith (the "Assignment Agreement") fifty percent (50%) of Wachovia Bank, National Association's Percentage Share of the Revolving Credit Commitment (the "Assigned Interest"). Pursuant to such assignment, KeyBank National Association is a party to the Original Agreement and, under Section 2.12 of the Original Agreement, is an "Augmenting Lender." D. Borrower has requested, pursuant to Section 2.12 of the Original Agreement, the Maximum Revolving Credit Amount be increased to $15,000,000 and KeyBank National Association, as Augmenting Lender, the other Lenders and the Administrative Agent consent to amend the Original Agreement in order to modify certain provisions of the Original Agreement pursuant to the terms and conditions hereof. NOW, THEREFORE, in consideration of the foregoing, and intending to be legally bound, the parties agree as follows: SECTION 1. Terms Defined in Agreement. As used in this Amendment, except as may otherwise be provided herein, all capitalized terms which are defined in the Original Agreement shall have the same meaning herein as therein, all of such terms and their definitions being incorporated herein by reference. The Original Agreement, as amended by this Amendment, is hereinafter called the "Agreement." SECTION 2. Amendment to Agreement. Subject to the conditions precedent set forth in Section 4 hereof, the Original Agreement is hereby amended as follows: (a) Section 1.02 is amended to add the following: "Appalachian Basin" shall mean the states of New York, Ohio, West Virginia, Kentucky and Tennessee, and the Commonwealths of Pennsylvania and Virginia. (b) The definition of "Majority Lenders" is amended by deleting the term "sixty-seven percent (67%)" and replacing it with the term "one hundred percent (100%)" in each instance such term appears. (b) Section 9.03(i) is amended by inserting the following phrase immediately before the period "." at the end of subsection (i): "; provided further, that (x) such acquisitions shall be limited to Persons primarily involved in the business of, and/or assets primarily involving, natural gas gathering operations and (y) such acquisitions outside the Appalachian Basin which are otherwise permitted pursuant to this Section 9.03(i) shall be limited to an aggregate purchase price of $5,000,000 during the term of this Agreement." (c) Section 10.01 is amended by replacing the period "." at the end of subsection (l) with "; or" and adding the following subsection (m) immediately after subsection (l): "(m) a Material Adverse Effect occurs." (d) Annex I attached to the Original Agreement is deleted in its entirety and Annex I attached hereto is substituted in lieu thereof. SECTION 3. Increase in Maximum Revolving Credit Amounts. Pursuant to the Borrower's written request under Section 2.12, and immediately following the assignment of the Assigned Interest to Key Bank National Association, the total aggregate Maximum Revolving Credit Amounts will be increased to $15,000,000. After giving effect to this Amendment, the Maximum Revolving Credit Amounts, outstanding Loans, risk relating to outstanding Letters of Credit, and Percentage Share of the Lenders are as set forth on Annex I hereto. 2 SECTION 4. Conditions of Effectiveness. The obligations of Administrative Agent and Lenders to amend the Original Agreement as provided in this Amendment and give effect to Section 3 hereof is subject to the fulfillment of the following conditions precedent: (a) The Assignment Agreement from Wachovia Bank, National Association to KeyBank National Association shall be fully executed. (b) Borrower shall deliver to Administrative Agent and Lenders multiple counterparts of this Amendment, duly executed by the Obligors. (c) Borrower shall deliver to Wachovia Bank, National Association its $7,500,000 promissory note duly executed by Borrower. (d) Borrower shall deliver to KeyBank National Association its $7,500,000 promissory note duly executed by Borrower. (e) Borrower shall pay to Administrative Agent for the benefit of KeyBank National Association $56,250.00 as an upfront fee. (f) Borrower shall deliver duly executed multiple counterparts of certificates of the Secretary or Assistant Secretary of the Company and Guarantor setting forth resolutions of its Board of Directors in form and substance satisfactory to the Lender with respect to this Amendment. (g) such other agreements, documents, financing statements, items, instruments, opinions, certificates, waivers, consents, and evidence as the Lender may request. (h) Borrower shall have made payment to Administrative Agent, in immediately available funds, payment of all accrued and unpaid legal fees and expenses referred to in Section 12.03 of the Original Agreement and Section 7 hereof to the extent invoices for such fees and expenses have been delivered to Borrower. SECTION 5. Representations and Warranties. Each of the Obligors represents and warrants to Administrative Agent and Lenders, with full knowledge that Administrative Agent and Lenders are relying on the following representations and warranties in executing this Amendment, as follows: (a) Each Obligor has the organizational power and authority to execute, deliver and perform this Amendment and such other Loan Documents executed in connection herewith, and all organizational action on the part of such Person requisite for the due execution, delivery and performance of this Amendment and such other Loan Documents executed in connection herewith has been duly and effectively taken; (b) The Original Agreement as amended by this Amendment and the Loan Documents and each and every other document executed and delivered in connection with this Amendment to which any Obligor is a party constitute the legal, valid and binding obligations of each Obligor to the extent it is a party thereto, enforceable against such Person in accordance with their respective terms; 3 (c) This Amendment does not and will not violate any provisions of any of the Organization Documents of any Obligor, or any contract, agreement, instrument or requirement of any Governmental Authority to which Borrower is subject; Obligors' execution of this Amendment will not result in the creation or imposition of any lien upon any properties of any Obligor other than those permitted by the Original Agreement and this Amendment; (d) Execution, delivery and performance of this Amendment by Obligors does not require the consent or approval of any other Person, including, without limitation, any regulatory authority or governmental body of the United States of America or any state thereof or any political subdivision of the United States of America or any state thereof; and (e) No Default or Event of Default exists and all of the representations and warranties contained in the Original Agreement and all instruments and documents executed pursuant thereto or contemplated thereby are true and correct in all material respects on and as of this date other than those which have been disclosed to Administrative Agent and Lenders in writing. Nothing in this Section 5 of this Amendment is intended to amend any of the representations or warranties contained in the Agreement or of the Loan Documents to which any Obligor is a party. SECTION 6. Reference to and Effect on the Agreement. (a) Upon the effectiveness of Sections 1, 2 and 3 hereof, on and after the date hereof, each reference in the Original Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like import, shall mean and be a reference to the Original Agreement as amended hereby. (b) Except as specifically amended by this Amendment, the Agreement shall remain in full force and effect and is hereby ratified and confirmed. SECTION 7. Cost, Expenses and Taxes. Borrower agrees to pay on demand all reasonable costs and expenses of Administrative Agent in connection with the preparation, reproduction, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder, including reasonable attorneys' fees and out-of-pocket expenses of Administrative Agent. In addition, Borrower shall pay any and all recording and filing fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Amendment and the other instruments and documents to be delivered hereunder, and agrees to save Administrative Agent harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes or fees. 4 SECTION 8. Extent of Amendments. Except as otherwise expressly provided herein, the Original Agreement and the other Loan Documents are not amended, modified or affected by this Amendment. Obligors ratify and confirm that (i) except as expressly amended hereby, all of the terms, conditions, covenants, representations, warranties and all other provisions of the Original Agreement remain in full force and effect, (ii) each of the other Loan Documents are and remain in full force and effect in accordance with their respective terms, and (iii) the Collateral is unimpaired by this Amendment. SECTION 9. Disclosure of Claims. As additional consideration to the execution, delivery, and performance of this Amendment by the parties hereto and to induce Lenders to enter into this Amendment, each Obligor represents and warrants that no Obligor knows of any defenses, counterclaims or rights of setoff to the payment of any Indebtedness. SECTION 10. Affirmation of Security Interest. Obligors hereby confirm and agree that any and all liens, security interest and other security or Collateral now or hereafter held by Administrative Agent for the benefit of Lenders as security for payment and performance of the Obligations under such Security Instruments to which such Obligor is a party are renewed and carried forth to secure payment and performance of all of the Obligations. The Security Instruments are and remain legal, valid and binding obligations of the parties thereto, enforceable in accordance with their respective terms. SECTION 11. Execution and Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. Delivery of an executed counterpart of this Amendment by facsimile and other Loan Documents shall be equally as effective as delivery of a manually executed counterpart of this Amendment and such other Loan Documents. SECTION 12. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas. SECTION 13. Headings. Section headings in this Amendment are included herein for convenience and reference only and shall not constitute a part of this Amendment for any other purpose. SECTION 14. NO ORAL AGREEMENTS. THE ORIGINAL AGREEMENT (AS AMENDED BY THIS AMENDMENT) AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [The remainder of this page intentionally blank. Signature pages to follow.] 5 IN WITNESS WHEREOF, the parties have executed this Second Amendment to Credit Agreement the day and year first above written. BORROWER: ATLAS PIPELINE PARTNERS, L.P., a Delaware limited partnership By: Atlas Pipeline Partners GP, LLC, its General Partner By: ------------------------------- Michael L. Staines, President S-1 GUARANTORS: ATLAS PIPELINE PARTNERS GP, LLC, a Delaware limited liability company By: ------------------------------- Michael L. Staines, President ATLAS PIPELINE NEW YORK, LLC, a Pennsylvania limited liability company By: Atlas Pipeline Operating Partnership, L.P., a Delaware limited partnership and its sole member By: Atlas Pipeline Partners GP, LLC, a Delaware limited liability company and its sole general partner By: ------------------------------- Michael L. Staines, President ATLAS PIPELINE OHIO, LLC, a Pennsylvania limited liability company By: Atlas Pipeline Operating Partnership, L.P., a Delaware limited partnership and its sole member By: Atlas Pipeline Partners GP, LLC, a Delaware limited liability company and its sole general partner By: ------------------------------- Michael L. Staines, President S-2 ATLAS PIPELINE PENNSYLVANIA, LLC, a Pennsylvania limited liability company By: Atlas Pipeline Operating Partnership, L.P., a Delaware limited partnership and its sole member By: Atlas Pipeline Partners GP, LLC, a Delaware limited liability company and its sole general partner By: ------------------------------- Michael L. Staines, President ATLAS PIPELINE OPERATING PARTNERSHIP, a Delaware limited partnership By: Atlas Pipeline Partners GP, LLC, a Delaware limited liability company and its sole general partner By: ------------------------------- Michael L. Staines, President S-3 LENDER, ADMINISTRATIVE AGENT AND ISSUING BANK: WACHOVIA BANK, NATIONAL ASSOCIATION Individually, Administrative Agent and Issuing Bank By: --------------------------------------- Russell Clingman Director S-4 LENDER: KEYBANK NATIONAL ASSOCIATION Individually By: --------------------------------------- Sherrie I. Manson Vice President S-5 ANNEX 1
- ------------------------------ -------------------- ---------------------- ------------------- ---------------------- Maximum Revolving Name of Lender Outstanding Loans Letters of Credit Percentage Share Credit Amount - ------------------------------ -------------------- ---------------------- ------------------- ---------------------- Wachovia Bank, National 50% $7,500,000 Association - ------------------------------ -------------------- ---------------------- ------------------- ---------------------- KeyBank National Association 50% $7,500,000 - ------------------------------ -------------------- ---------------------- ------------------- ---------------------- Total 100% $15,000,000 - ------------------------------ -------------------- ---------------------- ------------------- ----------------------
Annex I 1 EX-10 9 exh10-8c.txt EXH10-8C.TXT THIRD AMENDMENT TO CREDIT AGREEMENT This Amendment to Credit Agreement (this "Amendment") is made as of the 15th day of September, 2003, by and among ATLAS PIPELINE PARTNERS, L.P., a Delaware limited partnership (the "Borrower"); ATLAS PIPELINE PARTNERS GP, LLC, a Delaware limited liability company ("General Partner"); ATLAS PIPELINE NEW YORK, LLC, a Pennsylvania limited liability company ("APL New York"); ATLAS PIPELINE OHIO, LLC, a Pennsylvania limited liability company ("APL Ohio"), ATLAS PIPELINE PENNSYLVANIA, LLC, a Pennsylvania limited liability company ("APL Pennsylvania"), ATLAS PIPELINE OPERATING PARTNERSHIP, L.P., a Delaware limited partnership ("APL Operating," together with General Partner, APL New York, APL Ohio and APL Pennsylvania, collectively, the "Guarantors" and the Borrower and the Guarantors collectively, the "Obligors"); each of the lenders that is a signatory hereto (individually, together with its successors and assigns, a "Lender" and, collectively, the "Lenders"); WACHOVIA BANK, NATIONAL ASSOCIATION, as administrative agent for the Lenders (in such capacity, together with its successors in such capacity the "Administrative Agent"), and as issuing bank (in such capacity, together with its successors in such capacity, the "Issuing Bank"). R E C I T A L S: A. The Obligors, Lenders and Administrative Agent are parties to the Credit Agreement dated December 27, 2002 (the "Credit Agreement"), pursuant to which the Lenders agreed to loan up to $7,500,000 to Borrower. B. The Credit Agreement was amended by that certain First Amendment to Credit Agreement dated January 31, 2003 (the "First Amendment"), pursuant to which the Lenders agreed to loan up to $10,000,000 to Borrower. C. Effective March 28, 2003, Wachovia Bank, National Association, as Lender, assigned to KeyBank National Association, pursuant to that certain Assignment Agreement dated March 28, 2003 (the "Assignment Agreement"), fifty percent (50%) of Wachovia Bank, National Association's Percentage Share of the Revolving Credit Commitment. Pursuant to such assignment, KeyBank National Association is a Lender. D. Contemporaneously with the execution of the Assignment Agreement, the Credit Agreement was further amended by that certain Second Amendment to Credit Agreement dated March 28, 2003 (the "Second Amendment"), pursuant to which the Lenders agree to loan up to $15,000,000 to Borrower (the Credit Agreement as amended by the First Amendment and by the Second Amendment is herein called the "Original Agreement"). E. Borrower has requested that the Original Agreement be further amended including without limitation, increasing the aggregate Maximum Revolving Credit Amount to $20,000,000, and providing for the acquisition of certain Unrestricted Entities (as herein defined), and the Lenders and the Administrative Agent consent to amend the Original Agreement in order to modify certain provisions of the Original Agreement pursuant to the terms and conditions hereof. NOW, THEREFORE, in consideration of the foregoing, and intending to be legally bound, the parties agree as follows: SECTION 1. Terms Defined in Agreement. As used in this Amendment, except as may otherwise be provided herein, all capitalized terms which are defined in the Original Agreement shall have the same meaning herein as therein, all of such terms and their definitions being incorporated herein by reference. The Original Agreement, as amended by this Amendment, is hereinafter called the "Agreement." SECTION 2. Amendment to Agreement. Subject to the conditions precedent set forth in Section 3 hereof, the Original Agreement is hereby amended as follows: (a) Section 1.02 is amended to add the following: "APC" shall mean Alaska Pipeline Company, LLC, a Delaware limited liability company. "APC Acquisition" shall mean APC Acquisition, LLC, a Delaware limited liability company. "RAI" shall mean Resource America, Inc., a Delaware corporation. "RAI Put Agreement" shall mean the Put Agreement to be entered into between Borrower and RAI containing substantially the same terms as set forth in the RAI Put Term Sheet. "RAI Put Term Sheet" shall mean the term sheet dated September 15, 2003 for RAI Standby Commitment to Borrower for Friedman Billings Ramsey Put Right. "Unrestricted Entities" shall mean APC Acquisition and, upon consummation of its acquisitions of an equity interest in APC by APC Acquisition, APC. (b) The definition of "Applicable Margin" is amended by deleting the table contained therein and adding the following table in replacement thereof:
------------------------------- ----------------------------------- Leverage Ratio Applicable Margin ------------------------------- ----------------------------------- LIBOR Loans Base Rate Loans ------------------------------- ------------- --------------------- L/C Fees ------------------------------- ------------- --------------------- Less than or equal to 1.5 1.50% 0.00% ------------------------------- ------------- --------------------- Greater than 1.5, 1.75% 0.25% but less than or equal to 2.5 ------------------------------- ------------- --------------------- Greater than 2.5, 2.00% 0.50% but less than or equal to 3.0 ------------------------------- ------------- --------------------- Greater than 3.0 2.50% 0.75% ------------------------------- ------------- ---------------------
2 (c) The definition of "Guarantor" is amended by adding the following phrase immediately before the period (".") at the end of the definition: ", except for the Unrestricted Entities" (d) The definition of "Change in Control" is amended by adding the following phrase immediately following the term "Borrower at the end of clause (i) of such definition: "(provided, however, the acquisition by RAI, or a wholly-owned subsidiary of RAI, of 25% or more of the voting common units of Borrower pursuant to the terms of the RAI Put Agreement is deemed to not constitute a Change in Control)" (e) The definition of "Consolidated Subsidiaries" is amended by adding the following phrase immediately before the period (".") at the end of the definition: ", provided, however, that the Consolidated Subsidiaries of Borrower shall not include the Unrestricted Entities" (f) Clause (i) in the first sentence of Section 2.06 is deleted and replaced in its entirety by the following: "(i) as of September 15, 2003" (g) Section 2.12 is deleted in its entirety, together with a references thereto. (h) The second sentence of Section 8.13 is deleted and replaced in its entirety by the following sentences: "In addition, at the time of the formation or acquisition of any Subsidiary (other than the Unrestricted Entities), Borrower shall cause such Subsidiary to execute and deliver to the Administrative Agent (a) a Guaranty substantially in the form and upon the terms of Exhibit G-1, providing for the guaranty of payment and performance of the Indebtedness, (b) Security Documents in form and substance satisfactory to the Administrative Agent creating liens and security interests in all assets and properties of such Subsidiary and in the equity interest of such Subsidiary except for any equity interests in Unrestricted Entities, and (c) such other documents and instruments as may be required with respect to such Subsidiary pursuant to Section 8.05. At the time of the formation or acquisition of any Subsidiary or any Unrestricted Entity, Borrower shall cause such Subsidiary or Unrestricted Entity to execute and deliver to Administrative Agent certified copies of such Subsidiary's, or Unrestricted Entity's, as the case may be, organizational documents. 3 (i) Section 9.01 is amended by replacing the period (".") with a semi-colon (";") at the end of Subsection 9.01 (h), and deleting the existing Subsection 9.01 (i) and replacing it with the following Subsections 9.01(i), (j) and (k): "(i) Debt in the form of limited guaranty agreements executed by Borrower and APL Operating, severally, guaranteeing Debt incurred by APC Acquisition in an amount not to exceed $50,000,000; (j) Debt to RAI constituting Borrower's obligation to purchase RAI's Preferred Membership Interests in APC Acquisition, in the event RAI acquires such interests from Friedman Billings Ramsey under the terms of the RAI Put Agreement, and to reimburse RAI for its expenses in accordance with the RAI Put Term Sheet; and (k) Debt not otherwise described under subparagraphs (a) through (i) above not to exceed $250,000 in the aggregate." (j) Section 9.02 is amended by deleting the "and" at the end of Subsection 9.02(e) and inserting immediately before the period (".") at the end of Subsection 9.02 (f), the following Subsection 9.02(g): "; and (g) Liens on equity interests in any Unrestricted Entities securing Debt of such Unrestricted Entities." (k) Subsection 9.03(i) is amended by: (A) adding to clause (b) the following phrase immediately following the term "Person": "(other than an Unrestricted Entity)"; (B) adding to clause (e) the following phrase immediately following the term "Person": "(other than an Unrestricted Entity)"; (C) adding to clause (f) the following phrase immediately following the phrase "in such acquired assets" at the end of clause (f): "; provided, however, nothing herein shall require any Unrestricted Entity to grant a first priority lien in its assets"; and 4 (D) deleting existing clause (y) and replacing it in its entirety by the following: "(y) such acquisitions outside the Appalachian Basin which are otherwise permitted pursuant to this Section 9.03(i) shall be limited to an aggregate purchase price of $5,000,000 during the term of this Agreement, except for the acquisition by APC Acquisition of an equity interest in APC." (l) Section 9.06 is amended by adding the following phrase at the end of the first sentence thereof: "and as an owner of Unrestricted Entities." (m) Section 9.14 is amended by deleting the number "3.00" and replacing it with the number "3.50." (n) Section 9.15 is amended by deleting the number "$16,000,000" and replacing it with the number "$30,500,000." (o) Section 9.18 is amended by deleting the "and" immediately following the number "5" and adding the following phrase immediately following the number "6": ", 19, and 20" (p) Section 9.20 is amended by adding the following phrase immediately following the term "Subsidiaries" in the first sentence thereof: "(other than Unrestricted Entities)" (q) Section 9.23 is amended by adding the following sentence at the end thereof: "Without limiting the forgoing, no amendment to the RAI Put Agreement shall be made that shall modify the terms of Borrower's payment option with respect to the RAI put in such a manner as to require or permit Borrower to pay cash to RAI for such put." (r) Annex I attached to the Original Agreement is deleted in its entirety and Annex I attached hereto is substituted in lieu thereof. (s) Schedule 7.15 attached to the Original Agreement is deleted in its entirety and Schedule 7.15 attached hereto is substituted in lieu thereof. (t) Schedule 7.23 attached to the Original Agreement is amended to add as items 19 and 20 thereto the RAI Put Term Sheet and the RAI Put Agreement, respectively. 5 SECTION 3. Increase in Maximum Revolving Credit Amounts. Upon satisfaction of the conditions of effectiveness under Section 4 hereof, the total aggregate Maximum Revolving Credit Amounts will be increased to $20,000,000. After giving effect to this Amendment, the Maximum Revolving Credit Amounts, outstanding Loans, risk relating to outstanding Letters of Credit, and Percentage Share of the Lenders are as set forth on Annex I hereto. SECTION 4. Conditions of Effectiveness. The obligations of Administrative Agent and Lenders to amend the Original Agreement as provided in this Amendment and give effect to Section 3 hereof is subject to the fulfillment of the following conditions precedent: (a) Borrower shall deliver to Administrative Agent and Lenders multiple counterparts of this Amendment, duly executed by the Obligors and the Unrestricted Entities. (b) Borrower shall deliver to Wachovia Bank, National Association its $10,000,000 promissory note duly executed by Borrower. (c) Borrower shall deliver to KeyBank National Association its $10,000,000 promissory note duly executed by Borrower. (d) Borrower shall deliver duly executed multiple counterparts of certificates of the Secretary or Assistant Secretary of each of the Company, and the Guarantors setting forth resolutions of its Board of Directors in form and substance satisfactory to the Lender with respect to this Amendment. (e) Borrower shall deliver such other agreements, documents, financing statements, items, instruments, opinions, certificates, waivers, consents, and evidence as the Lender may request. (f) Borrower shall pay to Administrative Agent, for the ratable account of the Lenders, a fee equal to three-quarters of one percent (0.75%) of the increase in the total aggregate Maximum Revolving Credit Amounts from $15,000,000 to $20,000,000. (g) Borrower shall have made payment to Administrative Agent, in immediately available funds, payment of all accrued and unpaid legal fees and expenses referred to in Section 12.03 of the Original Agreement and Section 8 hereof to the extent invoices for such fees and expenses have been delivered to Borrower. SECTION 5. Post-Closing Obligations. On or before September 30, 2003, each Obligor, as applicable, shall deliver to Administrative Agent (i) duly executed multiple counterpart amendments to such of the Security Instruments as requested by Administrative Agent to amend the amount of the maximum indebtedness secured by such Security Documents from $15,000,000 to $20,000,000, and, (ii) as necessary, such mortgage tax affidavit(s). Each Obligor, as necessary, shall pay such mortgage taxes as may be due as a result of the amendment to the Security Instruments. 6 SECTION 6. Representations and Warranties. Each of the Obligors, as applicable, represents and warrants to Administrative Agent and Lenders, with full knowledge that Administrative Agent and Lenders are relying on the following representations and warranties in executing this Amendment, as follows: (a) Each Obligor has the organizational power and authority to execute, deliver and perform this Amendment and such other Loan Documents executed in connection herewith, and all organizational action on the part of such Person requisite for the due execution, delivery and performance of this Amendment and such other Loan Documents executed in connection herewith has been duly and effectively taken; (b) The Original Agreement as amended by this Amendment and the Loan Documents and each and every other document executed and delivered in connection with this Amendment to which such Obligor is a party constitute the legal, valid and binding obligations of each Obligor to the extent it is a party thereto, enforceable against such Person in accordance with their respective terms; (c) This Amendment does not and will not violate any provisions of any of the Organization Documents of any Obligor, or any contract, agreement, instrument or requirement of any Governmental Authority to which such Obligor is subject; the Obligors' execution of this Amendment will not result in the creation or imposition of any lien upon any properties of any Obligor other than those permitted by the Original Agreement and this Amendment; (d) Execution, delivery and performance of this Amendment by Obligors does not require the consent or approval of any other Person, including, without limitation, any regulatory authority or governmental body of the United States of America or any state thereof or any political subdivision of the United States of America or any state thereof; and (e) No Default or Event of Default exists and all of the representations and warranties contained in the Original Agreement and all instruments and documents executed pursuant thereto or contemplated thereby are true and correct in all material respects on and as of this date other than those which have been disclosed to Administrative Agent and Lenders in writing. Nothing in this Section 6 of this Amendment is intended to amend any of the representations or warranties contained in the Agreement or of the Loan Documents to which any Obligor is a party. SECTION 7. Reference to and Effect on the Agreement. (a) Upon the effectiveness of Sections 1, 2 and 3 hereof, on and after the date hereof, each reference in the Original Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like import, shall mean and be a reference to the Original Agreement as amended hereby. 7 (b) Except as specifically amended by this Amendment, the Agreement shall remain in full force and effect and is hereby ratified and confirmed. SECTION 8. Cost, Expenses and Taxes. Borrower agrees to pay on demand all reasonable costs and expenses of Administrative Agent in connection with the preparation, reproduction, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder, including reasonable attorneys' fees and out-of-pocket expenses of Administrative Agent. In addition, Borrower shall pay any and all recording and filing fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Amendment and the other instruments and documents to be delivered hereunder, and agrees to save Administrative Agent harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes or fees. SECTION 9. Extent of Amendments. Except as otherwise expressly provided herein, the Original Agreement and the other Loan Documents are not amended, modified or affected by this Amendment. Obligors ratify and confirm that (i) except as expressly amended hereby, all of the terms, conditions, covenants, representations, warranties and all other provisions of the Original Agreement remain in full force and effect, (ii) each of the other Loan Documents are and remain in full force and effect in accordance with their respective terms, and (iii) the Collateral is unimpaired by this Amendment. SECTION 10. Disclosure of Claims. As additional consideration to the execution, delivery, and performance of this Amendment by the parties hereto and to induce Lenders to enter into this Amendment, each Obligor represents and warrants that no Obligor knows of any defenses, counterclaims or rights of setoff to the payment of any Indebtedness. SECTION 11. Affirmation of Security Interest. Obligors hereby confirm and agree that any and all liens, security interest and other security or Collateral now or hereafter held by Administrative Agent for the benefit of Lenders as security for payment and performance of the Obligations under such Security Instruments to which such Obligor is a party are renewed and carried forth to secure payment and performance of all of the Obligations. The Security Instruments are and remain legal, valid and binding obligations of the parties thereto, enforceable in accordance with their respective terms. SECTION 12. Execution and Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. Delivery of an executed counterpart of this Amendment by facsimile and other Loan Documents shall be equally as effective as delivery of a manually executed counterpart of this Amendment and such other Loan Documents. SECTION 13. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas. SECTION 14. Headings. Section headings in this Amendment are included herein for convenience and reference only and shall not constitute a part of this Amendment for any other purpose. 8 SECTION 15. NO ORAL AGREEMENTS. THE ORIGINAL AGREEMENT (AS AMENDED BY THIS AMENDMENT) AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [The remainder of this page intentionally blank. Signature pages to follow.] 9 IN WITNESS WHEREOF, the parties have executed this Third Amendment to Credit Agreement the day and year first above written. BORROWER: ATLAS PIPELINE PARTNERS, L.P., a Delaware limited partnership By: Atlas Pipeline Partners GP, LLC, its General Partner By: ------------------------------ Michael L. Staines, President S-1 GUARANTORS: ATLAS PIPELINE PARTNERS GP, LLC, a Delaware limited liability company By: ------------------------------- Michael L. Staines, President ATLAS PIPELINE NEW YORK, LLC, a Pennsylvania limited liability company By: Atlas Pipeline Operating Partnership, L.P., a Delaware limited partnership and its sole member By: Atlas Pipeline Partners GP, LLC, a Delaware limited liability company and its sole general partner By: ----------------------------- Michael L. Staines, President ATLAS PIPELINE OHIO, LLC, a Pennsylvania limited liability company By: Atlas Pipeline Operating Partnership, L.P., a Delaware limited partnership and its sole member By: Atlas Pipeline Partners GP, LLC, a Delaware limited liability company and its sole general partner By: ----------------------------- Michael L. Staines, President S-2 ATLAS PIPELINE PENNSYLVANIA, LLC, a Pennsylvania limited liability company By: Atlas Pipeline Operating Partnership, L.P., a Delaware limited partnership and its sole member By: Atlas Pipeline Partners GP, LLC, a Delaware limited liability company and its sole general partner By: ----------------------------- Michael L. Staines, President ATLAS PIPELINE OPERATING PARTNERSHIP, a Delaware limited partnership By: Atlas Pipeline Partners GP, LLC, a Delaware limited liability company and its sole general partner By: ------------------------------- Michael L. Staines, President S-3 LENDER, ADMINISTRATIVE AGENT AND ISSUING BANK: WACHOVIA BANK, NATIONAL ASSOCIATION Individually, Administrative Agent and Issuing Bank By: --------------------------------------- Russell Clingman Director S-4 LENDER: KEYBANK NATIONAL ASSOCIATION Individually By: --------------------------------------- Sherrie I. Manson Vice President S-5 ANNEX 1
- ------------------------------- -------------------- ---------------------- ------------------- ---------------------- Maximum Revolving Name of Lender Outstanding Loans Letters of Credit Percentage Share Credit Amount - ------------------------------- -------------------- ---------------------- ------------------- ---------------------- Wachovia Bank, National $0 $0 50% $10,000,000 Association - ------------------------------- -------------------- ---------------------- ------------------- ---------------------- KeyBank National Association $0 $0 50% $10,000,000 - ------------------------------- -------------------- ---------------------- ------------------- ---------------------- Total $0 100% $20,000,000 - ------------------------------- -------------------- ---------------------- ------------------- ----------------------
Annex I 1 SCHEDULE 7.15 OWNERSHIP/SUBSIDIARIES (Issued and Outstanding Membership Units of the General Partner)
- ------------------------------------------ --------------------------------------------------------------------------- Holder Percentage of Ownership - ------------------------------------------ --------------------------------------------------------------------------- AIC, Inc. 33.40% member interest of Atlas Pipeline Partners, GP, LLC - ------------------------------------------ --------------------------------------------------------------------------- Viking Resources Corp. 23.56% member interest of Atlas Pipeline Partners, GP, LLC - ----------------------------------------- --------------------------------------------------------------------------- Resource Energy Group, Inc. 20.24% member interest of Atlas Pipeline Partners, GP, LLC - ------------------------------------------ --------------------------------------------------------------------------- Atlas Energy Group, Inc. 10.21% member interest of Atlas Pipeline Partners, GP, LLC - ------------------------------------------ --------------------------------------------------------------------------- REI - NY, Inc. 6.63% member interest of Atlas Pipeline Partners, GP, LLC - ------------------------------------------ --------------------------------------------------------------------------- Atlas Resources, Inc. 5.96% member interest of Atlas Pipeline Partners, GP, LLC - ------------------------------------------ ---------------------------------------------------------------------------
(Ownership of Authorized Securities of the Subsidiaries) Atlas Pipeline Partners, L.P. owns a 98.9899% limited partner interest in Atlas Pipeline Operating Partnership, L.P. Atlas Pipeline Partners GP, LLC owns a 1.0101% general partner interest in Atlas Pipeline Operating Partnership, L.P. Atlas Pipeline Operating Partnership, L.P. owns a 100% member interest in Atlas Pipeline Ohio, LLC. Atlas Pipeline Operating Partnership, L.P. owns a 100% member interest in Atlas Pipeline Pennsylvania, LLC. Atlas Pipeline Operating Partnership, L.P. owns a 100% member interest in Atlas Pipeline New York, LLC. Atlas Pipeline Operating Partnership, L.P. owns a 100% member interest in APC Acquisition, LLC. Schedule 7.15 EX-10 10 exh10-9.txt EXH10-9.TXT REVOLVING CREDIT AGREEMENT AND ASSIGNMENT Dated as of May 28, 2003 by and between LEAF FINANCIAL CORPORATION, LEASE EQUITY APPRECIATION FUND I, L.P., LEAF FUNDING, INC. and COMMERCE BANK, NATIONAL ASSOCIATION Table of Contents Page 1. The Loans................................................................2 - -- ---------- 2. Security Interest and Assignment.........................................6 - -- --------------------------------- 3. Indebtedness Secured.....................................................7 - -- --------------------- 4. Representations and Warranties of Borrower...............................8 - -- ------------------------------------------- 5. Eligibility Requirements................................................11 - -- ------------------------- 6. Covenants of Borrowers..................................................13 - -- ----------------------- 7. Agreement to Indemnify..................................................17 - -- ----------------------- 8. Agreements Regarding Collections........................................18 - -- --------------------------------- 9. Prepayments, Mandatory Prepayments......................................20 - -- ----------------------------------- 10. Default.................................................................22 - --- -------- 11. Certain Defined Terms Not Defined Elsewhere in the Agreement............25 - --- ------------------------------------------------------------- 12. Miscellaneous...........................................................25 - --- -------------- i REVOLVING CREDIT AGREEMENT AND ASSIGNMENT THIS REVOLVING CREDIT AGREEMENT AND ASSIGNMENT (this "Agreement") dated as of May 28, 2003, is made, by and between LEAF FINANCIAL CORPORATION ("Leaf Financial"), a Delaware corporation with offices at 1845 Walnut Street, 10th Floor, Philadelphia, Pennsylvania 19103, LEASE EQUITY APPRECIATION FUND I, L.P. ("Leaf I"), a Delaware limited partnership with offices at 49 Bancroft Mills, Unit P-15, Wilmington, Delaware 19809, LEAF FUNDING, INC. ("Leaf Funding"), a Delaware corporation with offices at 110 S. Poplar Street, Suite 101, Wilmington, Delaware 19801 (Leaf Financial, Leaf I and Leaf Funding and, subject to Section 1(c)(ii) hereof, Leaf I, each a "Borrower" and, collectively, the "Borrowers") and COMMERCE BANK, National Association, a national banking association with offices at 1701 Route 70 East, Cherry Hill, New Jersey 08034 ("Secured Party"). RECITALS A. Until the Commitment Termination Date (as defined in Section 1(a) below), Borrowers and Secured Party contemplate that Secured Party will from time to time make loans to Borrowers (each, a "Loan" and, collectively, the "Loans") evidenced by Borrowers' Master Note in the form attached hereto as Exhibit A (the "Note"). B. In exchange for each Loan, Borrowers will assign to Secured Party one or more leases or equipment finance agreements and will grant to Secured Party a security interest in the equipment, the payments and all collateral covering and proceeds arising under said leases and agreements. C. Borrowers may repay such Loans with the proceeds of fundings to be made under permanent financing to be undertaken in the near future, which permanent financing may require a transfer and release of the Collateral (as defined in Section 2(a) below) hereunder. D. All of the requirements of law have been fully complied with and all other acts and things necessary to make this Agreement a valid, binding and legal instrument have been done and performed. E. Resource America, Inc. and Leaf Asset Management, Inc (collectively, the "Guarantors") have each executed a Guaranty of Payment, dated the date hereof (collectively, the "Guaranty of Payment"), securing the Indebtedness (as defined herein) for the benefit of the Secured Party. F. Pursuant to that certain Revolving Credit and Assignment, dated as of June 11, 2002, by and between Leaf Financial and National City Bank and the Amendment to Revolving Credit Agreement and Assignment, dated as of March 28, 2003, among Leaf Financial, Leaf I, Leaf Funding, LLC and National City Bank, National City Bank has extended credit to Leaf Financial and Leaf I and Leaf Financial and Leaf I have granted National City Bank a security in certain collateral. G. Pursuant to the Intercreditor Agreement, dated as of the date hereof, National City Bank and the Secured Party have agreed to coordinate and provide for the application of any amounts received be either National City Bank or the Secured Party in any realization on the Collateral (as defined herein) and in the collateral granted to National City Bank by Leaf Financial and Leaf I. H. Each initially capitalized term used herein shall have the meaning set forth in these recitals, in Section 11 below, or as otherwise set forth in this Agreement, for the purposes hereof and for each of the Loan Documents. ACCORDINGLY, the parties agree as follows: 1. The Loans. (a) Loan. Subject to the terms and conditions of this Agreement, Secured Party agrees to make Loans to any of the Borrowers up to an aggregate principal amount of Ten Million Dollars ($10,000,000) (the "Commitment"), during the period commencing the date hereof and ending on the 364th day following the date hereof unless earlier terminated pursuant to the terms of this Agreement, including Section 11 hereof (the "Commitment Termination Date"). On or before 2:00 p.m. (Cherry Hill, New Jersey time) at least one (1) Business Day prior to a Borrower's intention to obtain a Loan from the Secured Party pursuant to the terms hereof, such Borrower shall have delivered to the Secured Party a notice in the form attached hereto as Exhibit G specifying the requested borrowing date and the principal amount of such Loan accompanied by (x) a borrowing computation in the form satisfactory to the Secured Party specifying the Borrowing Limit (as defined below) for such requested Loan and the aggregate Borrowing Base outstanding on such date, and (y) a report in the form attached as Exhibit F hereto. No Loan shall be made if, after giving effect thereto, the aggregate outstanding principal amount of all Loans would exceed the lesser of (x) Borrowing Base or (y) the Commitment (the "Borrowing Limit"). Each Contract (as defined in Section 2(a)(i) below) offered to Secured Party in connection with a Loan request shall (i) satisfy all of the conditions attributable to an Eligible Contract (as defined below), (ii) be in form and substance satisfactory to the Secured Party and otherwise comply with the conditions set forth in this Agreement. Each Loan shall be in the amount equal to or greater than Two Hundred Fifty Thousand Dollars ($250,000.00). Amounts borrowed and repaid may be reborrowed subject to the satisfaction of the terms and provisions hereof. (b) Note. The Loans shall be evidenced by the Note. (c) Term of Loan, Payments of Principal and Interest. (i) Principal on Loans advanced under the Commitment shall be due, in full on the Commitment Termination Date; provided that at no time shall the aggregate principal of outstandings exceed the Borrowing Limit. If at any time such excess exists, Borrowers will promptly, and in any event within two Business Days, reduce the outstanding aggregate principal balance of the Loans to an amount no greater than the Borrowing Limit. Accrued interest on Loans advanced under the Commitment shall be paid monthly on the first day of each month, on the Commitment Termination Date and on any day that the Loans are paid in full pursuant to Section 9 hereof. Loans may be voluntarily prepaid as provided in Section 9 hereof. 2 (ii) Takeout Financing. If, on or prior to the Commitment Termination Date, Leaf I shall enter into and become a borrower under any credit facility with a third-party lender, then Leaf I shall cease to be a Borrower hereunder and any amounts advanced to Leaf I hereunder shall be due in full immediately; provided, however, that if the Bank and the Borrowers other than Leaf I agree that such third-party credit facility is not a permanent financing, then Leaf I shall remain a Borrower hereunder. (d) Interest Rate. (i) Subject to the provisions of this Section 1(d), at the election of the Borrowers, the principal balance of each Loan shall bear interest at the Prime Rate (as defined below) plus One Hundred (100) basis points or at the LIBOR Rate (as defined below) plus Three Hundred (300) basis points. Each Borrower shall select the type of interest rate (Prime Rate or LIBOR Rate) applicable to any Loan at the time a notice of borrowing is given pursuant to Section 1(a) above. Any Loan or any portion thereof as to which the Borrowers shall not have duly specified an interest rate as provided herein shall conclusively be deemed to be a Loan at the Prime Rate. All interest on the Loans shall be calculated on the basis of a 360 day year for the actual number of days elapsed in such period. The interest rate on all outstanding Loans bearing interest at the Prime Rate shall change simultaneously and automatically upon each change in the Prime Rate. The term "Prime Rate" shall mean the fluctuating rate of interest per annum published in the "Money Rates" section of The Wall Street Journal on the applicable date or the highest "Prime Rate," if more than one is published, as such rate may change from day to day. If The Wall Street Journal ceases to be published for any reason on any day, or if it ceases to publish a "Prime Rate," then the Secured Party may use any similar published Prime Rate or Base Rate, in its sole discretion. The Prime Rate may not necessarily be the lowest or best rate of interest charged by the Secured Party. (ii) The term "LIBOR Rate" shall mean a rate per annum determined when, in connection with each Loan, no later than 12:00 p.m. (New Jersey time) two Business Days prior to the end of each calendar month, the Borrower shall select the monthly interest rate applicable (as determined by the Secured Party) to the current 30-day LIBOR period which shall then constitute LIBOR for the succeeding calendar month to be applicable to the LIBOR Rate and all LIBOR Rate Loans outstanding and which may become outstanding during the succeeding calendar month. The Borrowers shall give the Secured Party notice of its selection under this Paragraph in the form of Exhibit H hereto. If a Borrower fails to make an election hereunder for any month, the previous selection made under this Paragraph shall apply for that month. (iii) Provided that no Event of Default or unmatured Event of Default has occurred and is then continuing, the Borrowers shall have the option to (i) convert no more than once per month all or any one of its outstanding Prime Rate Loans into one or more LIBOR Rate Loans in a principal amount of not 3 less than $250,000, (ii) convert no more than once per month all or any part of its outstanding LIBOR Rate Loans in a principal amount equal to not less than $250,000, into Prime Rate Loans, or (iii) continue such LIBOR Rate Loans as LIBOR Rate Loans. Whenever the Borrowers desire to convert or continue Loans as provided above, the Borrowers shall give the Secured Party irrevocable prior written notice via facsimile in the form attached as Exhibit H (a "Notice of Conversion/Continuation") not later than 11:00 a.m. (Cherry Hill, New Jersey time) one Business Day before the day on which a proposed conversion or continuation of such Loan is to be effective specifying (A) the Loans to be converted or continued, (B) the effective date of such conversion or continuation (which shall be a Business Day), and (C) the principal amount of such Loans to be converted or continued (iv) Maximum Rate of Interest. Notwithstanding anything to the contrary herein or in any other Loan Document, no effective rate of interest hereunder shall exceed the maximum effective rate of interest permitted by applicable law or rule. Borrowers hereby agree to give Secured Party written notice in the event that any Borrower has actual knowledge that any interest payment made to Secured Party hereunder or under any other Loan Document will cause the total interest payments collected in any one year to be usurious under applicable law or rule, and Secured Party hereby agrees not to knowingly collect any interest from Borrowers in the form of fees or otherwise which would render the Loan usurious. In the event that interest hereunder or under any other Loan Document would be usurious in the opinion of Secured Party, Secured Party reserves the right to reduce the interest payable by Borrowers. This Section shall survive the repayment of the Loan. (e) Interest on Overdue Amounts. If any Borrower shall fail to timely pay any amount due to Secured Party under any Loan, Borrowers shall continue to pay Secured Party interest on such unpaid amount at the per annum rate of interest applicable to that Loan prior to such late payment, provided, however, that if such payment is not made to Secured Party within five (5) Business Days after the applicable due date, then interest upon such unpaid amount shall be paid at a per annum rate equal to three percent (3%) above the Prime Rate (the "Default Rate"). (f) Method of Payment. All Loan payments shall, unless otherwise specified by Secured Party in writing, be debited from any account maintained by Borrowers at the Secured Party. The authorization to debit any account at the Secured Party for all amounts due under the Agreement and the Loans shall continue, and is irrevocable, so long as any Obligations are outstanding. In the event the funds in such accounts are insufficient to pay in full the required payments, Borrowers shall immediately pay such deficiency by wire transfer of immediately available funds. If Secured Party permits payment to be made to Secured Party by wire transfer it shall be to an account designated in writing by Secured Party. (g) Direct and Continuing Liability; General Limitation on Guaranty Obligations. (i) Notwithstanding any other provision of the Note or this Agreement, each Borrower shall be jointly, severally and directly liable for the full and prompt payment of each Loan and any other Obligations. Liability for each Loan will be fully recourse to all of Borrowers' assets. 4 (ii) In any action or proceeding involving any state, federal or foreign bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of any Borrower under the Loan Documents would otherwise be held or determined to be void, voidable, invalid or unenforceable, or subordinated to the claims of any limited partner or any other creditors, solely on account of the amount of its liability thereunder, then, notwithstanding any other provision to the contrary, the amount of such liability shall, without any further action by such Borrower, the Secured Party or any other person, be automatically limited and reduced to the highest amount that is valid and enforceable and not subordinated to the claims of limited partners or other creditors as determined in such action or proceeding. (h) Loans as Debt. The parties intend the Loans to be treated as debt for tax and all other purposes. (i) Conditions Precedent. The Secured Party shall not be obligated to make any loan to the Borrowers hereunder until the following conditions have been satisfied, in addition to any of the other conditions set forth herein: (i) no Event of Default (as defined in Section 11 below) or event which upon notice, lapse of time or both would constitute an Event of Default on the date of the proposed borrowing shall have occurred and be continuing; (ii) on the date hereof, the Secured Party shall have received a favorable opinion of counsel from the Borrowers substantially in the form attached hereto as Exhibit E; (iii) on the date hereof, the Secured Party shall have received (x) evidence of the legal existence and good standing of each Borrower dated as a recent date issued by the Secretary of State of the State of Delaware and (y) a certificate of the secretary, assistant secretary of each Borrower certifying as to the corporate charter, operating agreement or partnership agreement, as the case may be and by-laws, if any, of each Borrower, the incumbency and signatures of the officer of each Borrower who have executed this Agreement and the other documents to be executed in connection herewith and the resolutions of the Board of Directors authorizing the execution, delivery and performance of this Agreement and the making of the loans hereunder; (iv) the Secured Party shall have received on the date of the proposed borrowing a list of the Contracts with counterpart schedules or notes endorsed to the Secured Party, delivery and acceptance certificates, UCC financing statements with respect to Collateral and other documents, certificates and filings as required by the Secured Party in its discretion in connection with the funding of such Contracts, the originals of which documents shall be held or filed by the Secured Party; (v) on the date of the proposed borrowing the Secured Party shall have received the Assignment referred to in Section 2(b) duly executed by each Borrower; (vi) the Note executed by the Borrowers; (vii) the Guaranty of Payment; and 5 (viii) on the date hereof, the Secured Party shall have received UCC-1 searches pertaining to Borrowers in all jurisdictions which Secured Party deems appropriate, to be performed by a company designated by Secured Party, at the sole cost and expense of the Borrowers. 2. Security Interest and Assignment. --------------------------------- (a) Security Interest. As collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Indebtedness, each Borrower hereby assigns over to and grants to Secured Party a security interest (the "Security Interest") in and to all of such Borrower's right, title and interest in and to the following properties, rights, interests and privileges, whether now owned or hereafter acquired, and in all products thereof and cash and non-cash proceeds of insurance policies from the loss thereof (all of which properties, rights, interests, privileges and proceeds are hereinafter called the "Collateral"). (i) Contracts. All lease agreements, conditional sale contracts, pay-per-use agreements, notes, security agreements and/or financing documents and agreements of any kind arising out of a lease, rental or provision of, or financing of Equipment entered into between each Borrower as lessor, seller, provider or lender and the entity named therein as lessee, purchaser, user or borrower (together with any guarantors or other parties obligated in respect of the Contracts, an "Obligor" or the "Obligors"), together with any master lease agreements or other documents which relate to the above described documents, all of which are in each case covered by or identified in any Assignment (collectively the "Contracts"); (ii) Goods. All goods and other property and rights covered by any Contract assigned to Secured Party, together with all accessories, accessions, attachments and appurtenances appertaining or attached to or used in connection with any of such property, whether now owned or hereafter acquired (the "Equipment"); (iii) Obligor Guaranties. All Guaranties given to each Borrower, or under which such Borrower has rights, by any person or entity guaranteeing the payment and/or performance of any Contract assigned to Secured Party (an "Obligor Guaranty") (iv) Rights and Payments. All right, title and interest of each Borrower in, under and to the Contracts, and all rents and other sums due and to become due thereunder, including any and all extensions or renewals thereof ("Payments"); (v) Software. All software products and license agreements or rights covered under any Contract assigned to Secured Party (to the extent any Borrower has transferable rights in such software); 6 (vi) Other Security. All instruments, documents of title, accounts, general intangibles, or money in each case related to, or property of any kind securing the payment of, any Contract assigned to Secured Party; (vii) Substitutions, Renewals, Replacements, Improvements. All enhancements to and substitutions, renewals and replacements of, and improvements to, any of the foregoing; (viii)Proceeds. All cash and noncash proceeds of any of the foregoing including, but not limited to, insurance proceeds and casualty loss payments ("Proceeds"); and (ix) General Corporate Assets. (i) all of Borrowers' inventory now owned or hereafter acquired; (ii) all of the Borrowers' documents of title now owned or hereafter acquired; (iii) all of the Borrowers' accounts now existing or hereafter arising; (iv) all of the Borrowers' general intangibles, chattel paper and instruments now existing or hereafter acquired or arising; (v) all guaranties of the Borrowers' existing and future accounts and general intangibles and all other security held by each Borrower for the payment or satisfaction thereof; (vi) the goods or the services, the sale or lease or performance of which gave rise to any account or general intangible of each Borrower, including any returned goods; (vii) all of the Borrowers' Equipment now owned or hereafter acquired; (viii) any balance or share belonging to each Borrower of any deposit, agency or other account with any Secured Party and any other amounts which may be owing from to time by any Secured Party to each Borrower; (ix) all property of any nature whatsoever of each Borrower now or hereafter in the possession of or assigned or hypothecated to the Secured Party for any purpose; (x) all Proceeds of all of the foregoing, including all Proceeds of other Proceeds and all rights of each Borrower, or any subsidiary of such Borrower, as servicer and/or administrator for any chattel paper and equipment of third parties. (b) Assignment. In connection with each Loan, each Borrower shall execute and deliver to Secured Party an assignment (the "Assignment") in the form attached hereto as Exhibit B which shall identify the Borrowing Limit of the Contracts assigned pursuant thereto. (c) No Assumption by Secured Party. Secured Party shall not be deemed by reason of any Assignment to have assumed any of Borrowers', or any lessor's or vendor's, obligations under any Contract. 3. Indebtedness Secured. --------------------- (a) Security for Loan Related to Assignment and Other Indebtedness. All Collateral covered under the Assignment shall secure the full and prompt payment of all Loans made pursuant to this Agreement and other amounts due to Secured Party under this Agreement, whether now existing or hereafter incurred, direct or indirect, absolute or contingent, and including any sums advanced and any costs and expenses incurred by Secured Party pursuant to this Agreement (all of which is herein sometimes referred to as the "Indebtedness"). 7 (b) Periodic Releases. Provided no Event of Default shall have occurred and be continuing, at such time as Secured Party has received the payment in full of the Prepayment Amount (as defined in Section 10(g) below) with respect to any Contract covered by such Loan under this Agreement, Secured Party shall release its security interest in the Contract and directly related Collateral within one business day of such payment of the Prepayment Amount, without recourse to, and without representations or warranties by, Secured Party of any kind whatsoever. Upon Secured Party's release of Collateral as provided above, the released Collateral shall no longer constitute security for the payment of any Indebtedness. 4. Representations and Warranties of each Borrower. ------------------------------------------------ Each Borrower represents and warrants (each representation and warranty shall be considered as having been made and restated concurrently with the making of any Loan as an inducement to Secured Party to make such Loan) that: (a) Organization and Qualification. Each Borrower is a corporation, limited liability company or limited partnership, as the case may be organized, validly existing and in good standing under the laws the State of Delaware; and such Borrower is duly qualified and in good standing as a foreign business entity authorized to do business in each state or jurisdiction where such qualification is necessary, where lack of qualification would have a materially adverse affect on such Borrower's business operations. (b) Authorization. Each Borrower is duly authorized to execute and deliver this Agreement, and is and will (as long as this Agreement is in effect and thereafter until payment in full of all amounts due and owing Secured Party pursuant to the Note or this Agreement) continue to be, duly authorized to perform all of its obligations to Secured Party under this Agreement and under the Note, instrument and document delivered in connection with this Agreement. (c) No Conflict. The execution, delivery and performance by Borrowers of this Agreement does not, and will not by the passage of time, the giving of notice or otherwise, (i) violate any provision of any law or regulation, (ii) violate any organizational document of any Borrower, or (iii) violate any judgment, order, decree, agreement, trust or other indenture or instrument to which a Borrower is a party or by which any of its property is bound. No Borrower is in default with respect to any judgment, writ, injunction, decree, rule or regulation of any governmental authority; (d) Financial Statements. Each Borrower has individually or on a combined basis, delivered to Secured Party copies of (i) such Borrower's most recent annual audited financial statements, prepared and certified by an independent firm of certified public accountants satisfactory to Secured Party, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding fiscal year and presenting fairly such Borrower's financial condition as at such date, and the results of such Borrower's operations for the twelve month period then ended and (ii) such Borrower's most recent quarterly financial statements, prepared in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding fiscal quarter and presenting fairly such Borrower's financial condition as at such date and the results of its operations for the quarter then ended, certified as true and correct by such Borrower's president, executive vice president, controller or chief financial officer, and since the date of the above described financial statements there has been no material adverse change in such Borrower's financial condition. 8 (e) Litigation and Contingent Liabilities. Each Borrower has delivered to Secured Party a schedule of material litigation or governmental proceedings pending or threatened against such Borrower (including estimates of the dollar amounts involved). Other than any liability incident to the litigation or proceedings disclosed in such schedule, such Borrower has no contingent liabilities not provided for or disclosed in the financial statements referred to in Section 4(d). (f) Addresses. Each Borrower's records concerning that part of the Collateral constituting accounts or chattel paper are kept at the address specified on the first page hereof, which is its chief executive office and principal place of business and has been its chief executive office and place of business since the earlier of (i) the date of such Borrower's organization and (ii) five calendar years prior to the date hereof. (g) Tradenames. Each Borrower has not conducted and does not conduct business under any tradename or assumed name other than those set forth on Schedule 4(g) attached hereto. (h) Taxes. Each Borrower has filed all tax returns (federal, state, and local) required to be filed and has paid all taxes, assessments, and governmental charges and levies thereon to be due, including interest and penalties. (i) No Default. Each Borrower has satisfied all judgments and such Borrower is not in default with respect to obligations, covenants or conditions contained in any material contract, agreement or instrument to which it is a party or by which it is bound or any judgment, writ, injunction, decree, material rule, or material regulation of any court, arbitrator, or federal, state, municipal, or other governmental authority, commission, board, bureau, agency, or instrumentality, domestic or foreign. (j) Legally Enforceable Agreement. This Agreement and each of the other Loan Documents to which each Borrower is a party, constitutes the legal, valid and binding obligations of such Borrower, enforceable against it in accordance with their respective terms. (k) Priority of Liens; Condition of Collateral. Each Borrower owns the Collateral free and clear of all Liens, encumbrances, security interests or other rights of third parties, excepting only the rights and interests granted Secured Party herein and in the other Loan Documents, and upon perfection of Secured Party's security interest in such Collateral, Secured Party will have a first Lien on such Collateral. (l) Solvency. --------- (i) The present fair saleable value of the assets of each Borrower after giving effect to the funding of the Loan hereunder exceeds the amount that will be required to be paid on or in respect of the debts and other liabilities (including contingent liabilities) of such Borrower as they mature; 9 (ii) The assets of each Borrower do not constitute unreasonably small capital for such Borrower to conduct its business as now conducted and as proposed to be conducted, including the capital needs of each Borrower; (iii) Each Borrower does not intend to, nor does such Borrower believe that it will, incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be received by such Borrower and of amounts to be payable on or in respect of debt of such Borrower). The cash available to each Borrower, after taking into account all other anticipated uses of the cash of such Borrower, is anticipated to be sufficient to pay all amounts on or in respect of the Indebtedness when the Indebtedness or any part thereof is required to be paid; (iv) The aggregate fair value of each Borrower's assets exceeds the aggregate of all its liabilities; and (v) Each Borrower agrees that Loans made hereunder and the assignment and grant of a security interest in the Collateral by the Borrowers hereunder is for the benefit of each Borrower and will not affect any of the Secured Party's rights hereunder. (m) Contracts. Each of the Contracts constitutes the legal, valid and binding obligations of the parties thereto as set forth therein and is enforceable against the lessee thereunder in accordance with its terms and there is no default or event of default under any contract on the part of any lessee thereunder. (n) Authorizations. Each Borrower has all authorizations, consents, approvals, licenses, accreditations and exceptions from, and has made all registrations and filings with, and all reports to, all federal, state and local governmental bodies and agencies and accreditation authorities (collectively referred to as "Governmental Approvals") necessary for the conduct of its business, and the conduct of its business is not and has not been in violation of any such Governmental Approvals or any applicable federal or state law, rule or regulation, including ERISA, or the rules and regulations of an accreditation authority, the failure of which to obtain or to comply with could not, in any such case, reasonably be expected to have a Material Adverse Effect. No Borrower requires any Governmental Approvals to enter into, or perform under, this Agreement, the Note, or any other Loan Document to which Borrowers are a party. There are no actions or investigations pending or, to the knowledge of any Borrower, threatened against or affecting any Borrower before any governmental authority, which could reasonably be expected to result in a material adverse change. (o) Accuracy of Representations; No Default. The information set forth herein and in each of the other Loan Documents is complete and accurate in all material respects and contains full and complete disclosure of all pertinent information in connection with each Borrower. None of such information contains any untrue statement of a material fact or omits to state a material fact necessary to make the information contained herein or therein not misleading or not incomplete. No Event of Default or unmatured Event of Default hereunder, or under any other Loan Document, has occurred. 10 5. Eligibility Requirements. ------------------------- Each of the Loans made pursuant to this Agreement will be made on the basis that the Contracts assigned to Secured Party with respect to each Loan are, at the time that the Loan is made, and will be at all times thereafter until payment in full of such Loans continue to be, Eligible Contracts. In order for a Contract to be an "Eligible Contract". all of the following conditions must be true, correct and satisfied with respect to the Contract, the Payments due under the Contract and the related Collateral: (a) Waiver of Defenses. The Contract provides that the Obligor under the Contract waives all defenses, set-offs, counterclaims, deductions or allowance or adjustment against the assignee of the lessor, vendor or financier. (b) Bona Fide Transaction; Fixtures. The Contract arises from a bona fide lease or sale of the Equipment, in the ordinary course of business, described in the Contract and the Equipment is in all respects in accord with the requirements of the Contract and has been delivered to and unqualifiedly accepted by the lessee, vendee or borrower thereunder, none of the Equipment covered by the Contract, after its delivery and acceptance by such lessee or vendee, is a fixture under the applicable laws of any state where the Equipment is or may be located. (c) Compliance with Laws; Validity, Enforceability; No Liens. The Contract and the related Equipment comply in all material respects with all applicable laws and regulations (including, without limitation, interest/usury laws); the Contract is genuine, valid, enforceable in accordance with its terms, accurately describes the related Equipment and Collateral and the Payments due under the Contract, and is in all respects what it purports to be; the Contract, the Payments due under the Contract, the related Equipment and Collateral and all proceeds thereof are not subject to any Lien, claim or security interest except the interest of the Obligor and each Borrower under the Contract and the Lien in Secured Party's favor. (d) Good Title. At the time of the Loan made with respect to the Contract, the applicable Borrower had (i) good title to the Contract and either good title or a first priority interest in Collateral, free of all Liens, claims or security interests; and (ii) all legal power, right and authority to assign the Contract to Secured Party. (e) Interest Transferred. A first priority perfected security interest in the Contract, the Payments due under the Contract, and each Obligor Guaranty related to the Contract, free of all Liens, claims or security interests, and valid security interest superior to the rights of all others in the Collateral, and all proceeds thereof, shall be vested in Secured Party by the Assignment executed by each Borrower relating to the Contract and the terms of the Assignment and the execution thereof do not result in a breach of the Contract or the related Obligor Guaranty. 11 (f) Counterparts of Contract. All counterparts of the Contract have been clearly marked to indicate that only one counterpart is the "Original" and assignable, and that counterpart will be delivered to Secured Party upon an Event of Default defined in Section 11 hereof. (g) Entire Agreement. The Contract represents the total and complete agreement between each Borrower and Obligor with respect to the Collateral and no Borrower has entered into any other agreements, whether written or oral, with the Obligor in respect of the Collateral. (h) Written Agreements. At the time a Loan is made with respect to a Contract, the applicable Borrower has informed Secured Party in writing of all agreements entered into in connection with the Contract and fully executed copies (all original copies if requested by Secured Party) of all those agreements will be delivered to Secured Party simultaneously with delivery of the Contract. (i) Capacity and Authority. Each party to the Contract and any Obligor Guaranty has all the legal capacity, power and right required for it to enter into the Contract or Obligor Guaranty and any supplemental agreements, and to perform its obligations thereunder; all such actions have received all corporate or governmental authorization required by any applicable charter, by-law, constitution, law rule or regulation. (j) No Obligor Default. No Obligor Default (as defined below in Section 10(c)), or event which with the passage of time or giving of notice, or both, would become an Obligor Default, exists and no Borrower has any knowledge of any fact that may impair the Contract's or the related Obligor Guaranty's validity. No Obligor is in bankruptcy, receivership, reorganization or is insolvent. No material change has occurred with respect to the Contract or the Obligor. (k) No Setoffs of Claims. There exist no setoffs, counterclaims or defenses on the part of any Obligor under the Contract or any Obligor Guaranty to any claims against or obligations of any obligor thereunder. (l) No Impairment of Value. No Borrower has done anything that might impair the value of the Contract or any related Obligor Guaranty or any of Secured Party's rights under the Contract, any related Obligor Guaranty, or to the Equipment covered by the Contract or Payments due under the Contract. (m) Insurance. The Contract requires that the Equipment covered by or the subject of the Contract be insured to such extent and against such hazards and liabilities as is commonly maintained by companies similarly situated and as each Borrower or its assigns may reasonably request from time to time. (n) Taxes. All taxes, assessments, fines, fees and other liabilities relating to the Contract, the Payments due under the Contract, the related Collateral, or any related Obligor Guaranty have been paid when due, and all filings in respect of any such taxes, assessments, fines, fees and other liabilities have been timely made, except for taxes being contested in good faith. 12 (o) No Borrower Default or Violation. No Borrower nor any vendor or lessor of the Equipment is in default of any of such party's obligations under the Contract or arising by contract or imposed by applicable law, rule or regulation with respect to the Contract and the related Equipment. (p) Perfection. Each Borrower has taken, at its expense, all steps from time to time requested by Secured Party to perfect (and continue the perfection of) Secured Party's security interest in the Contract, the Payments and the Equipment covered by the Contract. Perfection will be accomplished by Borrowers' perfection of a security interest against the Obligors and Secured Party's perfection of its security interest against each Borrower. (q) No Amendments. Neither the Contract nor any related Obligor Guaranty has been, or will be, altered, modified, changed or amended without Secured Party's prior written consent. (r) No Prepayments. At the time of the Loan made with respect to the Contract, no amounts have been prepaid on the Contract except advance payments and security deposits which are required by the terms of the Contract. (s) Use of Proceeds. Each Loan shall be used by each Borrower to finance all or a portion of the cost to such Borrower of the Equipment, which shall be or has been leased to unaffiliated third persons and is the subject of an Eligible Contract securing a Loan or, if such Equipment has already been acquired by such Borrower to reimburse such Borrower for the cost so incurred and for no other purpose. (t) Equipment. The Equipment is located in the United States of America and is used for commercial purposes. (u) Term. The Contract does not have an initial term greater than 84 months. (v) Past Due. No Contract payments are, and have not been at any time, more than 60 days contractually past due. (w) Progress Payments. No more than 20% of the Borrowing shall at any time be secured by Contracts pursuant to which any Borrower is entitled to receive progress payments from the Obligors. 6. Covenants of Borrowers. ----------------------- Each Borrower covenants that so long as the Commitment is in effect or Indebtedness is outstanding, such Borrower will: (a) Financial Statements. Furnish, individually or on a consolidated basis, to Secured Party: (i) as soon as available, but not later than sixty (60) days after the end of each quarter (except the last) of each fiscal year, 13 quarterly unaudited financial statements concerning such business, prepared in accordance with generally accepted accounting principles applied on a basis consistent with that of the preceding fiscal quarter, presenting fairly such Borrower's financial condition as at the end of that quarter and containing such data as may be reasonably requested by Secured Party and the results of its operations for the three (3) month period then ended, and certified as true and correct by such Borrower's president, executive vice president, controller or chief financial officer; (ii) as soon as available, but not later than one hundred-twenty (120) days after the end of each fiscal year, a copy of such Borrower's annual audit report for that year, prepared in accordance with generally accepted accounting principles applied on a basis consistent with that of the preceding fiscal year, presenting fairly such Borrower's financial condition as at the end of that fiscal year; containing such data as may be reasonably requested by Secured Party and the results of its operations for the twelve (12) month period then ended and signed without qualification by independent certified public accountants of recognized standing or otherwise satisfactory to Secured Party; (iii) at the time that any financial statements furnished under clause (i) or (ii) above, a certificate in substantially the same form as Exhibit C hereto or such other form as shall be satisfactory to Secured Party, signed by such Borrower's president, executive vice president, controller or chief financial officer setting forth such Borrower's compliance or noncompliance with the covenants and obligations under this Agreement and providing details as to such matters, and if such Borrower is not in compliance with any such covenant or obligation, setting forth a statement indicating the measures taken and proposed, and the time for such Borrower's return to compliance, and (iv) from time to time any other information as Secured Party may reasonably request. (b) Notice of Adverse Events. Notify Secured Party promptly upon such Borrower's learning of any default by any Obligor, and/or (ii) any and all litigation or other matters or events concerning such Borrower which might reasonably be construed to affect adversely Secured Party's interest in any Collateral or any of Secured Party's rights under this Agreement. (c) Access to Books and Records. Permit a representative of Secured Party (including any field examiner or auditor retained by Secured Party), upon at least two (2) Business Days' prior written notice, to inspect and make copies of such Borrower's books and records at such Borrower's offices, and to conduct field audits, with expenses (including reasonable travel expenses) to be paid by Borrowers not to exceed the lesser of actual reasonable costs or $7,500. So long as no default or Event of Default shall have occurred or be continuing, the Secured Party shall not conduct more than one (1) field audit in any fiscal year of any Borrower. (d) Taxes, Etc. Make or cause to be made all filings in respect of, and pay or cause to be paid when due, all taxes, assessments, fines, fees and other liabilities (including all taxes and other claims in respect to the Contracts and the related Equipment), except for taxes being contested in good faith. (e) Continuity of Business. Not (i) cease to engage in substantially the same line of business in which such Borrower is engaged on the date of this Agreement, (ii) cease to engage in the sale, lease and remarketing of goods 14 comparable to the Equipment, or (iii) without Secured Party's prior written consent, sell, transfer or convey a substantial part of such Borrower's assets outside of the ordinary course of business which shall include non-recourse financing or be a party to any merger or consolidation. (f) Performance of Obligations. Perform all such Borrower's obligations arising by contract or imposed by applicable law, rule or regulation with respect to the Contracts and the related Equipment. (g) Changed Locations. Notify Secured Party at least (30) days prior to such Borrower's (i) changing the location of its principal place of business or chief executive office, (ii) opening or closing any places of business in any jurisdictions where such openings or closings might affect the place where a UCC financing statement or similar document would need to be filed in order to perfect or protect Secured Party's security interest or other interest in any of the Collateral, or (iii) change the state of its organization. (h) Further Assurances. From time to time execute and deliver such further documents and do such further acts and things as Secured Party may reasonably request in order to fully effect the purposes of this Agreement and to protect Secured Party's interest in the Collateral. (i) Defense Against Claims. Defend the Collateral against the claims and demands of all other parties, including without limitation defenses, set-offs, claims, cross claims and counterclaims asserted by any Obligor against any Borrower or Secured Party and claims, cross claims and counterclaims asserted by any other person claiming an interest in the Collateral. (j) Delivery of Additional Documents. Upon Secured Party's reasonable request, will deliver to Secured Party or its designees any relevant instruments, documents of title and chattel paper representing or relating to the Collateral or any part thereof, and all schedules, invoices, shipping, or delivery receipts: together with any necessary endorsement or assignment and all purchase orders, contracts, or other documents representing or relating; to purchases or other acquisitions or sales, leases or other dispositions of the Collateral and the proceeds thereof and any and all other schedules, documents, and statements relating to the Collateral which Secured Party may from time to time reasonably request. (k) Limits. Not permit more than twenty percent (20%) of the Commitment to be secured by Contracts with the same lessee or its affiliates. (l) UCC Financing Statements. Deliver to Secured Party such Uniform Commercial Code ("UCC") financing statements against such Borrower as shall be reasonably required by Secured Party to perfect its interest in the Collateral. (m) Searches. Deliver and pay for such UCC and tax Lien searches at the Secretary of State of Delaware on such Borrower as Secured Party may from time to time reasonably require, but not more frequently than annually in the absence of an Event of Default. 15 (n) Monthly Reports. By the twenty-fifth day of each month, provide to Secured Party, in form and detail satisfactory to Secured Party, an aging report on all assigned Contracts and a calculation showing that the Borrowing Limit under Eligible Contracts does not exceed the Borrowing Base. Such monthly aging reports shall be certified by such Borrower's president, or its executive Vice President, or controller or chief financial officer. (o) Deposit Account. Maintain a demand deposit account at the Secured Party in which funds will be maintained sufficient to satisfy, in any given month, the interest payment due on the Indebtedness. (p) Financial Covenants. The Borrowers shall, on a combined basis: (i) maintain a minimum Adjusted Net Worth of Eight Hundred Thousand Dollars ($800,000) from the date hereof and hereafter through and including the termination of this Agreement, plus fifty percent (50%) of consolidated quarterly net income (without any reduction for losses) commencing with the quarter ended June 30, 2003. (ii) maintain an Interest Coverage Ratio of at least 1.10:1 to be measured quarterly from the quarter ending December 31, 2003 until termination of this Agreement. As used herein "Interest Coverage Ratio" shall mean earnings before interest expense, taxes, depreciation and amortization ("EBITDA") divided by interest expense. (iii) maintain a Senior Leverage Ratio (as defined below) no greater than 4:1. As used herein "Adjusted Net Worth" means Net Worth plus the non-current portion of Subordinated Debt. "Net Worth" means the sum of capital stock, plus retained earnings, plus paid-in-surplus, minus treasury stock. "Subordinated Debt" means all Borrowers' debt which is specifically junior and subordinated to the Indebtedness on terms satisfactory to Secured Party. The "Senior Leverage Ratio" shall be calculated by dividing the Borrowers' Combined Recourse Debt by the Borrowers' Adjusted Net Worth. "Combined Recourse Debt" means all Borrowers' debts, liabilities and obligations including, but not limited to, all accounts payable, income taxes payable and accrued liabilities and all contingent liabilities of Borrowers, including guaranties computed as the maximum liability guaranteed, and any partially recourse debt to the maximum extent of such recourse, but excluding non-recourse debt. (q) Fees. Pay the following fees: (i) reasonable closing fees and expenses (including, without limitation, reimbursement of audit fees and legal expenses) upon execution of this Agreement and (ii); a commitment fee equal to ..50% of the average daily unused balance of the Commitment during each calendar quarter payable quarterly in arrears at the end of each calendar quarter commencing with the calendar quarter ending June 30, 2003 and on the date of termination of the Commitment. The commitment fee shall not be first payable until the September 30, 2003 calculation in arrears. 7. Negative Covenants. Each Borrower covenants that so long as the Commitment is in effect or any Indebtedness remains outstanding such Borrower will not: 16 (a) Restricted Payments. Declare or pay any dividends; purchase, redeem, retire, or otherwise acquire for value any of its capital stock, now or hereafter outstanding; make any distribution of assets to its stockholders as such whether in cash, assets, or in obligations of such Borrower; or 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; make any other distribution by reduction of capital or otherwise in respect of any shares of its capital stock. Except that each Borrower may declare and-pay cash dividends to its stockholders of fifty percent (50%) of the positive net income of such Borrower arising after the date hereof and computed on a cumulative basis so long as no Event of Default or event which upon notice, lapse of time or both would constitute an Event of Default has occurred and is continuing or would occur after giving effect thereto. (b) Negative Pledge. Other than with respect to Secured Party, create, incur, assume, or suffer to exist on the Collateral, any mortgage, deed of trust, pledge, Lien security interest, assignment, charge, or encumbrance (including without limitation, any conditional sale, or other title retention agreement, or finance lease, except the Contracts themselves), of any nature, upon or with respect to any of the Collateral now owned or hereafter acquired, or sign or file under the UCC of any jurisdiction a financing statement which names any Borrower, as a debtor, and any Collateral, as the property, covered by such financing statement or sign, any security agreement authorizing any secured party thereunder to file such financing statement. (c) Mergers. Merge or consolidate with any person during any twelve (12) month period, or acquire all or substantially all of the assets or the business of any person, unless (a) such person is in the same line of business as Borrowers, (b) a Borrower is the surviving entity and (c) no Event of Default exists prior to or after such transaction. (d) Sale of Assets. Sell, lease, assign, transfer, or otherwise dispose of more than ten percent (10%) of the Borrowers', now owned or hereafter acquired, assets (including, without limitation receivables and leasehold interests) during any twelve (12) month period provided, however, that Borrowers may (a) lease equipment in the ordinary course of business, (b) enter into securitization of its assets in the ordinary course of business, (c) sell equipment at the expiration or termination of any Contract, and (d) create Liens in contracts and specific assets and related equipment not constituting collateral financed on a non recourse basis. (e) Intercompany Investments. Permit any subsidiary of any Borrower to be in substantially the same line of business and make a loan to, guaranty the obligations of, or purchase assets of, any subsidiary of any Borrower, affiliate of any Borrower, or person under common control with a Borrower, any person shall include any entity in whatever form. 8. Agreement to Indemnify. ----------------------- (a) Indemnification. Secured Party assumes no obligation or liability to the Obligor under any Contract and no assignment of any Contract shall impose any such obligation or liability on Secured Party. Borrowers jointly and severally agree to indemnify and save Secured Party harmless of, from and against any losses, damages, penalties, forfeitures, claims, costs, expenses (including court costs and reasonable attorney's fees) or liabilities 17 which may at any time be brought, incurred, assessed or adjudged against Secured Party, related to or arising from the Contracts and the related Collateral excluding (except as provided in 13(m) hereof) any of the foregoing relating to any action by any regulatory agency with jurisdiction over Secured Party, but, including, without limitation, those arising or resulting from: any alleged failure of any Contract or the related Equipment to comply with any applicable law, rule, regulation or contractual specification; any alleged failure on any Borrower's part to keep or perform any of its obligations, express or implied, with respect to any Contract or the related Equipment; any alleged injury to persons or property or any violation or invasion of any patent or invention rights; any governmental fees, charges, taxes or penalties (other than from relating to the revenue or income of Secured Party) levied or imposed in respect to any Contract or any related Equipment; any breach by any Borrower of any of its representations, warranties, covenants or other obligations or agreements contained in this Agreement, in any Contract or in any agreement related hereto or thereto; or any inaccuracy in any information provided to Secured Party by any Borrower. The provisions of this Section 8 shall survive termination of this Agreement. (b) Indemnity Notices; Control of Proceedings. Each Borrower will give Secured Party notice of any event or condition that requires indemnification by Borrowers hereunder, or any allegation that such event or condition exists, promptly upon obtaining knowledge thereof. Each Borrower may, at its option assume the defense of any claim or lawsuit for which Secured Party seeks indemnification hereunder, and after any such assumption Secured Party shall no longer defend such claim or lawsuit, provided that counsel shall be reasonably satisfactory to Secured Party. Borrowers agree to be jointly and severally obligated to pay all amounts due hereunder promptly on notice thereof from Secured Party. To the extent that Borrowers may make or provide to Secured Party's satisfaction for payment under this indemnity provision, and if Borrowers are otherwise in compliance with the terms of this Agreement, Borrowers shall be subrogated to Secured Party's rights with respect to such event or condition and shall have the right to control litigation related thereto and to determine the settlement of claims thereon. All of the indemnities and agreements contained in this Section shall survive and continue in full force and effect notwithstanding termination of this Agreement or of any Contract. 9. Agreements Regarding Collections. --------------------------------- (a) Collections. Each Borrower agrees to collect Payments under all Contracts which are the subject of Loans. Each Borrower will undertake such collections as owner or servicer and not as Secured Party's agent, and in connection therewith will, at its sole cost and expense, diligently perform all billing and collecting for amounts due and to become due with respect to such Contracts. Each Borrower shall bill Obligors in accordance with its standard billing procedures. (b) Collection Reports. So long as any Borrower shall administer Contracts, such Borrower shall maintain books and records pertaining to all such Contracts. Each Borrower will provide to Secured Party, on or before the 25th day of each month, a report in the form attached hereto as Exhibit F, as of the preceding month, concerning Contracts assigned to Secured Party under this Agreement, and Equipment related thereto. Subject to the limitations in Section 18 6(c) hereinabove, each Borrower shall give Secured Party and its representatives during normal business hours and upon reasonable notice, access to all records, files, books of account, databases and information pertaining to all Contracts and Payments which are the subject of Loans made pursuant to this Agreement and shall permit such representatives to inspect, audit, and to make extracts there from. (c) Taxes. Each Borrower will make or cause Obligors to make all filings in respect of, and file or cause Obligors to file for and remit payments received on account of, any and all personal property taxes, license, permit and registration fees, sales, use, excise, or similar taxes, together with any penalties or interest in connection therewith, now or hereafter imposed by any state, Federal or other government or agency on any Equipment covered or Payments due under any Contracts, whether the same shall be payable by or billed or assessed to Obligors, Borrowers or Secured Party. (d) Notice Letters and Billing Information, Contracts with Obligors. Each Borrower agrees to provide to Secured Party (i) an original notice in the form of Exhibit D hereto, which shall be issued on plain paper and executed by such Borrower's duly authorized officer, but be blank as to the addressee and contract information as shown on the Exhibit, and (ii) a supply of such Borrower's letterhead upon which copies of the foregoing letter may be reproduced. Each Borrower irrevocably authorizes Secured Party or its designee, to (i) deliver such executed letter to each Obligor, (ii) mechanically reproduce the executed letter (with completed information as to the Obligor, etc.) and/or (iii) to reproduce such letters and execute them on such Borrower's behalf and to deliver the same as an original to each Obligor to whom notice under this Section is to be given. Each Borrower also agrees to provide to Secured Party as reasonably requested, with information stating the names and current addresses of, and to the extent known by such Borrower the names of the contact persons for, each Obligor under any Contract then subject to any Loan. (e) Power of Attorney. Each Borrower hereby irrevocably constitutes and-appoints Secured Party after the occurrence and during the continuation of any uncured Event of Default, as such Borrower's true and lawful attorney with full power of substitution, for such Borrower and in its name, place and stead, to ask, demand, collect, receive, receipt for, sue for, compound and give acquittance for any and all Payments and other sums due under Contracts assigned hereunder, to endorse, in writing or by, stamp, such Borrower's name or otherwise on all checks, collections, receipts or instruments given in payment or part payment thereof Secured Party's authority may be delegated by Secured Party to any qualified entity with which Secured Party has arranged for the performance of any billing, collection or administration of Contracts. (f) Secured Party's Discretion. After the occurrence and during the continuation of any uncured Event of Default Secured Party and its designee may take or fail to take whatever action with respect to the collection of such Payments and receipt of such funds as Secured Party or such designee, in their reasonable but sole discretion, shall deem proper. Regardless of any such action Secured Party may or may not take, the provisions of Section 10 which govern Prepayment will remain in force and shall be unaffected by any such action or failure to act on Secured Party's part. 19 (g) Reimbursement of Collection Expenses. Borrowers agree to be jointly and severally obligated to reimburse Secured Party, within ten (10) days after Secured Party's request therefor, for all reasonable and customary out-of-pocket expenses and costs which have been incurred in connection with Secured Party's billing and collection of such Contracts, including but not limited to the costs and expenses incurred or charged in connection with the delegation of such responsibilities to a designee. (h) Application of Payments; Excess Payments to Reserve. Following any Event of Default and during the continuation thereof, Secured Party may receive all Payments under the Contracts and apply such Payments against any amounts due from such Borrower on account of the Loans or otherwise. The amount of Payments received in excess of such amounts due shall be allocated by Secured Party to an interest bearing reserve account for the benefit of such Borrower ("Reserve") and held for later application against amounts due from such Borrower or release to such Borrower as provided below. 10. Prepayments, Mandatory Prepayments. ----------------------------------- (a) Contract Prepayments. If a Contract is prepaid in full for any reason, Borrowers shall be jointly and severally obligated to prepay in full the Prepayment Amount related to such Contract, subject to provisions of Section 3(b) hereof. (b) Mandatory Partial Prepayment of Loans (Lack of Eligibility). In the event that (i) the Contract related to any Loan at any time is not an Eligible Contract or ceases to be an Eligible Contract, and (ii) Secured Party in its sole discretion requests or demands that the Loan be paid with respect to such Contract, then Borrowers shall be jointly and severally obligated to make a mandatory Prepayment of the Loan within three (3) Business Days of Secured Party's request or demand, by paying to Secured Party the Prepayment Amount with respect to the Contract, determined as of the date of prepayment. (c) Mandatory Partial Prepayment of Loans (Obligor Default). Upon any of the following (each, an "Obligor Default") (i) failure of an Obligor under any Contract to make a Payment within sixty (60) days of the due date of that payment; (ii) failure of any Obligor to perform any of its material obligations under any Contract which failure is not cured within thirty (30) days of notice; (iii) insolvency of any Obligor, inability of any Obligor to pay its debts as they mature, the making by any Obligor of an Assignment for the benefit of creditors, or institution of any proceeding by any Obligor alleging that the obligor is insolvent or unable to pay its debts as they mature; (iv) the institution of any proceeding against any Obligor alleging that the Obligor is insolvent or unable to pay its debts as they mature if such proceeding is not withdrawn or dismissed within sixty (60) days after its institution; (v) entry of any final judgment against any Obligor remaining unsatisfied for a period of thirty (30) days if such judgment is deemed by Secured Party to be a material factor in the creditworthiness of the Obligor, (vi) death of any Obligor who is a natural person, (vii) dissolution, merger, consolidation or transfer of a substantial part of the property of any Obligor which is a corporation or a partnership, if such dissolution, merger, consolidation or transfer is deemed by Secured Party to be a material factor in determining the creditworthiness of such Obligor, or (viii) falsity as of the date made in any material statement, 20 representation or warranty of any Obligor in connection with any Contract, then and in any of such events, Borrowers shall be jointly and severally obligated to make a mandatory prepayment of the Loan, by paying to Secured Party the Prepayment Amount with respect to the Contract within three (3) Business Days of any such event, determined as of the date of prepayment. (d) Mandatory Partial Prepayment of Loans (Payment Shortfall). In the event that the aggregate principal balance on the Loans exceeds the Borrowing Base, then Borrowers shall be jointly and severally obligated to immediately make a mandatory partial prepayment of the Loans equal to the amount of such excess. (e) Substitution of Contracts. In lieu of payment of the Prepayment Amount with respect to the Contract, as provided in Section 10(b), (c) and (d) above, each Borrower may offer Secured Party as a substitute a Contract ("Qualifying Contract") which has the same or substantially similar terms and the same or more favorable Payment requirements as the Contract to be prepaid, all as determined by Secured Party in Secured Party's sole and reasonable discretion. If Secured Party determines, in its discretion that such Contract is a Qualifying Contract and that the Obligor under the Qualifying Contract has an acceptable credit quality and Secured Party accepts such Qualifying Contract in substitution for the Contract to be prepaid (it being acknowledged that Secured Party shall have no obligation to accept such Qualifying Contract), then the substitution shall occur upon such Borrower's execution and delivery to Secured Party of such documents as Secured Party shall reasonably request, including an Assignment, to collaterally assign to Secured Party all of such Borrower's right, title and interest in the Qualifying Contract, the Payments arising thereunder and all related Obligor Guaranties, and a first priority perfected security interest in the Equipment related Collateral, and all proceeds thereof. All the terms and conditions of this Agreement, including the eligibility requirements of Section 6 shall apply with respect to the substituted Qualifying Contract. The term of the Qualifying Contract, the amortization schedule for such Qualifying Contract and the Borrowing Limit and monthly payment for such Qualifying Contract shall all be deemed equal to the term, amortization schedule, Borrowing Limit and monthly payment of the Contract to be prepaid as of the date of substitution. Upon each Borrower's assignment and Secured Party's acceptance of the Qualifying Contract as soon as practicable Secured Party will release to such Borrower all of Secured Party's right, title and interest in the Contract which was to prepaid, any unpaid Payments due thereunder and the Equipment and Collateral securing the same. Upon the substitution of Qualifying Contract for a Contract subject to prepayment under this Section, each Borrower shall be relieved of any further prepayment obligation with respect to the Contract originally subject to prepayment. (f) Mandatory Prepayment of All Loans. If an Event of Default occurs and is continuing, then upon demand by Secured Party, Borrowers shall be jointly and severally obligated to immediately make a mandatory prepayment of all of the Loans by paying to Secured Party the aggregate Prepayment Amount of each of the Loans, determined as of the date of prepayment. 21 (g) Determining Prepayment Amounts. The "Prepayment Amount" attributable to any Contract covered by a Loan shall be an amount equal to a pro rata portion of the unpaid principal and accrued interest on such Loan based on a ratio in which the Borrowing Limit of the Contract shall be the numerator and the aggregate Borrowing Limits of all Contracts covered by such Loan shall be the denominator. (h) Voluntary Prepayment. Each Borrower may make optional prepayment of any one or more of the Loans in all or in part (subject to paragraph a hereof) at any time without premium or penalty; provided, however, that, without the Secured Party's prior written consent, no such prepayment of any LIBOR Rate Loan may be made on any day other than the last day of the Interest Period for such Loan. 11. Default. -------- (a) Events of Default. Any of the following events or conditions shall constitute an "Event of Default" under this Agreement with respect to the Note and affected Collateral: (i) Non-payment within five (5) days of when due, whether by acceleration or otherwise, of any Indebtedness, time being of the essence, or failure by any Borrower to observe or perform and the continuance thereof for twenty (20) days after notice from Secured Party, any obligation, covenant, condition or agreement required to be observed or performed by any Borrower under this Agreement, the Note, Assignment, evidence of Indebtedness, or any Contract or any other default under this Agreement or any material provision of a Contract; (ii) Any bankruptcy, reorganization, debt arrangement or other proceedings under any bankruptcy or insolvency law shall be instituted by or against any Borrower provided, however, that if filed against a Borrower an Event of Default will not occur unless such proceedings are not dismissed within sixty (60) days of filing; (iii) Making a general assignment by any Borrower for the benefit of creditors; the appointment of a receiver or trustee for any Borrower or for any of their assets; or the institution by or against any Borrower of any kind of insolvency proceedings or any proceeding for the dissolution or liquidation of such Borrower; provided, however, that if filed against any Borrower an Event of Default will not occur unless such proceedings are not dismissed within sixty (60) days of filing; (iv) (1) Failure to pay any indebtedness to Secured Party for borrowed money (other than the Loans or any interest or premium thereon), when due after applicable notice and grace periods (whether by scheduled maturity required prepayment, acceleration, demand, or otherwise), or (2) failure to perform or observe any term, covenant, or condition on its part to be performed or observed under any agreement or instrument relating to any such indebtedness, when required to be performed or observed after applicable notice and grace periods, if the effect of such failure to perform or observe is to accelerate, or to permit the acceleration of, after the giving of notice or passage of time, or both, the maturity of such indebtedness whether or not such failure to perform or observe shall be waived by the holder of such indebtedness, or any such indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; 22 (v) Any representation, warranty or statement made herein or in any other document delivered in connection herewith or any certificate or statement furnished pursuant to or in connection herewith or therewith, shall prove to be incorrect, misleading or incomplete in any material respect on the date as of which made or deemed made; (vi) A judgment or judgments for the payment of money in excess of Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate shall be rendered against any Borrower and such judgment or judgments shall not have been vacated, discharged, stayed or bothered pending appeal within thirty (30) days from the entry thereof; (vii) Imposition of any Lien or series of Liens against the Collateral whether by operation of law or by consent other than any Liens granted to the Secured Party as security for the Obligations; (viii) The Secured Party's first Lien and security interest in any of the Collateral shall cease, other than solely as a result of an act or omission by Secured Party, to constitute a first Lien on the Collateral or otherwise to be in full force and effect, or the validity or enforceability thereof shall be contested by any Borrower or any Borrower shall deny that it has any further liability or obligation under any of the Loan Documents; or (ix) An "Event of Default" (as defined therein) shall have occurred under that certain Revolving Credit Agreement and Assignment between Leaf Financial and National City Bank dated as of June 11, 2002, as the same may be amended from time to time. (b) Rights and Remedies upon Default. Upon the happening and during the continuation of any Event of Default, Secured Party (i) may declare one or all of the Borrowers to be in Default hereunder and all or any part of the Indebtedness to be immediately due and payable without notice or demand; (ii) may, without any notice whatsoever, demand, collect and sue for any of the payments, Collateral or proceeds thereof and any funds represented by the Reserve and retain and apply such proceeds and funds against the Indebtedness, (iii) take whatever actions as are legally available to it in enforcing the rights or remedies under any or all of the Contracts, or to mitigate damages under the Contracts or to (but Secured Party, shall not be required to) cure any default of any Borrower or provide for the performance of any Borrower's obligations under the Contracts; (iv) may terminate the Commitment and discontinue making any Loans pursuant to this Agreement; (v) shall have all of the rights and remedies of a secured party under the UCC as enacted and under any other applicable law from time to time in effect and (vi) may sue or take any other legal action to collect all the Indebtedness from any Borrower. Secured Party may also exercise any additional remedies granted herein, in any other agreement now or hereafter in effect between any Borrower and Secured Party, in any Contract, or otherwise granted by law or equity. Without limiting the generality of the foregoing, at all times and for any reason Secured Party shall have the right to make a demand for payment of any Indebtedness which is payable upon demand. All rights and remedies of Secured Party under this Agreement, under the Contract, under the UCC, or otherwise shall be cumulative and exercisable concurrently or consecutively or in the alternative, at Secured Party's option. 23 Without limiting the generality of the foregoing, each Borrower expressly agrees that, after an Event of Default and during the continuation thereof, Secured Party may (i) subject to Obligor's right under the Contract, lawfully enter any premises where any Collateral (concerning which an Event of Default has occurred) may be without judicial process and take possession of the Collateral, (ii) directly bill and collect for Payments under the Contracts (and take such further actions with respect to the Collateral as provided in Section 8 hereof, and (iii) sell, lease or otherwise dispose of any or all of the Collateral. (c) Notice. Each Borrower agrees that any notice by Secured Party of the sale, lease or other disposition of Collateral or any other intended action under this Section 11, whether required by the UCC or otherwise, shall constitute reasonable notice to such Borrower or its successors, assigns or transferees if the notice is mailed by overnight mail via nationally recognized overnight carrier, at least ten (10) calendar days before the date of any public sale, lease or other disposition of the Collateral, or at least ten (10) calendar days before the date after which any private sale, lease or other disposition of the Collateral is to take place, to such Borrower's address as specified in this Agreement or to any other address which such Borrower has notified Secured Party in writing as the address to which notices shall be given to such Borrower or such Borrower's successors, assigns or transferees. (d) Effect of Sale of Collateral. Any sale by Secured Party whether under any power of sale hereby given or by virtue of judicial proceedings shall operate to divest all right, title, interest, claim and demand whatsoever, either at law or in equity, of any Borrower in and to the Collateral sold and shall be a perpetual bar, both at law and in equity, against such Borrower, its successors and assigns, and against any all persons claiming the property sold or any part thereof under, by or through such Borrower, its successors and assigns, and against any and all persons claiming the property sold or any part thereof under, by or through such Borrower, its successors and assigns (subject, however, to the then existing rights, if any, of the obligor under the applicable Contract and to the rights and interest of such Borrower, its successors and assigns, in the proceeds of such sale which are in excess of the amount required to satisfy the Indebtedness). (e) Application of Proceeds. The proceeds of any sale or collection of the Collateral or any part thereof, and the proceeds and the avails of any remedy hereunder shall be paid to and applied as follows: (i) To the payment of costs and expenses of foreclosure or suit, if any, and of such sale, and the reasonable compensation of the agents, attorneys, paralegals and counsel of Secured Party and of all expenses, liabilities and advances incurred or made hereunder by Secured Party, or the holder or holders of the Note, and of all taxes, assessments or Liens superior to the Lien of these presents, except any taxes, assessments or other superior Lien subject to which said sale may have been made; 24 (ii) To the payment to the holder of the Note of the amount then owing or unpaid on the Note for principal, late charges and interest (first to late charges, then to interest and then to principal); and in case any such proceeds shall be insufficient to pay the whole amount so due upon the Note then to the payment of such principal, late charges and/or interest then owing on the Note as Secured Party or the holders of such Notes shall elect; (iii) To the payment of any other Indebtedness; and (iv) To the payment to Borrowers of all sums remaining. 12. Certain Defined Terms Not Defined Elsewhere in the Agreement. ------------------------------------------------------------- "Acquisition Costs" shall mean with respect to any item of Equipment the original cost to any Borrower of acquiring the same. "Borrowing Base" shall mean the lesser of (i) eighty percent (80%) of present value of the cash flow stream from the underlying leases or (ii) the original underlying lease amount. "Business Day" shall mean any day, excluding Saturday and Sunday and excluding any other day which in the Commonwealth of Pennsylvania is a legal holiday or a day on which banking institutions are authorized by law to close. "Lien" means any charge against or interest in property securing payment of a debt or performance of an obligation owed to any person, whether created by agreement, statute, common law or judicial or governmental authority, legal action or equitable process, or proceeding, including, but not limited to, any security interest, lien, encumbrance, mortgage, assignment, pledge, conditional sale, lease, consignment or bailment. "Obligations" means the Indebtedness and all covenants and agreements of the Borrowers contained in, or arising out of or in connection with, this Agreement or the other Loan Documents. "Scheduled Payments" shall mean those non-cancelable payments that are scheduled to become due under an Eligible Contract (as hereinafter defined) on account of rent or payment of the equipment cost financed under the Contract, but excluding payments due for taxes, insurance and non-equipment related items. 13. Miscellaneous. -------------- (a) Costs of Enforcement. Borrowers agree to be jointly and severally obligated to pay all reasonable costs and expenses, including reasonable attorney's and paralegals' fees, expenses and court costs incurred by Secured Party in enforcing any of the provisions of this Agreement or in enforcing any obligations of any Borrower contained in the Note or an Assignment. 25 (b) Waiver of Notice of Obligor Default. Borrowers consent that, after the occurrence and during the continuation of an Event of Default and without affecting any of Borrowers' liabilities or obligations hereunder or under the Note or an Assignment, Secured Party may agree with any Obligor as to any commercially reasonable modification, alteration, release, compromise, extension, waiver, consent, or other similar or dissimilar indulgence of or with respect to any Contract. (c) Notices. Any notice under this Agreement shall be in writing and shall be delivered in person, by overnight delivery or by United States first class mail, postage prepaid, and addressed: (i) if to any Borrower, at such Borrower's address set forth on the first page of this Agreement; (ii) if to Secured Party, at Commerce Bank, National Association, 1701 Route 70 East, Cherry Hill, New Jersey 08034, Attn: Gerard L. Grady, Vice President; (iii) if to either party at any other address as such party may, by notice as herein provided, received by the other, designate as its address for all notices under this Agreement. (d) VENUE; JURISDICTION. THIS AGREEMENT HAS BEEN DELIVERED FOR ACCEPTANCE BY SECURED PARTY IN PHILADELPHIA, PENNSYLVANIA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. BORROWERS HEREBY (1) IRREVOCABLY SUBMIT TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN THE COMMONWEALTH OF PENNSYLVANIA OVER ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS AGREEMENT; (II) IRREVOCABLY WAIVE, TO THE FULLEST EXTENT BORROWERS MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING; (III) AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW AND (IV) AGREE NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST SECURED PARTY OR ANY OF ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY MATTER ARISING OUT OR RELATING TO THIS AGREEMENT IN ANY COURT OTHER THAN ONE LOCATED IN PHILADELPHIA COUNTY, PENNSYLVANIA. NOTHING IN THIS SECTION SHALL AFFECT OR IMPAIR SECURED PARTY'S RIGHT TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR SECURED PARTY'S RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST ANY BORROWER, OR ANY SUCH BORROWER'S PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. 26 (e) Successors and Assigns, Entire Agreement; Assignment by Secured Party. This Agreement shall be binding on, and inure to the benefit of, Secured Party and Borrowers and their respective successors and assigns and contains the entire understanding and agreement with respect to the subject matter hereof. It is understood and agreed that from time to time Secured Party may assign (i) to one or more of Secured Party's affiliates, subsidiaries or subsidiaries of its affiliates, all of Secured Party's right, title and interest in any Loan, loan documents or Collateral; and with Borrowers' prior consent (so long as no Event of Default or event which upon notice, lapse of time or both would constitute an Event of Default) to any other person or entity, and (ii) assign, transfer or grant participations (but not assignments) in this Agreement or any Loan, Loan Documents or Collateral, of not more than forty-nine percent (49%) interest to any person or entity. (f) Assignment of Borrower. This Agreement is not assignable by any Borrower, by operation of law or otherwise, except to a party acquiring substantially all of such Borrower's assets, employees and business and any Borrower's obligations may not be delegated, except in connection therewith. (g) Secured Party's Reliance. All of the covenants, agreements, representations and warranties made by each Borrower in this Agreement shall, notwithstanding any investigation by Secured Party, be deemed to be material to and to have been relied upon by Secured Party with respect to each Loan made by Secured Party pursuant to this Agreement. Secured Party's knowledge at any time of any breach of or non-compliance with any of such covenants, agreements, representations or warranties shall not constitute a waiver of any thereof. None of Secured Party's rights under this Agreement will be waived except by a writing signed by Secured Party and any such waiver will be effective only as to the matters expressly set forth in such writing. (h) Illegality. Secured Party's obligation to perform under this Agreement is limited by and subject to any and all applicable laws, rules and regulations. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. Notwithstanding anything herein to the contrary, in no event shall interest, fees or charges payable under this Agreement, the Note or any Loan Document exceed those permitted by applicable law. Any provision of this Agreement, the Note or of any Loan Document which would otherwise charge or require payment of any interest, fee or charge in excess of the maximum permitted by applicable law shall be hereby amended to charge and require payment of only the maximum interest, fee or charge permitted by applicable law. 27 (i) Perfection of Security Interest. Each Borrower authorizes Secured Party to file any financing statement or statements relating to the Collateral (with or without such Borrower's signature thereon), and to take any other action deemed necessary or appropriate by Secured Party to perfect and to continue perfection of the Security Interest. Each Borrower hereby irrevocably appoints Secured Party as its attorney-in-fact to execute financing statements in such Borrower's name and to perform all other acts which Secured Party deems necessary or appropriate to perfect and protect the Security interest. Such appointment is binding and coupled with an interest. Upon request of Secured Party before or after the occurrence of an Event of Default, each Borrower agrees to give Secured Party or its designees possession of any Collateral in its control or physical possession, possession of which is, in Secured Party's opinion, necessary or desirable to perfect or continue perfection of priority of the Security Interest. A photocopy of this Agreement is sufficient as a financing statement and may be filed as such if Secured Party so elects. (j) Right of Offset. In addition to all liens upon and rights of setoff against the Borrower's money, securities or other property given to the Secured Party by law, the Secured Party shall have, with respect to the Obligations, and to the extent permitted by law, a contractual possessory security interest in, and a contractual right of setoff against, and each Borrower hereby assigns, conveys, delivers, pledges, and transfers to the Secured Party all of such Borrower's right, title and interest in and to, all of such Borrower's deposits, monies, securities, and other property now or hereafter in the possession of or on deposit with, or in transit to, the Secured Party, or any direct or indirect subsidiary or affiliate of the Secured Party, whether held in a general or special account or deposit. Every such security interest and right of setoff may be exercised without demand upon or notice to any Borrower to satisfy Borrowers' obligations hereunder. Each such right of setoff shall be deemed to have been exercised immediately upon the occurrence of an Event of Default hereunder without any action of the Secured Party, although the Secured Party may enter such setoff on its books and records at a later time. (k) Failure to Perform; Reimbursement. Upon Borrowers' failure to perform any of their duties hereunder or under any Contract, Secured Party may, but it shall not be obligated to, perform any of such duties and Borrowers shall forthwith upon demand reimburse Secured Party for any expense incurred by Secured Party in doing so with interest thereon at a rate equal to the lesser of the Prime Rate plus three percent (3%) or the maximum rate permitted by applicable law. (l) Waiver of Notice of Dishonor and Protest, etc. Each Borrower waives dishonor, protest, presentment, demand for payment, notice of dishonor and notice of protest of any instrument at any time held by Secured Party with respect of which any Borrower is any way liable and waives notice of any other action by Secured Party. (m) CERTAIN WAIVERS. SECURED PARTY SHALL NOT BE LIABLE TO ANY BORROWER OR ANY AFFILIATE OF ANY BORROWER FOR CONSEQUENTIAL DAMAGES ARISING FROM ANY BREACH OF CONTRACT, TORT OR OTHER WRONG RELATING TO THE ESTABLISHMENT, ADMINISTRATION OR COLLECTION OF THE OBLIGATIONS, OR RELATING IN ANY WAY TO THIS LOAN AGREEMENT, THE NOTE OR ANY OF THE OTHER LOAN DOCUMENTS OR THE ACTION OR INACTION OF ANY SUCH PERSONS UNDER, IN CONNECTION WITH OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. 28 (n) Releases. Each Borrower acknowledges that it has been represented by competent counsel in connection with the transactions contemplated hereby and has been fully advised by such counsel of the full range of rights and obligations possessed by each Borrower and undertaken and received pursuant to the terms of this Agreement and the other Loan Documents and, specifically, the provisions of this Agreement and the other Loan Documents. Each Borrower hereby knowingly and, after consultation with counsel, freely acknowledges and agrees that it does not now have nor does it know of any basis for any claim in tort, contract or otherwise against Secured Party for breach of any of the terms of any of the Loan Documents. Each Borrower acknowledges and agrees that this Agreement and the other Loan Documents were negotiated, executed and delivered freely and with full and informed knowledge of the consequences of this Agreement and the other Loan Documents and that it has executed this Agreement and the other Loan Documents without duress, and that Secured Party has proceeded in a commercially reasonable manner in light of all of the facts and circumstances surrounding the transactions that are the subject of this Agreement and the other Loan Documents. (o) WAIVER OF JURY TRIAL. BORROWERS AND SECURED PARTY ALL 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 ANY OTHER LOAN DOCUMENT OR THE RELATIONSHIP EVIDENCED HEREBY OR THEREBY. EACH BORROWER ACKNOWLEDGES THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR SECURED PARTY TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THAT SECURED PARTY WOULD NOT EXTEND CREDIT TO ANY BORROWER IF THE WAIVER SET FORTH IN THIS SECTION WERE NOT A PART OF THIS AGREEMENT. (p) Increased Costs. In the event that any future law: (i) changes the basis of taxation of any amounts payable to the Secured Party under this Agreement or the Loans (other than taxes imposed on the overall net income of the Secured Party) by the United States or the jurisdiction in which the Lender has its principal offices; or (ii) impose or modify any reserve, Federal Deposit Insurance Corporation premium or assessment, special deposit, minimum capital, capital ratio or similar requirements relating to any extensions of credit or other assets of, or any deposits with or liabilities of, the Secured Party, and the result of any such event shall be to increase the Secured Party's costs of making or maintaining any Loan or to reduce any amount receivable by the Secured Party from the Borrowers in respect of any Loan, then, upon demand made by the 29 Secured Party as promptly as practicable after it obtains knowledge that such aforesaid cost exist but in no event later than ninety (90) days after obtaining such knowledge, the Borrowers shall be jointly and severally obligated to pay to Secured Party additional fees in an amount which shall be sufficient to compensate the Secured Party for such costs. In the event that Secured Party shall make any demand for additional fees as hereinabove set forth, the Borrowers shall be entitled to receive from the Lender documentation reasonably substantiating the occurrence of any event referred to in Subsection (i) or (ii) above and a determination of how the increased costs to Secured Party and the amount of additional fees to Secured Party have been determined. 30 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. Borrowers: ---------- \ LEAF FINANCIAL CORPORATION By: Miles Herman ------------------------ Miles Herman President LEASE EQUITY APPRECIATION FUND I, L.P., a Delaware limited partnership By: Leaf Asset Management, Inc., its general partner By: Miles Herman ------------------------ Name: Miles Herman Title: President LEAF FUNDING, INC. By: Miles Herman ---------------------------- Name: Miles Herman Title: Senior Vice President Secured Party: -------------- COMMERCE BANK, NATIONAL ASSOCIATION By: Gerald L. Grady --------------------- Gerard L. Grady Vice President 31 SCHEDULE 4(g) ------------- (Tradenames) HVAC Capital Corp Advantage Leasing Corp Integrity Leasing & Financing Millennium Leasing & Financial Services Medstrat Capital American Equipment Finance May 28, 2003 MASTER NOTE $10,000,000. FOR VALUE RECEIVED, the undersigned LEAF FINANCIAL CORPORATION, a Delaware corporation with offices at 1845 Walnut Street, 10th Floor, Philadelphia, Pennsylvania 19103, LEASE EQUITY APPRECIATION FUND I, L.P., a Delaware limited partnership with offices at 49 Bancroft Mills, Unit P-15, Wilmington, Delaware 19809, and LEAF FUNDING, INC., a Delaware corporation with offices at 110 S. Poplar Street, Suite 101, Wilmington, Delaware 19801, (collectively, the "Borrowers") promise to be jointly and severally obligated to pay to the order of COMMERCE BANK, National Association together with any other holder hereof, "Lender"), at its office at 1701 Route 70 East, Cherry Hill, New Jersey 08034, or at such other place as Lender may from time to time designate in writing, without grace, the principal sum of Ten Million Dollars ($10,000,000.00) or so much thereof as has been advanced hereunder, together with interest on the unpaid balance of the principal from time to time outstanding at the rate per annum set forth in the Revolving Credit Agreement and Assignment between Borrowers and Lender dated as of the date hereof (the "Credit Agreement"). Principal and interest owing under this Note shall be payable as provided in the Credit Agreement. In the event that any payment of principal or interest is not made within five (5) days of the date when due hereunder, whether at its stated maturity, by acceleration or otherwise, it is hereby agreed that Lender shall have the option of collecting, on demand, interest on the unpaid amount of such delinquent payment from the day when due until the day when paid, at a rate equal to three percent (3%) above the "Prime Rate" (as defined in the Agreement), provided however, that in no event shall the rate of interest charged exceed the maximum rate permitted by applicable law. Interest owing under this Note shall be computed on the basis of a 360-day year for the actual number of days elapsed. All payments made hereunder shall at Lender's option be applied first to late charges, then to accrued interest, then to principal. All amounts owing under this Note shall be payable in lawful money of the United States of America which, as at the time of payment, shall be legal tender for the payment of public and private debts and shall be payable without relief or `benefit of any valuation, stay, appraisement, extension or redemption laws now or hereafter existing. This Note is secured by the Credit Agreement between Borrowers and Lender and the separate Guaranties of Payment, each dated as of May 28, 2003, by Resource America, Inc. and Leaf Asset Management, Inc. ("collectively, the Guarantor") and by Assignments issued pursuant to the Credit Agreement, under which a security interest is granted in favor of Lender, which together with all other agreements, instruments and documents delivered in connection therewith and herewith, are hereinafter sometimes referred to as the "Loan Documents". In the event of any default, after applicable notice and cure periods, if any, in the payment or performance of any liability or obligation owing under this Note, under any of the Loan Documents, or under any other instrument, document or agreement executed by or binding on each Borrower in favor of Lender, Lender may during the continuation of such default declare this Note, all interest hereunder and all other amounts payable hereunder to be immediately due and payable, without further notice or demand of any kind. In addition, upon the occurrence and during the continuation of any such default, Lender shall have all other rights and remedies existing in Lender's favor at law or in equity or provided for in any of the Loan Documents or in any of such other instruments, documents, or agreements. The rights and remedies of Lender as provided herein, in the Loan Documents, in such other instruments, documents, and agreements, at law and in equity shall be cumulative and concurrent, and may be pursued singularly, successively, or together, at the sole discretion of Lender. No act of omission or commission of Lender, including specifically any failure to exercise any right, remedy or recourse, shall be deemed to be a waiver or release of the same, such waiver or release to be effected only through a written document executed by Lender and then only to the extent specifically recited therein. A waiver or release with reference to any one event shall not be construed as continuing, as a bar to or as a waiver or release of, any subsequent right, remedy or recourse as to any other event. Voluntary prepayments of this Note are permitted as more fully provided in the Credit Agreement. Mandatory prepayment in full of this Note shall be required to be paid upon the occurrence of certain events and within the times provided in the Credit Agreement. Notwithstanding anything herein to the contrary, in no event shall interest, fees or charges payable under this Note or any Loan Document exceed those permitted by applicable law. Any provision of this Note or of any Loan Document which would otherwise charge or require payment of any interest, fee or charge in excess of the maximum permitted by applicable law shall be hereby amended to charge and require payment of only the maximum interest, fee or charge permitted by applicable law. Borrowers waive presentment and demand for payment, dishonor, notice of dishonor, protest and notice of protest of this Note. Borrowers agree to be jointly and severally obligated to pay all of Lender's reasonable costs and expenses of collection, including reasonable attorneys' and paralegals' fees and expenses. If more than one party shall execute this Note, the term "Borrower" as used herein shall mean all parties signing this Note and each of them, and all such parties shall be jointly and severally obligated hereunder. The provisions of this Note shall be binding upon each Borrower and its heirs, personal representatives, successors and assigns and shall inure to the benefit of Lender and its successors and assigns. THE LOAN EVIDENCED HEREBY HAS BEEN MADE, AND THIS NOTE HAS BEEN DELIVERED, AT PHILADELPHIA, PENNSYLVANIA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAWS PROVISIONS) OF THE COMMONWEALTH OF PENNSYLVANIA. BORROWERS HEREBY (I) 2 IRREVOCABLY SUBMIT TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN THE COMMONWEALTH OF PENNSYLVANIA, OVER ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS NOTE OR ANY OF THE LOAN DOCUMENTS; (II) IRREVOCABLY WAIVE, TO THE FULLEST EXTENT BORROWERS MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING; (III) AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW; AND (IV) AGREE NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST LENDER OR ANY OF LENDER'S DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY MATTER ARISING OUT OF OR RELATING TO THIS NOTE OR ANY OF THE LOAN DOCUMENTS IN ANY COURT OTHER THAN ONE LOCATED IN PHILADELPHIA COUNTY, PENNSYLVANIA. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR IMPAIR LENDER'S RIGHT TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR LENDER'S RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST ANY BORROWER OR ANY SUCH BORROWER'S PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. BORROWERS WAIVE THE RIGHT TO A TRIAL BY JURY IN ANY ACTION ARISING OUT OF THIS NOTE. 3 If this Note is not dated when executed by each Borrower, Lender is hereby authorized, without notice to such Borrower, to date this Note as of the date when the first loan evidenced hereby is made. Wherever possible each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note. LEAF FINANCIAL CORPORATION By: Miles Herman --------------- Name: Miles Herman Title: President Borrower's Address: ------------------- 1845 Walnut Street, 10th Floor Philadelphia, Pennsylvania 19103 LEASE EQUITY APPRECIATION FUND I, L.P., a Delaware limited partnership By: Leaf Asset Management, Inc., its general partner By: Miles Herman --------------- Name: Miles Herman Title: President Borrower's Address: ------------------- 49 Bancroft Mills, Unit P-15 Wilmington, Delaware 19809 LEAF FUNDING, INC. By: Miles Herman ------------ Name: Miles Herman Title: Senior Vice President Borrower's Address: ------------------- 110 S. Poplar Street, Suite 101 Wilmington, Delaware 19801 4 EX-10 11 exh10-10.txt EXH10-10.TXT PURCHASE AND SALE AGREEMENT between ATLAS PIPELINE PARTNERS, L.P. and SEMCO ENERGY, INC. Dated as of September 16, 2003 TABLE OF CONTENTS ARTICLE I Definitions..............................................1 Section 1.1. Defined terms...........................................1 Section 1.2. Construction............................................9 ARTICLE II Sale and Purchase........................................9 Section 2.1. Sale and Purchase of Company Equity Interests...........9 Section 2.2. Conversion of Company to Limited Liability Company.....10 ARTICLE III Purchase Price..........................................10 Section 3.1. Purchase Price.........................................10 Section 3.2. Purchase Price Adjustment..............................10 ARTICLE IV Representations and Warranties of Seller................11 Section 4.1. Corporate Status; Power and Authority..................11 Section 4.2. Duly Executed..........................................12 Section 4.3. Qualification..........................................12 Section 4.4. Consent................................................13 Section 4.5. Capitalization of the Company; Title to Company Equity Interests......................13 Section 4.6. Sufficiency of Company Assets; Title to Company Assets................................13 Section 4.7. No Breach, Etc.........................................14 Section 4.8. Financial Statements; Material Liabilities; Undisclosed Liabilities...................14 Section 4.9. Changes, etc...........................................15 Section 4.10. Environmental Laws.....................................15 Section 4.11. Personal Property......................................16 Section 4.12. Certain Regulatory Matters.............................16 Section 4.13. Material Contracts.....................................17 Section 4.14. Litigation.............................................17 Section 4.15. Rights-of-Way..........................................18 Section 4.16. Employee Matters.......................................18 Section 4.17. Insurance..............................................18 Section 4.18. Patents; Trademarks; Etc...............................18 Section 4.19. Indemnity Claim........................................19 Section 4.20. Books and Records; Other Information...................19 Section 4.21. Brokers................................................19 ARTICLE V Representations and Warranties of Purchaser.............19 Section 5.1. Corporate Status; Power and Authority..................19 Section 5.2. Power; Duly Executed...................................19 Section 5.3. Qualification..........................................19 Section 5.4. Governmental Consent...................................20 Section 5.5. Brokers................................................20 Section 5.6. Financial Arrangements of Purchaser....................20 Section 5.7. Purchaser Qualification................................20 ARTICLE VI Covenants and Certain Actions of the Parties............20 Section 6.1. Obligations of Seller..................................20 Section 6.2. Obligations of Purchaser...............................25 Section 6.3. Insurance..............................................26 Section 6.4. Cooperation by Seller..................................26 Section 6.5. Certain Title Curative Work............................27 ARTICLE VII Approvals; Commercially Reasonable Efforts..............27 Section 7.1. Approvals; Commercially Reasonable Efforts.............27 ARTICLE VIII Conditions Precedent....................................28 Section 8.1. Closing Conditions.....................................28 Section 8.2. Hart-Scott-Rodino Compliance...........................28 Section 8.3. Conditions to Obligations of Seller....................28 Section 8.4. Conditions to Obligations of Purchaser.................30 ARTICLE IX Closing.................................................32 Section 9.1. Closing................................................32 ARTICLE X Termination.............................................32 Section 10.1. Termination............................................32 Section 10.2. Limitation on Right to Terminate; Effect of Termination............33 ARTICLE XI Taxes...................................................34 Section 11.1. Seller Tax Representations and Warranties..............34 Section 11.2. Tax Covenants and Indemnification......................35 ARTICLE XII Indemnification.........................................37 Section 12.1. Indemnification........................................37 Section 12.2. Disclaimer Regarding Transmission Business.............41 ARTICLE XIII Miscellaneous...........................................42 Section 13.1. Modification...........................................42 Section 13.2. Entire Agreement.......................................42 Section 13.3. Expenses...............................................42 Section 13.4. Extension and Waiver...................................42 Section 13.5. Further Actions........................................42 Section 13.6. Notices................................................42 Section 13.7. Assignment.............................................44 Section 13.8. No Third Party Beneficiaries...........................44 Section 13.9. Severability...........................................44 Section 13.10. Counterparts...........................................44 Section 13.11. Applicable Law; Alternative Dispute Resolution.........44 Section 13.12. Publicity..............................................45 ii EXHIBITS Exhibit A......Operation and Maintenance and Administrative Services Agreement Exhibit B......Special Contract for Gas Transportation Exhibit C......Gas Transmission Agreement Exhibit D......Bill of Sale and Assignment Agreement Exhibit E......Limited Liability Company Agreement Exhibit F......Gas Control Agreement Exhibit G......Tower License Exhibit H......Reciprocal Easement and Joint Use Agreement iii PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (this "Agreement"), effective as of September 16, 2003 is by and between SEMCO Energy, Inc., a Michigan corporation, and Atlas Pipeline Partners, L.P., a Delaware limited partnership. WITNESSETH: WHEREAS, Seller owns the Company Common Stock that will be converted into the Company Equity Interests immediately prior to the Closing; and WHEREAS, Purchaser desires to purchase, and Seller desires to sell, the Company Equity Interests subject in all respects to the provisions of this Agreement. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows: ARTICLE I Definitions Section 1.1 Defined terms. As used herein, the following terms have the following meanings: "AAA" is defined in Section 13.11(b)(ii). "Affiliate" means, with respect to any Person, any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with the specified Person. For the purpose of this definition, "control," when used with respect to any specified Person, means the possession of the power to direct the management or policies of the specified Person, directly or indirectly, whether through the ownership of voting securities, partnership or limited liability company interests, by contract or otherwise. "Agreement" means this Purchase and Sale Agreement, as the same may be amended or modified in writing by the Parties from time to time. "Base Financial Statements" is defined in Section 4.8(a). "Bill of Sale and Assignment Agreement" is defined in Section 8.4(k). "Board of Directors" means the board of directors of Seller or Purchaser's General Partner, as the case may be, or any duly authorized committee of that board. "Business Day" means any day except Saturday, Sunday and any other day on which banking institutions located in the City of New York, New York are required or authorized to close. "Claim Notice" means a written notice of claim given by a Party seeking indemnification pursuant to the terms of this Agreement that specifies in reasonable detail the specific nature of the Losses and the estimated amount of such Losses. "Closing" is defined in Section 9.1. "Closing Date" is defined in Section 9.1. "Code" means the Internal Revenue Code of 1986, as amended. "Company" means, prior to the LLC Conversion, Alaska Pipeline Company, an Alaska corporation, and after the LLC Conversion, Alaska Pipeline Company, LLC, a Delaware limited liability company. "Company Assets" means all assets, properties and rights of the Company. "Company Common Stock" is defined in Section 4.5. "Company Equity Interests" means all the outstanding limited liability company interests of the Company. "Company Regulatory Financial Statements" is defined in Section 4.8(a). "Company's Charter Documents" is defined in Section 4.1(b). "Confidentiality Agreement" is defined in Section 6.1(b)(i). "Contracts" means all agreements, contracts, subcontracts, leases, notes, bonds, guarantees, letters of credit, indentures and other legally binding commitments, whether written or oral, and each amendment, supplement or modification, whether written or oral, in respect of any of the foregoing to which (i) the Company is a party, or (ii) by which the Company Assets are bound. "Data Room" means the presentation materials prepared by Seller to assist Purchaser in its investigation of the Company and the Transmission Business and made available to Purchaser in Anchorage, Alaska, together with the materials included on the CD-ROM provided by Seller to Purchaser and any materials provided by Seller to Purchaser in response to written supplemental requests. "Encumbrance" means any mortgage, pledge, restriction on transfer (other than any such restriction under applicable law and regulations or as may be specified in the Company's Charter Documents), proxy or voting or other similar agreement (other than as may be specified in the Company's Charter Documents), assessment, security interest, lien, adverse claim, levy, charge or other legal or equitable encumbrance of any kind. "Environmental Laws" means any and all Legal Requirements (including common law) pertaining to the protection of human health (as it relates to exposure to Hazardous Materials), the environment (including, without limitation, any generation, use, storage, treatment, Release, or threatened 2 Release of Hazardous Materials into the indoor or outdoor environment), wildlife or natural resources that is in effect in any and all jurisdictions in which the Company is conducting or at any time has conducted business or where the Company Assets are located, and any binding judicial or administrative interpretation (including, but not limited to, any judicial or administrative order, consent decree, judgment or settlement) thereof, including, without limitation, the Clean Air Act, as amended, the Federal Water Pollution Control Act, as amended, the Rivers and Harbors Act of 1899, as amended, the Oil Pollution Act of 1990, as amended, the Safe Drinking Water Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Resource Conservation and Recovery Act, as amended, the Hazardous and Solid Waste Amendments Act of 1984, as amended, the Toxic Substances Control Act, as amended, the Occupational Safety and Health Act, as amended, the Hazardous Materials Transportation Act, as amended, the Natural Gas Pipeline Safety Act of 1968, as amended, and the Hazardous Liquid Pipeline Safety Act of 1979, as amended. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Excluded Assets" means those assets of the Company set out in Section 6.1(a)(xiii) of Seller's Disclosure Schedule under the heading "Excluded Assets." "Excluded Obligations" means those obligations or liabilities of the Company set out in Section 6.1(a)(xiii) of Seller's Disclosure Schedule under the heading "Excluded Obligations." "FERC" means the Federal Energy Regulatory Commission as established by the Department of Energy Organization Act of 1977, 42 U.S.C. ss 7171, as amended, or its regulatory successor, as applicable. "Final Order" means an action by the relevant Governmental Authority that has not been reversed, stayed, enjoined, set aside, annulled or suspended, with respect to which any waiting period prescribed by law before the transactions approved thereby may be consummated has expired, as to which all conditions to the consummation of such transactions prescribed by such action have been satisfied, and for which the time for perfecting an appeal has expired without an appeal being perfected, or if an appeal has been perfected, such appeal has been finally resolved. "GAAP" shall mean accounting principles generally accepted in the United States of America as in effect from time to time. "Gas Control Agreement" is defined in Section 8.3(k). "Gas Transmission Agreement" is defined in Section 8.3(i). "Governmental Authority" means any federal, state, local, foreign or other government, any governmental, regulatory, judicial or administrative agency, bureau, commission, body or other authority exercising or entitled to exercise any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power, or any court or governmental tribunal, but does not include the Purchaser, the Seller, any Affiliates thereof, or any of their respective successors in interest. 3 "Hart-Scott-Rodino Act" is defined in Section 4.4. "Hazardous Material" means any substance, material or waste in such quantity or concentration that it is regulated by any Environmental Law as hazardous, toxic, a pollutant, contaminant, solid waste, or words of similar meaning, including, without limitation, petroleum, petroleum products, petroleum hydrocarbons, petroleum by-products, crude oil, and any components, fractions or derivatives thereof, methyl tertiary butyl ether, ammonia, asbestos, urea, formaldehyde and polychlorinated biphenyls. "Indebtedness" of any Person means all obligations of such Person for borrowed money or evidenced by bonds, notes, debentures or similar instruments, or any guarantee of any of the foregoing. "Indemnified Party" is defined in Section 12.1(f). "Indemnifying Party" is defined in Section 12.1(f). "Interim Period" is defined in Section 6.1(a). "Intellectual Property" means patents, trademarks, trade names, service marks, service names, copyrights and other proprietary intellectual property rights and all pending applications for the registration of any of the foregoing. "Knowledge", when used in the phrases "to Seller's Knowledge," "to the Knowledge of Seller" or similar phrases with respect to Seller, means, and shall be limited to, the actual knowledge of the executive officer of Seller or the senior employee of Seller who is responsible for the area of operation of the Company to which such Person's knowledge relates, and, when used in the phrases "to Purchaser's Knowledge," "to the Knowledge of Purchaser" or similar phrases with respect to the Purchaser, means, and shall be limited to, the actual knowledge of the executive officer of Purchaser or the senior employee of Purchaser who is responsible for the area of operation of the Purchaser to which such Person's knowledge relates. "Legal Requirements" means any and all applicable (i) laws (statutory and administrative), ordinances, regulations, judgments, orders, writs, injunctions and decrees of any Governmental Authority and (ii) contracts with any arbitrator or Governmental Authority relating to compliance with matters described in (i) above. "Limited Liability Company Agreement" is defined in Section 2.2. "LLC Conversion" is defined in Section 2.2. "Losses" is defined in Section 12.1(a). "Material Adverse Effect" means (i) any event, circumstance or condition materially impairing a Party's authority, right, or ability to consummate the transactions contemplated by this Agreement or the other Operative Documents; or (ii) any change (or changes taken together) in, or effect on, the indicated Person or business that is materially adverse to the operations, business, condition (financial or otherwise), or assets of such 4 Person or business, taken as a whole, but excluding (a) changes in the international or national wholesale or retail markets for natural gas; (b) changes in the regional or local wholesale or retail markets for natural gas which do not result in non-weather related decreases in the volume of gas delivered through the Pipeline; (c) changes in general economic, regulatory or political conditions, commodity prices for oil or natural gas or securities markets in the United States or worldwide or any outbreak of hostility, terrorist activities or war or changes that affect generally the industry in which the indicated Person or business operates; (d) the announcement or pendency of the transactions contemplated by this Agreement, or the consummation of the transactions contemplated hereby; and (e) any change which is cured (including, by the payment of money) before the earlier of the Closing or the termination of the Agreement under Section 10.1. For purposes of clause (ii) of the immediately preceding sentence, a change that has an effect that is quantifiable in monetary terms is materially adverse to a Person if its negative effect exceeds, or is reasonably expected to exceed on a present value basis, $5,000,000. Any determination as to whether any condition or other matter has a Material Adverse Effect shall be made only after taking into account all effective insurance coverages and effective third party indemnifications with respect to such condition or matter. "Material Contract" means any Contract (i) that calls for payments or guarantees to or from the Company, on the one hand, and any third party, on the other hand, of an amount in excess of $500,000 annually or $2,000,000 in the aggregate for any 12-month period, or (ii) is a partnership, limited liability company or joint venture agreement; or (iii) that constitutes a swap, cap, collar, derivative or other hedging arrangement. "Material Liability" means, in the case of any Person, any material liability of such Person. "Material Permits" means all Permits relating to the Company other than those the absence of which do not, or, measured as the date hereof and the Closing Date, would not, materially impair the use of the Company Assets for the purposes for which they are held or the value of the Company's interest therein. "Notice Period" is defined in Section 12.1(f). "Operating Documents" means the Operative Documents other than this Agreement and the Bill of Sale and Assignment Agreement. "Operation and Maintenance and Administrative Services Agreement" is defined in Section 8.3(g). "Operative Documents" means this Agreement, the Operation and Maintenance and Administrative Services Agreement, the Special Contract, the Gas Transmission Agreement, the Gas Control Agreement, the Tower License, the Reciprocal Easement and the Bill of Sale and Assignment Agreement. "Party" means Seller or Purchaser, as the context requires and "Parties" means, collectively, Seller and Purchaser. 5 "Permits" means any and all permits, authorizations, exemptions, certificates, approvals, registrations, legal status, variances, franchises, orders or other approvals and licenses (i) under any Legal Requirement or (ii) granted by any Governmental Authority. "Permitted Encumbrances" means, with reference to the Company: (a) liens for Taxes, assessments and governmental charges not yet delinquent or, if delinquent, that are being contested in good faith in the ordinary course of business and for which adequate reserves have been established; (b) carriers', warehousemen's, materialmen's, mechanics', repairmen's, employees' or other similar liens or charges for liquidated amounts arising in the ordinary course of business (i) if securing amounts that have not yet become due and payable or payment is being withheld as provided by law or (ii) if their validity is being contested in good faith in the ordinary course of business by appropriate action and for which adequate reserves have been established; (c) deposits made in the ordinary course of business to secure the performance of leases, tenders, statutory obligations, surety and appeal bonds, performance and return-of-money bonds and other similar obligations (exclusive of obligations incurred in connection with any Indebtedness) or any liens on such deposits in favor of the holder thereof; (d) any judgment lien relating to a judgment for not more than $100,000, unless the judgment it secures shall not, within 30 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall not have been discharged within 30 days after the expiration of any such stay; (e) leases granted in the ordinary course of business or leases to which any property acquired in connection with the Company in the ordinary course of business is subject; (f) any encumbrances (including encumbrances to secure the payment of money) on any lands subject to any rights-of-way in favor of the Company whether or not superior to such rights-of-way and any encumbrances (other than to secure the payment of money), easements, rights-of-way, permits, reservations, leases, rights in respect of gravels, minerals, oil, gases or water or in respect of grazing, logging, mining, canals, ditches, reservoirs or the like, conditions, covenants, and restrictions, provided that such encumbrances, easements, rights-of-way, permits, reservations, leases, rights, conditions, covenants, and restrictions are such that they will not either individually or in the aggregate, if exercised or availed of, interfere materially with the use or operation of the property of Seller or the Company or materially detract from the value of such property; (g) all Legal Requirements and rights reserved to or vested in any Governmental Authority to control, regulate or use any property of Seller or the Company; (h) other than any consents of any Governmental Authority, any third party consents to assignment and similar agreements and obligations with respect to which (A) waivers or consents have been obtained from the appropriate Person prior to the Closing, or (B) the applicable period of time for asserting such rights has expired prior to the Closing without any exercise of such rights, or (C) no consent is required in respect of the transactions contemplated by this Agreement; and 6 (i) any other liens, charges, encumbrances, contracts, agreements, instruments, obligations, defects or irregularities of any kind whatsoever (but not including liens securing Indebtedness) affecting the Company Assets that, individually or in the aggregate, do not and could not reasonably be expected to materially impair the use of such assets for the purposes for which they are held or the value of the interest therein. "Person" means an individual, corporation, limited liability company, partnership, joint venture, bank, trust, unincorporated organization and/or a government or any department or agency thereof or other entity of any kind. "Pipeline" means the natural gas pipeline, a map of which is set out in Section 4.6(a) of Seller's Disclosure Schedule. "Post-Closing Taxes" means Taxes for any taxable period beginning after the Closing Date, and, for any taxable period beginning before the Closing Date and ending after the Closing Date, Taxes relating to the portion of such taxable period after but not including, the Closing Date. "Pre-Closing Taxes" means Taxes for any taxable period ending on or prior to the Closing Date, and, for any taxable period beginning before the Closing Date and ending after the Closing Date, Taxes relating to the portion of such taxable period up to and including the Closing Date. "Purchase Price" is defined in Section 3.1. "Purchaser" means Atlas Pipeline Partners, L.P., a Delaware limited partnership. "Purchaser Indemnitees" means Purchaser and its officers, directors, employees, agents, representatives, Affiliates, subsidiaries (including, after the Closing, the Company), and their respective successors and assigns. "Purchaser Parties" is defined in Section 6.1(b)(i). "Purchaser's Disclosure Schedule" means the Disclosure Schedule of Purchaser provided by Purchaser contemporaneously with this Agreement. "Purchaser's General Partner" means Atlas Pipeline Partners GP, LLC. "Purchaser's Required Governmental Consents" is defined in Section 5.4. "Purchaser's Required Non-Governmental Approvals" is defined in Section 5.7. "RCA" means the Regulatory Commission of Alaska or any successor commission or agency. 7 "Reciprocal Easement" is defined in Section 8.3(l). "Release" means any depositing, spilling, leaking, pouring, emitting, discarding, abandoning, emptying, discharging, migrating, injecting, escaping, leaching, seeping, dumping, or disposing. "Retained E-mail" means all electronic mail and other computer-based communications stored on any electronic, digital, or other storage or back-up media and retained in the ordinary course of Seller's or any of its Affiliates' business or the Transmission Business. "Seller" means SEMCO Energy, Inc., a Michigan corporation. "Seller Division" means the ENSTAR Natural Gas Company operating division of Seller. "Seller Indemnitees" means Seller and its officers, directors, employees, agents, representatives, Affiliates, subsidiaries, and their respective successors and assigns. "Seller's Charter Documents" is defined in Section 4.1(a). "Seller's Disclosure Schedule" means the Disclosure Schedule of Seller provided by Seller contemporaneously with this Agreement. "Seller's Required Governmental Consents" is defined in Section 4.4. "Seller's Required Non-Governmental Approvals" is defined in Section 4.7. "SEMCO Material Adverse Effect" means any event, circumstance or condition occurring or arising after the date of this Agreement that materially and adversely affects or is reasonably likely to materially and adversely affect Seller's ability (financial or otherwise) to perform its obligations under any of the Operative Documents. For the avoidance of doubt, a SEMCO Material Adverse Effect shall be deemed to have occurred if SEMCO would be in default under any material indebtedness for borrowed money immediately after the Closing Date after giving effect to the transactions contemplated by this Agreement. "Special Contract" is defined in Section 8.3(h). "Target Working Capital Amount" is defined in Section 3.2(a). "Taxes" means unclaimed property and escheat obligations, taxes, charges, fees, levies, penalties or other assessments imposed by any Governmental Authority, including but not limited to, income, excise, real or personal property, sales, use, ad valorem, value added, environmental, transfer, franchise, payroll, withholding, social security (or similar), gross receipts, license, severance, fuel, production, transportation, stamp, occupation, employment, payroll, unemployment, disability or other taxes, including any interest, penalties or additions attributable thereto, whether disputed or not. 8 "Tax Return" means any return, report, information return, declaration, claim for refund or other document (including any schedule or related or supporting information) required to be supplied to any taxing authority with respect to Taxes, including amendments thereto. "Termination Date" is defined in Section 10.1(b). "Tower License" is defined in Section 8.4(n). "Transmission Business" means the operation and ownership of the Pipeline for the intrastate transportation of natural gas. "Transmission Business Insurance Policies" means all insurance policies carried by or for the benefit of Seller or the Company with respect to the Transmission Business, including all liability, property damage, self insurance arrangements, retrospective assessments and business interruption policies in respect thereof. "Working Capital" means cash, accounts receivable and other current assets less accounts payable, the current portion of deferred obligations and other current liabilities, in each case, determined in accordance with GAAP applied in a manner consistent with the Base Financial Statements. The obligations of the Company to make the payments contemplated by the Tower License and the Gas Control Agreement shall not be current liabilities for purposes of determining Working Capital. Section 1.2 Construction. As used in this Agreement: (a) the words "hereof," "herein," and "hereunder" and derivative or similar words shall refer to this entire Agreement and not to any particular provision of this Agreement; (b) the terms "Article" or "Section" refer to the specified Article or Section of this Agreement or the applicable Disclosure Schedule; (c) the terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa; (d) the terms "dollars" and "$" shall mean United States dollars; (e) accounting terms which are specifically defined under GAAP and are not otherwise defined herein shall have the respective meanings given to them under GAAP; and (f) unless otherwise specified, all references in this Agreement to times of the day shall be to Michigan time. No provision of this Agreement will be interpreted in favor of, or against, any Party by reason of the extent to which any such Party or its counsel participated in the drafting thereof or by reason of the extent to which any such provision is inconsistent with any prior draft hereof or thereof. ARTICLE II Sale and Purchase Section 2.1 Sale and Purchase of Company Equity Interests. Subject to all of the terms and conditions of this Agreement, at the Closing, Seller shall sell, transfer and deliver the Company Equity Interests to Purchaser, and Purchaser (or its designee) shall purchase and accept delivery from Seller of the Company Equity Interests, free and clear of all Encumbrances and other limitations and restrictions of any nature whatsoever (other than limitations or restrictions under applicable laws and regulations or as may be specified in the Company's Charter Documents). 9 Section 2.2 Conversion of Company to Limited Liability Company. Immediately prior to the Closing, Seller shall cause the Company to be converted from a corporation to a limited liability company (the "LLC Conversion") and adopt the limited liability company agreement attached hereto as Exhibit E as its limited liability company agreement (the "Limited Liability Company Agreement"), whereafter all references to the Company in this Agreement shall be deemed to refer to such limited liability company. ARTICLE III Purchase Price Section 3.1 Purchase Price. The aggregate purchase price for the Company Equity Interests shall be $94,300,000, as adjusted pursuant to Section 3.2 ("Purchase Price"). Section 3.2 Purchase Price Adjustment. (a) Working Capital Adjustment. The Purchase Price is based on the understanding that on the Closing Date, the Company has Working Capital of $-0- (the "Target Working Capital Amount"), and Seller agrees to use commercially reasonable efforts to cause the Company's Working Capital to be zero on the Closing Date. If the Company's Working Capital is not equal to the Target Working Capital Amount, the Purchase Price shall be adjusted upwards by the amount by which the Company's Working Capital exceeds the Target Working Capital Amount or downwards by the amount by which the Target Working Capital Amount exceeds the Company's Working Capital. (b) Adjustment Procedures. (i) At least five Business Days prior to the anticipated Closing Date, Seller, with the assistance and participation of, and in consultation with, Purchaser, shall prepare and provide Purchaser with an estimate of the Company's Working Capital as of the Closing Date, and if such estimate is above or below the Target Working Capital Amount, the Purchase Price payable on the Closing Date shall be adjusted upward or downward, as the case may, be, as provided in Section 3.2(a). (ii) If, following the Closing, Purchaser believes that an adjustment to the Purchase Price is required in addition to the adjustment, if any, provided in Section 3.2(b)(i), Purchaser will cause to be prepared and delivered to Seller no later than 90 days after the Closing Date an audited balance sheet of the Company, as at the Closing Date, which balance sheet shall present fairly, in conformity with GAAP, the assets and liabilities of the Company as at the close of business on the Closing Date and shall set forth the Company's Working Capital. Subject to the dispute procedures set forth in Section 3.2(c), if such balance sheet shows that the actual Working Capital of the Company as at the Closing Date is different than that used for determining the adjusted Purchase Price payable on the Closing Date, the Purchase Price shall be adjusted downward or upward, as the case may be, to reflect the actual Working Capital of the Company as at the Closing Date, and the Purchaser or 10 Seller, as the case may be, shall, as promptly as possible, pay or refund, as the case may be, the amount by which the Purchase Price as estimated pursuant to Section 3.2(a) was less than or exceeded the Purchase Price as finally determined pursuant to this Section 3.2(b). The cost of any audit performed for purposes of this Section 3.2(b) shall be shared equally by Purchaser and Seller. (c) Dispute Procedures. During the 30-day period following Seller's receipt of the audited balance sheet for the Company delivered pursuant to Section 3.2(b), Seller and its independent auditors will be permitted to review the working papers of the auditors relating to the audited balance sheet. The audited balance sheet shall become final and binding upon the Parties on the thirtieth day following receipt thereof by Seller unless Seller gives Purchaser written notice of its disagreement therewith prior to such date. Any notice of disagreement shall specify in reasonable detail the nature of any disagreement so asserted. If a notice of disagreement is received by Purchaser in a timely manner, then the audited balance sheet (as revised in accordance with clauses (i) or (ii) below) shall become final and binding upon the Parties on the earlier of (i) the date the Parties resolve in writing any differences they have with respect to any matter specified in the notice of disagreement or (ii) the date any disputed matters are finally resolved in writing by the arbitrator referred to below. During the 30-day period following the delivery of a notice of disagreement, or such longer period as may be agreed upon by Seller and Purchaser, Seller and Purchaser shall seek in good faith to resolve in writing any differences that they may have with respect to any matter specified in the notice of disagreement. At the end of such 30-day period, or such longer period as may have been agreed upon, Seller and Purchaser shall submit to an arbitrator for review and resolution any and all matters arising under this Section 3.2(c) which remain in dispute. The arbitrator shall be a nationally recognized independent public accounting firm as shall be agreed upon by the Parties in writing. The arbitrator shall render a decision resolving the matters submitted to the arbitrator within 30 days following submission thereto. The cost of any arbitration (including the fees of the arbitrator) pursuant to this Section 3.2(c) shall be borne 50% by Purchaser and 50% by Seller. The fees and disbursements of Seller's independent auditors incurred in connection with their review of the audited balance sheet shall be borne by Seller. ARTICLE IV Representations and Warranties of Seller Except as expressly set forth or disclosed with particularity in the corresponding Section of Seller's Disclosure Schedule, Seller represents and warrants to Purchaser on the date of this Agreement and on the Closing Date (unless a representation and warranty speaks as of a specified date) that: Section 4.1. Corporate Status; Power and Authority. (a) Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan. Seller has all the requisite corporate power and authority to carry on its business as it is now being conducted and to own or lease and operate its properties as, and in the places where, such business is now conducted and where such properties are now owned or leased and operated. Seller has all the requisite corporate power and corporate authority to execute and deliver this Agreement and the other Operative Documents and to perform its obligations hereunder and 11 thereunder, and the execution, delivery and performance of this Agreement and the other Operative Documents have been duly authorized by all necessary corporate action on the part of Seller. Section 4.1(a) of Seller's Disclosure Schedule lists all charter documents that, as of the date hereof, constitute the Articles of Incorporation and by-laws, as amended, of Seller ("Seller's Charter Documents"). True, correct and complete copies of Seller's Charter Documents were contained in the Data Room. (b) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Alaska. The Company has all the requisite corporate power and corporate authority to carry on its business as it is now being conducted and to own or lease and operate its properties as, and in the places where, such business is now conducted and where such properties are now owned or leased and operated. The Company has the corporate power to own the Company Assets and to operate the Transmission Business as such business is now conducted. The Company does not own, directly or indirectly, any equity security, voting rights or investment rights in any other Person which is not an Excluded Asset. Section 4.1(b) of Seller's Disclosure Schedule lists all charter documents that, as of the date hereof, constitute the Articles of Incorporation and by-laws, as amended, of the Company ("Company's Charter Documents"). True, correct and complete copies of the Company's Charter Documents were contained in the Data Room. (c) Upon the LLC Conversion pursuant to Section 2.2, the Company will be a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware. Upon the LLC Conversion pursuant to Section 2.2, the Company will have all the requisite limited liability company power and limited liability company authority to carry on its business as it is now being conducted and to own or lease and operate its properties as, and in the places where, such business is now conducted and where such properties are now owned or leased and operated. Upon the LLC Conversion pursuant to Section 2.2, the Company will have the limited liability company power to own the Company Assets and to operate the Transmission Business as such business is now conducted. Following the completion of the LLC Conversion, no consent, waiver, approval, order, license, permit or authorization of any Governmental Authority must be obtained solely as a result of the LLC Conversion for the Company to own the Company Assets and operate the Transmission Business as such business is now conducted, other than Seller's Required Governmental Consents. Section 4.2. Duly Executed. This Agreement has been duly executed and delivered on behalf of Seller and constitutes, and, when executed and delivered in accordance with this Agreement, each of the other Operative Documents shall constitute, a legal, valid and binding obligation of each of Seller and the Company, as applicable, enforceable against Seller or the Company, as applicable, in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting creditors' rights generally and general principles of equity. Section 4.3. Qualification. The Seller and the Company are duly qualified and in good standing, and are authorized to do business as foreign corporations (or, in the case of the Company, following the LLC Conversion, as a foreign limited liability company) in all jurisdictions where the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification necessary. Prior to the LLC Conversion, the Company is qualified to do business only in Alaska, and after the LLC Conversion, the Company will be qualified to do business only in Delaware and Alaska. 12 Section 4.4. Consent. No material consent, waiver, approval, order or authorization of, or registration, designation, declaration or filing with, or notification to, any Governmental Authority or any other Person is, has been or will be required on the part of Seller or the Company in connection with the execution or delivery of this Agreement, the other Operative Documents or the consummation of the transactions contemplated by this Agreement or the other Operative Documents, except (a) for those consents or approvals set forth in Section 4.4 of Seller's Disclosure Schedule (the "Seller's Required Governmental Consents"), (b) for the filing of a premerger notification and report form under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("Hart-Scott-Rodino Act"), and (c) as may be necessary as a result of any facts or circumstances relating solely to Purchaser. Section 4.5. Capitalization of the Company; Title to Company Equity Interests. The authorized capital stock of the Company consists of 2,850,000 shares of common stock, par value $1.00 per share ("Company Common Stock"), of which 1,900,500 shares are duly authorized, validly issued and outstanding, fully paid and nonassessable, and 150,000 shares of preferred stock, of which no shares are outstanding. All such outstanding Company Common Stock is owned by Seller. Seller has good and valid title to the Company Common Stock, free and clear of any Encumbrances and other limitations and restrictions of any nature whatsoever (other than limitations or restrictions under applicable laws and regulations or as may be specified in the Company's Charter Documents). Upon completion of the LLC Conversion pursuant to Section 2.2, all outstanding Company Equity Interests will be held by Seller and will be validly issued in accordance with the Limited Liability Company Agreement of the Company, fully paid and nonassessable. By delivery by Purchaser of payment for the Company Equity Interests and by execution and delivery by Seller of the Bill of Sale and Assignment Agreement, as provided in this Agreement, Purchaser shall acquire good title to the Company Equity Interests, free and clear of all Encumbrances. There are no outstanding subscriptions, options, warrants, conversion rights, outstanding convertible securities, preemptive rights, preferential rights, or other rights (contractual or otherwise) or agreements of any kind for the purchase, acquisition or subscription from (or the purchase, sale or issuance by) Seller of any equity or ownership interest in the Company, and no outstanding authorization therefor has been given. There are no restrictions upon the voting or transfer of the Company Equity Interests pursuant to any Contract to which any of Seller or the Company is a party or to which any of them may be bound. Section 4.6. Sufficiency of Company Assets; Title to Company Assets. (a) The Company Assets and the Excluded Assets described in Section 4.6(a) of the Seller's Disclosure Schedule are all of the assets, properties and rights used by Seller or the Company to conduct the Transmission Business. A true and correct map of the Pipeline is set out in Section 4.6(a) of Seller's Disclosure Schedule. (b) The Company has good title to the Company Assets, which Company Assets are not subject to any Encumbrances except (i) Permitted Encumbrances, (ii) Encumbrances that will be removed by obtaining Seller's Required Non-Governmental Approvals, and (iii) other Encumbrances described in 13 Section 4.6(b) of Seller's Disclosure Schedule. The Company enjoys peaceful and undisturbed possession under all material leases of real property on which the facilities operated by it or Seller (as they relate to the Transmission Business) are situated, and all such leases are valid and subsisting and in full force and effect. Section 4.7. No Breach, Etc. (a) The execution, delivery and performance of this Agreement and the other Operative Documents by Seller and the Company, as applicable, and the consummation by Seller and the Company, as applicable, of the transactions contemplated hereby and thereby do not and will not result in (i) any conflict with or breach or violation of or default under the Seller's Charter Documents or the Company's Charter Documents, (ii) subject to obtaining the Seller's Required Governmental Consents, any violation of any applicable provision of Legal Requirements, (iii) subject to obtaining the Seller's Required Governmental Consents and those additional consents or approvals described in Section 4.7 of Seller's Disclosure Schedule (the "Seller's Required Non-Governmental Approvals"), any material conflict with or breach or violation of or (with due notice or lapse of time or both) default under or right to terminate, cancel or accelerate under, or cause any obligation, penalty or premium to arise under, any Contract, (iv) the creation or imposition of any material Encumbrance on any of the Company Assets whatsoever, or (v) the cancellation, modification, revocation or suspension of any Material Permits. (b) No Material Permits are required or necessary under applicable Legal Requirements in connection with its and the Company's ownership of the Company Assets and operation of the Transmission Business as currently conducted other than those that have been obtained, or which, in the ordinary course of business, the Company or Seller is in the process of obtaining. Section 4.7(b) of the Seller's Disclosure Schedule sets forth the Material Permits for which either the Company or Seller has filed an application that is pending as of the date of this Agreement. The Company Assets and the Transmission Business are being operated in compliance with the provisions of Seller's and the Company's Material Permits and applicable Legal Requirements. Section 4.8. Financial Statements; Material Liabilities; Undisclosed Liabilities. (a) The Data Room contained the unaudited, consolidated balance sheets and income statements of the Company and the Seller Division for each of the last three fiscal years of Seller, ending with the fiscal year ended December 31, 2002 and for the four months ended April 30, 2003 (the "Base Financial Statements"), and the balance sheets and income statements for the Company as filed in the Annual Report to the RCA (including the FERC Form 2) for each of the last three fiscal years of the Company, ending with the fiscal year ending December 31, 2002 (the "Company Regulatory Financial Statements"). The Base Financial Statements were prepared in accordance with GAAP applied on a consistent basis, except for the method of allocation of certain expenses between the Company and Seller's Alaska gas distribution operations. The Company and the Seller Division are subject to the provisions of The Statement of Financial Accounting Standard ("SFAS") 71, "Accounting for the Effects of ' 14 Certain Types of Regulation". The Company Regulatory Financial Statements reflect certain regulatory adjustments that have been required of the Company and the Seller Division by the RCA and its predecessor agency. The liabilities shown on the balance sheet included in the Company Regulatory Financial Statement as at December 31, 2002 include all of the liabilities of the Company that would be required to be reflected on a balance sheet of the Company that was prepared in accordance with GAAP applied in a manner consistent with the application of such principles in the preparation of the Base Company Financial Statements. (b) Since the date of the Base Financial Statements, the Company has not incurred any liabilities required under GAAP to be disclosed in the Company's financial statements, except for liabilities that have arisen in the ordinary course of business, consistent with past practice. (c) The budget and projections presented to Purchaser were prepared in good faith based on assumptions that, taken as a whole, are reasonable. Section 4.9. Changes, etc. Since April 30, 2003: (a) except for those actions taken in compliance with this Agreement, the Transmission Business has been conducted in the ordinary course of business consistent with past practice; (b) no Indebtedness has been incurred or committed to be incurred by the Company, except (i) such Indebtedness to Seller that will be satisfied at or before Closing, (ii) Indebtedness that has been incurred in the ordinary course of business (but in no event in excess of $250,000), and (iii) Indebtedness described in Section 4.9(b) of Seller's Disclosure Schedule; (c) there has not been any amendment, cancellation or termination of any Material Contract; (d) there has not been any cancellation of any Indebtedness or waiver of any rights of substantial value to the Company, whether or not in the ordinary course of business; (e) there has not been any revaluation by the Company of the Company Assets, including, without limitation, writing off notes or accounts receivable; (f) there has not been any change in the accounting methods or practices by the Company; (g) there has not been any damage, destruction or loss (whether or not covered by insurance) adversely affecting the properties, business or prospects of the Company; and (h) no event or circumstance has occurred or condition has arisen that has had or is reasonably likely to have a Material Adverse Effect on the Company. Section 4.10. Environmental Laws. (a) The Company and the Company Assets have been and are being operated by Seller and the Company in compliance in all material respects with Environmental Laws and Seller has disclosed to Purchaser in Section 4.10(a) 15 of the Seller's Disclosure Schedule all past or present conditions of the real property, and all matters and issues in any way pertinent or related to the Company or the acquisition, ownership, operation or management of the Company Assets Known to it which, individually or in the aggregate, could reasonably be expected to lead to imposition of a Material Liability on the Company. (b) There are no present or past conditions arising from or relating to the Company or the Company Assets involving or resulting from a past or present Release of Hazardous Materials to any medium, including, but not limited to, air, land, surface waters or underground waters, or from any past or present generation, transportation, treatment, storage or disposal of any Hazardous Materials or from the storage, use or handling of any such Hazardous Materials that may lead to imposition of a Material Liability on the Company; (c) There are no material writs, injunctions, decrees, orders or judgments outstanding, or any claims, notices of violations of Environmental Laws, requests for information from a Governmental Authority, actions, suits, proceedings or investigations pending, or to Seller's Knowledge, threatened, involving the Company or the Company Assets relating to (A) its compliance with any Environmental Law or (B) the existence, Release, disposal, discharge, spill, treatment, storage or recycling of Hazardous Materials upon or into the environment at any on-site or off-site location; (d) There has been no exposure of any person or property to any Hazardous Material in connection with the Company's ownership or operation of the Company Assets that could reasonably be expected to form the basis for tort claims by third parties for damages or compensation; (e) The Seller has made available to Buyer all internal and external audits, studies, substantive correspondence, Permits, and related documents that are in Seller's or the Company's possession or custody on environmental matters and compliance with Environmental Laws relating to the Company and the Company Assets. Section 4.11. Personal Property. All material items of personal property and fixtures constituting a part of the Company Assets that are used or useful in the normal operations of the Transmission Business have been maintained in all material respects in an operating condition and state of repair (normal wear and tear excepted) adequate for the current use of such item in the ordinary conduct of the Transmission Business. Section 4.12. Certain Regulatory Matters. (a) Section 4.12(a) of Seller's Disclosure Schedule lists all certificates and Permits heretofore issued by the RCA to the Company or Seller in connection with the Transmission Business on the date hereof. (b) Section 4.12(b) of Seller's Disclosure Schedule reflects all of the operative tariffs heretofore authorized and approved by the RCA that are in effect and specifically applicable to the Transmission Business on the date hereof and all of the pending rate, certificate or other filings heretofore made by Seller or the Company before the RCA and the status of each such filing on the date hereof. 16 (c) Section 4.12(c) of Seller's Disclosure Schedule reflects all of the regulatory filings (other than those periodic filings that Seller or the Company is required to file in the ordinary course of business as a regulated utility) that Seller has been ordered by the RCA to make in the future which are or will be applicable to the Transmission Business (including but not limited those relating to all operative tariffs or rates charged, or to be charged, by the Company in the Transmission Business, including under special contracts), the subject matter of each such filing, and the date (if any) by which Seller intends to make, or is ordered to make such filings. (d) All currently effective material filings heretofore made by Seller or the Company with the RCA were made in material compliance with Legal Requirements then applicable thereto and the information contained therein was true and correct in all material respects as of the respective dates of such filings. (e) The Company is not (i) a "public utility company", a "holding company" or a "subsidiary company" of a "holding company" or (ii) to the Knowledge of the Seller, an "affiliate" of a "holding company", in each case, within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 4.13. Material Contracts. (a) Section 4.13(a) of Seller's Disclosure Schedule contains a complete and correct list of all Material Contracts as of the date hereof to the extent not included in the Excluded Assets. There are no defaults by Seller or the Company under any such contracts that, individually or in the aggregate, will materially and adversely impair the Transmission Business. To Seller's Knowledge, there are no defaults by any other party to any such contracts that, individually or in the aggregate, will materially and adversely impair the Transmission Business. Each Material Contract is valid, binding and enforceable against Seller or the Company, as applicable, and, to Seller's Knowledge, each of the other parties thereto in accordance with its terms, and in full force and effect on the date hereof, except where a failure to be so valid, binding and enforceable or in full force and effect would not materially and adversely impair the Transmission Business. (b) Section 4.14(b) of Seller's Disclosure Schedule sets forth each Material Contract requiring a consent as a result of the execution, delivery and performance of this Agreement, the Operative Documents or the consummation of the transactions contemplated hereby. Section 4.14. Litigation. Section 4.14 of Seller's Disclosure Schedule lists all actions, suits, proceedings or governmental investigations pending or, to the Knowledge of Seller, threatened against the Company which if adversely decided, could reasonably be expected to have a Material Adverse Effect on the Company, challenge or may challenge the validity of this Agreement or any of the Operative Documents or seek to enjoin or otherwise restrain the transactions contemplated herein and therein. Except as set forth in Section 4.14 of Seller's Disclosure Schedule, as of the date hereof, there is no order, judgment, injunction or decree of any Governmental Authority outstanding against the Company or against Seller (as it pertains to the Company or the Transmission Business), that, individually or in the aggregate, would have any effect 17 referred to in the foregoing clauses (a), (b) or (c). Notwithstanding the foregoing, but except as specifically pertains to the Company or the Transmission Business, Seller makes no representation or warranty in this Section 4.14 as to any actions, suits, proceedings or governmental investigations which are, or contain issues, of broad applicability to, or which affect broadly, the natural gas, natural gas liquids or pipeline industry, including any state or federal rulemaking or similar proceeding of general applicability and any petition for review or appeal thereof. Section 4.15. Rights-of-Way. The Company owns or has a legal right to possess all material rights-of-way or easements through all real property used or necessary for the conduct of the Transmission Business, as it is now being conducted without any known material conflict with the rights of others. Section 4.16. Employee Matters. The Company does not now have, and, from the date hereof to the Closing Date, will not have, any employees. The Company is not a party to any employment, personal services or consulting agreements or arrangements, and does not currently sponsor, maintain or have an obligation to contribute to any employee benefit plan within the meaning of Section 3(3) of ERISA, or any other bonus, pension, stock option, stock purchase, benefit, welfare, profit-sharing, retirement, disability, vacation, severance, change in control, hospitalization, insurance, incentive, deferred compensation and other similar fringe or employee benefit plans, fund, programs or arrangements, whether written or oral. The Company has not, at any time within the six years prior to the Closing Date sponsored, maintained or had any obligation to contribute to any employee pension benefit plan within the meaning of Section 3(3) of ERISA. Section 4.17. Insurance. (a) Section 4.17 of Seller's Disclosure Schedule lists of all Transmission Business Insurance Policies and all such policies are in full force and effect on the date hereof. (b) All premiums payable under such Transmission Business Insurance Policies have been paid in a timely manner and each of the Company and Seller has complied fully with the terms and conditions of such Transmission Business Insurance Policies. Neither Seller nor the Company is in default under any provisions of such Transmission Business Insurance Policies. Section 4.18. Patents; Trademarks; Etc. (a) The Transmission Business is conducted without conflict with or infringement of asserted patent, trade names, trademark, servicemark, copyright, trade secret, industrial model, utility model, know-how or other industrial property rights of others. (b) Except as set forth in Section 4.18(b) of Seller's Disclosure Schedules, to Seller's Knowledge, the Company or Seller owns all right, title and interest in and to, or has a valid and enforceable license or other right to use lawfully all the Intellectual Property used by Seller or the Company in connection with the Transmission Business free and clear of all Encumbrances. 18 Section 4.19. Indemnity Claim. Seller and the Company have taken all necessary and appropriate actions to preserve any and all rights to indemnification in their favor pursuant to clause (ii) of Section 12.2 of the purchase and sale agreement dated July 15, 1999 between Ocean Energy, Inc. and Seller, as amended. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not adversely affect the entitlement of the Company to receive indemnification under such agreement. Section 4.20. Books and Records; Other Information. The minute books and other similar records of the Company contain true and complete records of all actions taken at any meetings of the stockholders of the Company, the Board of Directors of the Company or any committee thereof and all written consents executed in lieu of any such meetings. Complete copies of all such minute books and other similar records have been provided to Purchaser. Section 4.21. Brokers. No investment banker, financial advisor, broker or finder has acted for or on behalf of Seller or any Affiliate of Seller in connection with this Agreement or the transactions contemplated by this Agreement other than McDonald Investments, Inc. No investment banker, financial advisor, broker or finder is entitled to any brokerage or finder's fee, or to any commission, based in any way on agreements, arrangements or understandings made by or on behalf of Seller or any Affiliate of Seller for which Purchaser or the Company has or will have any liabilities or obligations (contingent or otherwise). ARTICLE V Representations and Warranties of Purchaser Except as set forth or disclosed in the corresponding section of Purchaser's Disclosure Schedule, Purchaser represents and warrants to Seller on the date of this Agreement and on the Closing Date (unless a representation and warranty speaks as of a specified date) that: Section 5.1. Corporate Status; Power and Authority. Purchaser is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware. Purchaser has all the requisite partnership power and partnership authority to execute and deliver this Agreement and the other Operative Documents and to perform its obligations hereunder and thereunder, and the execution, delivery and performance of this Agreement and the other Operative Documents has been duly authorized by the Board of Directors of Purchaser's General Partner, which constitutes all necessary partnership action required on the part of the Purchaser for such authorization. Purchaser has heretofore delivered to Seller true and complete copies of its Agreement of Limited Partnership, as amended. Section 5.2. Power; Duly Executed. This Agreement has been duly executed and delivered by Purchaser's General Partner on behalf of Purchaser and constitutes the legal, valid and binding obligation of Purchaser enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting creditors' rights generally and general principles of equity. Section 5.3. Qualification. Purchaser is duly qualified and in good standing as a foreign partnership authorized to do business in all jurisdictions where the failure to so qualify would have a Material Adverse Effect on Purchaser. Prior to the Closing, Purchaser's designee that will acquire the Company Equity Interests shall become duly qualified and in good standing to do business in the State of Alaska. 19 Section 5.4. Governmental Consent. No material consent, waiver, approval, order or authorization of, or registration, designation, declaration or filing with, or notification to, any Governmental Authority is, has been or will be required on the part of Purchaser in connection with the execution and delivery of this Agreement or the other Operative Documents or the consummation of the transactions contemplated hereby or thereby, except (i) for those consents or approvals set forth in Section 5.4 of Purchaser's Disclosure Schedule (the "Purchaser's Required Government Consents"), (ii) for the filing of a premerger notification and report form under the Hart-Scott-Rodino Act, and (iii) where the failure to obtain such consents, waivers, approvals, order, authorizations, or to make such registration, designations, declarations, filings or notifications, would not, individually or in the aggregate, prevent or materially impair or delay the ability of Purchaser to perform its obligations under this Agreement or the other Operative Documents or to consummate the transactions contemplated hereby or thereby. Section 5.5. Brokers. No investment banker, financial advisor, broker or finder is entitled to any investment banker, financial advisor, brokerage or finder's fee, or to any commission, based in any way on agreements, arrangements or understandings made by or on behalf of Purchaser or any Affiliate of Purchaser for which Seller or any Affiliate thereof (including, prior to the Closing, the Company) has or will have any liabilities or obligations (contingent or otherwise). Section 5.6. Financial Arrangements of Purchaser. Purchaser will have at the Closing adequate sources of funds to enable it to pay the full Purchase Price when required hereunder and any adjustments thereto and to effect the transactions contemplated hereby. Section 5.7. Purchaser Qualification. To Purchaser's Knowledge, Purchaser is qualified to obtain, and there are no conditions in existence which could reasonably be expected to delay, impede or condition the receipt by Purchaser of Purchaser's Required Governmental Consents or those additional consents or approvals described in Section 5.7 of Purchaser's Disclosure Schedule (the "Purchaser's Required Non-Governmental Approvals"). ARTICLE VI Covenants and Certain Actions of the Parties Section 6.1. Obligations of Seller. (a) Conduct of Business, Etc. From the date of this Agreement and until the Closing ("Interim Period"), except as is otherwise approved by Purchaser in writing (which approval shall not be unreasonably withheld or delayed), Seller shall: (i) except as permitted or contemplated by this Agreement, cause the Company to carry on the Transmission Business in the ordinary course of business consistent with past practice and, to the extent consistent with such business, use all reasonable efforts to preserve intact the present business organization and to preserve its relationships with customers, suppliers and others having business dealings with the Company; 20 (ii) except as required for the LLC Conversion, cause the Company to maintain its corporate existence and, to the extent within the control of Seller, cause the Company to maintain all qualifications of the Company that are required for it to carry on the Transmission Business as set forth in clause (i) above; (iii) except as required for the LLC Conversion, not permit the Company to amend its Articles of Incorporation or by-laws; (iv) not permit the Company to (A) create, incur, assume, guarantee or otherwise become liable with respect to any indebtedness for money borrowed, issue or cause to be issued any notes, bonds, debentures, letters of credit or grant any option, warrant or right to purchase any thereof or (B) issue any securities convertible or exchangeable for debt securities of the Company other than indebtedness payable to the Seller which shall be satisfied prior to the Closing as provided in Section 6.1(a)(xiv); (v) except for the distribution of the Excluded Assets to Seller pursuant to Section 6.1(a)(xiii), refrain from disposing of any material Company Assets and from selling any Company Assets, other than sales of worn-out or obsolete equipment for fair or reasonable value in the ordinary course of business consistent with past practice; (vi) not subject any of its assets, or any part thereof, to any Encumbrance except Permitted Encumbrances; (vii) not permit the Company to merge or consolidate with any other corporation or acquire any stock, securities, property or assets of any other Person; provided, however, that the foregoing restriction shall not prohibit any acquisition of property or assets to be used by the Transmission Business in the ordinary course of business or for capital expenditures permitted by Section 6.1(a)(xi); (viii) except as required for the LLC Conversion, not permit the Company to issue any equity securities, or enter into any contract, or grant any option, warrant or right, calling for the issuance of any such securities, or create or issue any securities convertible into any such equity securities or convertible into securities in turn so convertible, or enter into any contract, or grant any option, warrant or right, calling for the issuance of any such convertible securities; (ix) not permit the Company to redeem, retire, purchase or otherwise acquire, directly or indirectly, any of its equity interests or declare, set aside or pay any dividends or other distributions in respect of its equity interests; (x) advise and consult, and cause the Company to advise and consult, with Purchaser in advance of any material actions (including, without limitation, rate filings) to be taken with respect to regulatory matters or other contested matters; 21 (xi) continue to implement the Company's capital expenditure program consistent with the Company's 2003 and (if applicable) 2004 capital expenditure budgets and, except as provided in such budgets, Seller will not, and will not permit the Company, to commit to make any capital expenditures, capital additions or capital improvements with respect to the Transmission Business which would be binding on the Company following the Closing Date; (xii) other than in the ordinary course of business, enter into or amend any Material Contract, in each case except to the extent related to any capital expenditure permitted by Section 6.1(a)(xi); (xiii) immediately prior to the Closing, cause the Company to distribute the Excluded Assets to Seller and obtain the release of the Company from further liabilities or obligations in respect of the Excluded Obligations; (xiv) immediately prior to the Closing, satisfy all intercompany obligations between the Company and Seller as follows: (A) if the aggregate intercompany accounts shows a net liability owed by the Company to Seller, such obligation shall be satisfied by Seller being deemed to make a contribution to the Company's capital in the amount of such obligation, or (B) if the aggregate intercompany accounts show a net liability owed by Seller to the Company, such obligation shall be paid in full by Seller in cash; (xv) continue to maintain all material items of personal property and fixtures constituting a part of the Company Assets that are used or useful in the normal operations of the Transmission Business in all material respects in an operating condition and state of repair (normal wear and tear excepted) adequate for the current use of such item in the ordinary conduct of the Transmission Business; (xvi) maintain in full force and effect all Permits held by the Company and Seller (as such Permits relate to the Transmission Business), except for those Permits the failure of which to maintain in full force and effect would not materially impair the use of the Company Assets for the purposes for which they are held or the value of the interest therein; (xvii) duly and timely file or cause to be filed all reports and returns required to be filed with any Governmental Authority and promptly pay or cause to be paid when due all Taxes, assessments and governmental charges, including interest and penalties levied or assessed, unless diligently contested in good faith by appropriate proceedings; (xviii) not change its methods of accounting that were in effect on December 31, 2002, except as required by GAAP or applicable law as recommended by its independent auditors; (xix) not make any material Tax election or settle any material Tax controversy; 22 (xx) not permit any material insurance policy naming the Company as a beneficiary or loss-payable to expire or be canceled or terminated, unless a comparable insurance policy reasonably acceptable to Purchaser is obtained and in effect; (xxi) immediately prior to the Closing, terminate or cause the Company to terminate all contracts or service agreements between the Company and Seller or Seller's other Affiliates except for the Operative Documents and any other agreement contemplated by this Agreement; (xxii) provide Purchaser with updated financial statements each calendar quarter ending September 30, 2003 and thereafter, prepared in a manner consistent with the Base Financial Statements, within 45 days after the end of such calendar quarter; (xxiii) obtain prior to the Closing any air permits required for the operation of its Gudenrath and Kalifonski compressor stations; and (xxiv) Prior to the Closing, perform at Seller's cost and expense, the land curative work described in Section 6.1(a)(xxiv) of Seller's Disclosure Schedule. (b) Access and Information. (i) The Company and Seller have given and, during the Interim Period, Seller shall give, or shall cause to be given, to Purchaser and its employees, agents and representatives appropriate access, at all reasonable times and at Purchaser's expense, to the properties, books, files, records and officers of the Company and of Seller and their agents, including legal representatives and accountants, as such relate to the Company Assets and the Transmission Business, and will furnish or shall cause to be furnished, at no cost to Purchaser other than reasonable out-of-pocket expenses and the cost of copying or duplication, all information and documents relating to the Transmission Business as Purchaser may reasonably request, and permit Purchaser to contact and meet with the employees of Seller involved in the Transmission Business at such place or places and at such times as reasonably designated by Purchaser, provided that no such investigation shall unreasonably interfere with the Transmission Business, or relationships with employees or customers of Seller or customers of the Company. During the Interim Period, Seller shall permit Purchaser to make copies of information relating to the Transmission Business contained in the books, files and records of Seller and the Company. Purchaser will cause all information regarding Seller, the Company or the Transmission Business obtained or acquired by Purchaser or Purchaser's representatives, employees, consultants, independent contractors, attorneys and financing sources and other advisors (the "Purchaser Parties") pursuant to this Agreement to be used and maintained by the Purchaser Parties in accordance with the terms of the confidentiality agreement dated February 27, 2003, by and between McDonald Investments Inc. (as agent for Seller) and Purchaser (the "Confidentiality Agreement"). Notwithstanding the foregoing provisions of this Section 6.1(b), (1) to the extent necessary in order to obtain the Purchaser Required Governmental Consents, Purchaser may disclose such information to the appropriate Governmental Authorities provided Purchaser makes commercially reasonable efforts to ensure that the information that is so disclosed will be 23 accorded confidential treatment by the Governmental Authority; (2) Seller shall not be required to disclose information to the extent that the disclosure thereof is prohibited under confidentiality agreements currently in effect on the date hereof, and (3) Purchaser shall be permitted to disclose information to the extent required by applicable Legal Requirements or stock exchange regulations or to the extent requested by its (or its designee's) lenders. (ii) Seller shall have the right to have a representative present at all times of any inspections, interviews, and examinations conducted at or on the offices or other facilities or properties of Seller or the Company. Purchaser shall have no right of access to, and Seller shall have no obligation to provide to Purchaser, (1) bids received from others in connection with the transactions contemplated by this Agreement and information and analysis (including financial analysis) relating to such bids, or (2) any information the disclosure of which would jeopardize any privilege available to the Company, Seller or any of their Affiliates relating to such information or would cause Seller to breach a confidentiality obligation. Purchaser agrees that if Purchaser or its authorized representatives receive, or if the information (whether in electronic mail format, on computer hard drives or otherwise) held by the Company as of the Closing includes information that relates to the business operations or other strategic matters of Seller, or any of its Affiliates (other than the Company), such information shall be held in confidence on the terms and subject to the conditions contained in the Confidentiality Agreement, but the term of the restriction on the disclosure and use of such information shall continue in effect as to such information for a period of two years from the Closing. Purchaser further agrees that if Seller or the Company inadvertently furnishes to Purchaser copies of or access to information that is subject to clause (2) of the second preceding sentence, Purchaser will, upon Seller's request, promptly return same to Seller and Purchaser will destroy any and all extracts therefrom or notes pertaining thereto (whether in electronic or other format). (iii) Purchaser agrees that Seller may retain (1) a copy of all materials included in the Data Room, together with a copy of all documents referred to in such materials, (2) copies of all books and records prepared by Seller or its Affiliates in connection with the transactions contemplated by this Agreement, including bids received from others and information relating to such bids, (3) copies of any books and records which may be relevant in connection with the assertion or defense of disputes arising hereunder, (4) all consolidating and consolidated financial information and all other accounting books and records prepared or used in connection with the preparation of financial statements of Seller, and (5) copies of all Retained E-mail. Seller agrees that all such information shall be treated as Confidential Information of Purchaser as within the meaning of the Operation and Maintenance and Administrative Services Agreement and shall be subject to the terms and conditions of the confidentiality provisions contained therein. (iv) Notwithstanding anything to the contrary set forth in this Agreement, the obligations of confidentiality hereof, as they relate to the transactions contemplated hereby, shall not apply to the federal tax structure or federal tax treatment of such transactions, and each Party (and any employee, 24 representative, or agent of any Party) may disclose to any and all Persons, without limitation of any kind, the federal tax structure and federal tax treatment of such transaction. The preceding sentence is intended to cause the transactions contemplated hereby not to be treated as having been offered under conditions of confidentiality for purposes of Section 1.6011-4(b)(3) (or any successor provision) of the Treasury Regulations promulgated under Section 6011 of the Code and shall be construed in a manner consistent with such purpose. In addition, each Party hereto acknowledges that it has no proprietary or exclusive rights to the tax structure of the transactions contemplated hereby or any tax matter or tax idea related to such transaction. (c) Hart-Scott-Rodino. (i) Seller will prepare and submit to the Federal Trade Commission and the Department of Justice, as promptly as practicable but in no event later than 120 days after the date hereof, all necessary filings for Seller and the Company in connection with the transactions contemplated by this Agreement under the Hart-Scott-Rodino Act. (ii) In the event that a request for additional information is made of Seller pursuant to the Hart-Scott-Rodino Act, Seller shall use all reasonable efforts to comply or cause to be complied with such request as soon as practicable after receipt of such request. Seller shall use its commercially reasonable efforts to obtain early termination of the applicable waiting period to the extent required by the applicable regulatory authorities pursuant to the Hart-Scott-Rodino Act. Notwithstanding the foregoing, nothing contained herein shall require Seller or the Company to sell, transfer, divest or otherwise dispose of any assets or properties. Seller will coordinate and cooperate with Purchaser in exchanging such information and providing such reasonable assistance as may be requested in connection with such filing. (d) Director Resignations. On the Closing Date, Seller shall cause to be delivered to Purchaser duly signed resignations of each of the directors of the Company. Section 6.2. Obligations of Purchaser. (a) Hart-Scott-Rodino. (i) Purchaser will prepare and submit to the Federal Trade Commission and the Department of Justice, as promptly as practicable but in no event later than 120 days after the date hereof, all necessary filings for Purchaser in connection with the transactions contemplated by this Agreement under the Hart-Scott-Rodino Act. (ii) In the event that a request for additional information is made of Purchaser pursuant to the Hart-Scott-Rodino Act, Purchaser shall use all reasonable efforts to comply or cause to be complied with such request as soon as practicable after receipt of such request. Purchaser shall use its commercially reasonable efforts to obtain early termination of the applicable waiting period to the extent required by the applicable regulatory authorities pursuant to the Hart-Scott-Rodino Act. Notwithstanding the foregoing, nothing contained herein shall require Purchaser or the Company to sell, transfer, divest or otherwise dispose of any assets or properties. Purchaser will coordinate and cooperate with Seller in exchanging such information and providing such reasonable assistance as may be requested in connection with such filing. 25 (b) Access to Information. After Closing, Purchaser will, and will cause its counsel and independent public accountants to, afford to representatives of Seller, including its counsel and accountants, reasonable access at reasonable times upon prior notice and at Seller's expense to all books, records, files and documents related to the Company or the Transmission Business in order to permit Seller (i) to prepare and file its tax returns and to prepare for and participate in any investigation with respect thereto, (ii) to prepare for and participate in any other investigation and defend any litigation relating to or involving the Seller, the Company or the Transmission Business for which Seller may be responsible, (iii) to discharge its obligations under this Agreement and the other Operative Documents to which it is a party and for other reasonable purposes, and Purchaser will afford Seller reasonable assistance in connection therewith. Purchaser will cause such records to be maintained for not less than six years from the date of Closing (or, if longer, any period required by applicable Legal Requirements); provided, however, that in the event that Purchaser transfers all or a portion of the Transmission Business to any third party during such period, Purchaser may transfer to such third party all or a portion of the books, records, files and documents related thereto, provided such third party transferee expressly assumes in writing the obligations of Purchaser under this Section 6.2(b). Following the Closing Date, and to the extent reasonably necessary to permit Seller or any of its Affiliates to defend (including, without limitation, any related investigation, appeal or settlement) any lawsuit, mediation, enforcement action, arbitration, administrative hearing or other adjudicative proceeding relating to the Transmission Business, Purchaser agrees to afford Seller and its Affiliates and their respective accountants and counsel, during normal business hours, at no cost to Seller other than reasonable out-of-pocket expenses, (i) reasonable access to all employees of Purchaser or any of its Affiliates and all witnesses subject to the control or direction of Purchaser or any of its Affiliates and (ii) reasonable access to all documents and records within the custody or subject to the control of Purchaser or any of its Affiliates; provided, however, that in the event of any litigation nothing herein shall limit either party's rights of discovery under applicable law. Section 6.3. Insurance. (a) Purchaser acknowledges and agrees that, effective upon the Closing, the Transmission Business Insurance Policies may be terminated or modified to exclude coverage of the Company and the Transmission Business. Section 6.4. Cooperation by Seller. (a) Seller shall, and shall cause the Company to, cooperate with Purchaser and Purchaser's auditors in the preparation at Purchaser's expense of such audited financial statements for the Company as Purchaser may reasonably request to comply with applicable Legal Requirements, stock exchange rules and requirements of Purchaser's (or its designee's) lenders, including providing reasonable access to its and the Company's accountants, employees, work papers, books and records and financial data relating to the Company and the Transmission Business. 26 (b) Seller shall, and shall cause the Company to, cooperate with Purchaser, at Purchaser's sale cost and expense, in consummating Purchaser's (or its designee's) financing for the acquisition of the Company Equity Interests, including (i) providing reasonable access to its and the Company's accountants, officers, directors and representatives; provided, however, Seller shall not be required to waive or modify any legal rights in respect to such financing; and (ii) executing a consent to collateral assignment of the Operative Documents in favor of the lenders that (A) provides such lenders with notice and the right to consent to any material modifications of such Operative Documents; (B) provides such lenders with notice of default and an opportunity to cure any defaults under such Operative Documents; (c) adds such lenders under Seller's applicable insurance policies; (D) consents to an assignment of such Operative Documents upon or in lieu of foreclosure; (E) contains appropriate attornment provisions; (F) establishes limitations of liability and recoupment against such lenders and its assignees or purchasers; and (G) provides for the treatment of such Operative Documents in the event of a bankruptcy of the Company. Section 6.5. Certain Title Curative Work. Within fourteen (14) days from the date of this Agreement, Purchaser and Seller shall mutually agree on a land consultant knowledgeable about pipeline land issues in Alaska, and which shall be jointly retained by Purchaser and Seller to review Seller's land records for the purpose of determining the land curative work, if any, necessary to give the Company good title to any portion of the rights of way used or necessary to conduct the Transmission Business, as it is now being conducted, subject to Permitted Encumbrances and other defects or irregularities as would be acceptable to a prudent pipeline operator, Seller shall, at its sole cost and expense, perform any curative work identified by such consultant to bring Seller's title to such state as soon as practicable; provided, however, that the Closing shall not be delayed as a result of incompleted curative work provided all of the other conditions precedent therefor have been satisfied. The costs and expenses of the land consultant shall be shared equally between Purchaser and Seller. ARTICLE VII Approvals; Commercially Reasonable Efforts Section 7.1. Approvals; Commercially Reasonable Efforts. (a) The Parties recognize the importance of obtaining the Seller's Required Governmental Consents, the Seller's Required Non-Governmental Approvals, the Purchaser's Required Governmental Consents and the Purchaser's Required Non-Governmental Approvals and, in this regard, agree to use their commercially reasonable efforts to seek such consents and approvals and will cooperate fully with the other party in promptly seeking to obtain such consents and approvals. The Parties shall apply for and diligently prosecute all applications for, and shall use commercially reasonable efforts promptly to obtain as quickly as practicable, such consents and approvals as shall be necessary to permit the consummation of the transactions contemplated by this Agreement. To this end, the Parties agree to make available the personnel and other resources of their respective organizations in order to accomplish actions reasonably required by them to obtain all such approvals or consents. Prior to making such applications, the Parties shall agree to the capital expenditure budget for calendar year 2004. 27 (b) Seller and Purchaser agree that Seller shall have primary responsibility for the preparation and filing of the application and related material with the RCA seeking approval of required permit transfers for the transactions contemplated herein and approval of any jurisdictional contracts between the parties contemplated hereby, subject to Purchaser's compliance with the terms of paragraph (a) above. Each party shall pay its own costs and expenses associated with the RCA approval process. ARTICLE VIII Conditions Precedent Section 8.1. Closing Conditions. The respective obligations set forth herein of Seller and Purchaser to consummate the transactions contemplated hereby shall be subject to the fulfillment, on or before the Closing Date, in the case of Seller, of the conditions set forth in Sections 8.2 and 8.3, and in the case of Purchaser, of the conditions set forth in Sections 8.2 and 8.4. Any of the following conditions may be waived in whole or in part by the Party whose obligation to perform at Closing is subject to such condition. Section 8.2. Hart-Scott-Rodino Compliance. The applicable waiting period, together with any extensions thereof, under the Hart-Scott Rodino Act shall have expired or terminated without any action being taken, or any agreement having been entered into by Seller, the Company or Purchaser or any consent decree or order having been issued by any Governmental Authority, to sell, transfer, divest or otherwise dispose of any assets or properties of the Company or Purchaser. Section 8.3. Conditions to Obligations of Seller. (a) Representations and Warranties of Purchaser. The representations and warranties of Purchaser contained in Article V of this Agreement shall be true and correct in all respects as of the date hereof and as of the Closing Date (except to the extent that any representation or warranty speaks as of a specified date, in which case such representation or warranty shall be true and correct only as of such specified date), except for (i) changes permitted or contemplated by this Agreement and (ii) failures of such representations and warranties to be true and correct that would not, individually or in the aggregate, prevent or materially impair or delay the ability of Purchaser to perform its obligations under this Agreement or to consummate the transactions contemplated by this Agreement. Purchaser shall have duly performed and complied in all material respects with all covenants and agreements contained herein required to be performed or complied with by it at or before the Closing. (b) Officers' Certificate. Purchaser shall have delivered to Seller a certificate, dated the Closing Date and signed by the President and the Chief Financial Officer of Purchaser's General Partner, certifying, in form reasonably satisfactory to Seller and its counsel that, to such officers' best knowledge and belief, after due inquiry, the conditions set forth in Section 8.3(a) hereof have been fulfilled. 28 (c) Required Governmental Consents. All of Seller's Required Governmental Consents shall have been obtained by Final Order, and such consents shall, among other matters, (i) approve without being subject to refund the rates contained in the Special Contract, (ii) approve without being subject to refund the pass-through of such rates to the customers of Seller Division, and (iii) not otherwise contain any condition which will, or is reasonably expected to, have a Material Adverse Effect on Seller's gas distribution business in the State of Alaska. The condition contained in this Section 8.3(c) shall not be satisfied if any Required Governmental Consent (1) disallows or makes subject to refund the inclusion of a federal income tax component in rates of the Company, (2) sets a procedural schedule for review of the rates of the Company or Seller Division (but may expressly reserve jurisdiction over such rates), or (3) disapproves the 10 year term of the Special Contract or requires that term to be shortened. (d) Required Non-Governmental Approvals. All of Seller's Required Non-Governmental Approvals, the absence of which would have a Material Adverse Effect on Seller after the Closing, and all of Purchaser's Required Non-Governmental Approvals, the absence of which would have a Material Adverse Effect on Seller, in each case other than those consents and approvals that are customarily obtained after the Closing of a transaction of the nature of the transaction contemplated by this Agreement, have been obtained and are in full force and effect. (e) Actions at Closing. Purchaser shall have taken the respective actions to be taken by it at the Closing pursuant to Section 9.1 hereof. (f) Absence of Proceedings. No action, suit or proceeding shall be pending and no statute, rule or regulation and no injunction, order, decree or judgment of any court or Governmental Authority of competent jurisdiction shall be in effect that could reasonably be expected to prohibit, restrain, enjoin or restrict the consummation of the transactions contemplated by this Agreement. (g) Operation and Maintenance and Administrative Services Agreement. The Company shall have duly executed and delivered the Operation and Maintenance and Administrative Services Agreement between Seller and the Company substantially in the form of Exhibit A hereto (the "Operation and Maintenance and Administrative Services Agreement"). (h) Special Agreement for Gas Transportation. The Company shall have executed and delivered the Special Contract for Gas Transportation between Seller Division and the Company substantially in the form of Exhibit B hereto (the "Special Contract"). (i) Gas Transmission Agreement. The Company shall have executed and delivered the Gas Transmission Agreement between Seller and the Company substantially in the form of Exhibit C hereto (the "Gas Transmission Agreement"). (j) Tower License. The Company shall (i) have duly executed and delivered the Tower License and (ii) have paid in full to Seller the license fee for the Tower License. (k) Gas Control Agreement. The Company shall (i) have duly executed and delivered an agreement substantially in the form of Exhibit F hereto (the "Gas Control Agreement") providing for Seller to perform control room services for the Company for a period of 10 years from the Closing Date and (ii) have paid in full to Seller the service fee under the Gas Control Agreement. 29 (l) The Company shall have executed and delivered the Reciprocal Easement and Joint Use Agreement between Seller and the Company in substantially the form of Exhibit H hereto (the "Reciprocal Easement") with Schedule 2.1 thereto properly completed. Section 8.4. Conditions to Obligations of Purchaser. (a) Representations and Warranties of Seller. The representations and warranties of Seller contained in Article IV and Section 11.1 of this Agreement shall be true and correct in all respects as of the date hereof and as of the Closing Date (except to the extent that any representation or warranty speaks as of a specified date, in which case such representation or warranty shall be true and correct only as of a specified date), except for (i) changes permitted or contemplated by this Agreement and (ii) failures of such representations and warranties (other than the representations and warranties set forth in the second sentence of Section 4.1(a), the first two sentences of Section 4.1(b), Section 4.1(c), Section 4.2 and, Section 4.5 hereof) to be true and correct that would not, individually or in the aggregate, have a Material Adverse Effect on the Company. Seller shall have duly performed and complied in all material respects with all covenants and agreements contained herein required to be performed or complied with by it at or before the Closing. (b) Officers' Certificate. Seller shall have delivered to Purchaser a certificate, dated the Closing Date and signed by its President and Chief Financial Officer, certifying, in form reasonably satisfactory to Purchaser and its counsel that, to such officers' best knowledge and belief, after due inquiry, the conditions set forth in Section 8.4(a) hereof have been fulfilled. (c) Required Governmental Consents. All of Seller's Required Governmental Consents and Purchaser's Required Governmental Consents shall have been obtained by Final Orders, and such Final Orders shall, among other matters, approve without being subject to refund the rates contained in the Special Contract and not otherwise contain any condition that will, or is reasonably expected to, have a Material Adverse Effect on the Company or Purchaser. The condition contained in this Section 8.4(c) shall not be satisfied if any Required Governmental Consent (i) disallows or makes subject to refund the inclusion of a federal income tax component in the rates of the Company, (ii) sets a procedural schedule for review of the rates of the Company (but may expressly retain jurisdiction over such rates), or (iii) disapproves the 10 year term of the Special Contract or requires that term to be shortened. (d) Required Non-Governmental Approvals. All of Seller's Required Non-Governmental Approvals, the absence of which would have a Material Adverse Effect on the Company, and all of Purchaser's Required Non-Governmental Approvals, the absence of which would have a Material Adverse Effect on Purchaser, in each case other than consents and approvals that are customarily obtained after the closing of a transaction of this nature, have been obtained and are in full force and effect. (e) Actions at Closing. Seller shall have taken the actions to be taken by Seller at the Closing pursuant to Section 9.1 hereof. (f) Absence of Proceedings. No action, suit or proceeding shall be pending and no statute, rule or regulation and no injunction, order, decree or judgment of any court or Governmental Authority of competent jurisdiction shall be in effect that could reasonably be expected to prohibit, restrain, enjoin or restrict the consummation of the transactions contemplated by this Agreement. 30 (g) Material Adverse Effect. No Material Adverse Effect on the Company or SEMCO Material Adverse Effect shall have occurred or shall be reasonably expected to occur. (h) Operation and Maintenance and Administrative Services Agreement. Seller Division shall have duly executed and delivered the Operation and Maintenance and Administrative Services Agreement. (i) Special Contract. Seller Division shall have duly executed and delivered the Special Contract. (j) Gas Transmission Agreement. Seller shall have duly executed and delivered the Gas Transmission Agreement. (k) Bill of Sale and Assignment Agreement. Seller shall have duly executed and delivered a Bill of Sale and Assignment Agreement in substantially the form attached hereto as Exhibit D, transferring the Company Equity Interests (the "Bill of Sale and Assignment Agreement"). (l) Directors of the Company. Seller shall deliver duly executed resignations of the directors of the Company effective as of the Closing Date. (m) Certificate of Non Foreign Status. Seller shall deliver to Purchaser a certificate of non foreign status of Seller which meets the requirements of Treasury Regulation Section 1.445-2. (n) Tower License. Seller shall have granted Purchaser a non-terminable license substantially in the form of Exhibit G hereto (the "Tower License") to use the radio tower facilities listed on Section 8.4(n) of the Seller's Disclosure Schedule. (o) Gas Control Agreement. Seller Division shall have duly executed and delivered the Gas Control Agreement. (p) Certificates of Insurance. Seller shall have delivered to Purchaser certificates of insurance showing that Seller has in place insurance complying with the requirements set forth in Article V of the Operation and Maintenance and Administrative Services Agreement. (q) Reciprocal Easement and Joint Use Agreement. Seller Division shall have executed and delivered the Reciprocal Easement with Schedule 2.2 thereto properly completed. 31 ARTICLE IX Closing Section 9.1. Closing. The closing of the purchase and sale of the Company Equity Interests (the "Closing") will take place at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th Street, New York, New York 10019-5389 on the later of (a) November 30, 2003 and (b) the first Business Day that is five calendar days after all of the conditions specified in Article VIII have been satisfied or waived (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of such conditions), unless another time, date and place is agreed to in writing by the Parties. The date of the Closing is referred to in this Agreement as the "Closing Date." The Closing shall be effective for all purposes at 12 o'clock midnight, Alaska Time, on the Closing Date. At the Closing, the following events shall occur, each event being deemed to have occurred simultaneously with the other events: (a) Seller shall deliver to Purchaser (i) the Bill of Sale and Assignment Agreement; (ii) the certificate to be delivered pursuant to Section 8.4(b); (iii) the Operation and Maintenance and Administrative Services Agreement; (iv) the Special Contract; (v) the Gas Transmission Agreement; (vi) the Gas Control Agreement; (vii) the Tower License; and (viii) the Bill of Sale and Assignment Agreement; and (ix) the Reciprocal Easement; and (b) Purchaser shall deliver to Seller (i) an amount of cash equal to the Purchase Price, as adjusted pursuant to Section 3.2(a), by wire transferring such amount, in lawful money of the United States of America in immediately available funds, to such account in the United States of America as Seller shall have designated by written notice to Purchaser no less than three business days before the Closing Date; (ii) the certificate to be delivered pursuant to Section 8.3(b); (iii) the Operation and Maintenance and Administrative Services Agreement, duly executed by the Company; (iv) the Special Contract, duly executed by the Company; (v) the Gas Transmission Agreement, duly executed by the Company; (vi) the Gas Control Agreement, duly executed by the Company, and the related fee payment; (vii) the Tower License, duly executed by the Company, and the related fee payment; and (viii) the Reciprocal Easement, duly executed by the Company. ARTICLE X Termination Section 10.1. Termination. Subject to Section 10.2 hereof, this Agreement and the transactions contemplated hereby may be terminated and abandoned at any time prior to the Closing Date: (a) by mutual consent of Purchaser and Seller; or (b) by Purchaser or Seller at any time after 9 Months after the effective date of this Agreement (the "Termination Date") if the Closing shall not have occurred on or prior to such date; provided however, that the right to terminate this Agreement under this Section 10.1(b) shall not be available to any Party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before the Termination Date; or 32 (c) by either Seller or Purchaser, if (i) there has been a breach of any representation, warranty, covenant or agreement on the part of the Company or Seller (in the case of termination by Purchaser) or Purchaser (in the case of termination by Seller), which breach (A) will cause the conditions set forth in Sections 8.2 and 8.4 (in the case of termination by Purchaser) or Sections 8.2 and 8.3 (in the case of termination by Seller) not to be satisfied, and (B) shall not have been cured within 20 Business Days following receipt by the breaching party of written notice of such breach from the other party; or (ii) any event shall have occurred which makes it impossible for the conditions set forth in Article VIII hereof to be satisfied, provided that any termination pursuant to this clause (ii) shall not be effective until 20 Business Days after notice thereof is delivered by the party seeking to terminate to the other party, and shall be automatically rescinded if (1) such condition is solely for the benefit of the party receiving such notice and (2) such party, prior to such 20th Business Day, irrevocably waives satisfaction of such condition based on such event; or (d) by Purchaser or Seller if (i) any state or federal law, order, rule or regulation is adopted or issued, that has the effect, as supported by the written, reasoned opinion of outside counsel for such Party, of prohibiting the transactions contemplated under this Agreement or causing a Material Adverse Effect on such Party (or, in the case of the Purchaser, either a Material Adverse Effect on the Company or a SEMCO Material Adverse Effect), or if (ii) any court of competent jurisdiction in the United States or any state shall have issued an order, judgment or decree permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement or causing a Material Adverse Effect on such Party (or, in the case of the Purchaser, either a Material Adverse Effect on the Company or a SEMCO Material Adverse Effect) or, in the case of the Purchaser, a SEMCO Material Adverse Effect, and such order, judgment or decree shall have become final and nonappealable. Section 10.2. Limitation on Right to Terminate; Effect of Termination. (a) A Party shall not be allowed to exercise any right of termination pursuant to Section 10.1 if the event giving rise to the termination right shall be due to the willful failure of such Party seeking to terminate this Agreement to perform or observe in any material respect any of the covenants, or agreements hereof to be performed or observed by such Party. (b) If this Agreement is terminated as permitted under Section 10.1 hereof, such termination shall be without liability of or to any Party to this Agreement, or any shareholder, unitholder, director, officer, employee, agent, servant, consultant or representative of such Party; provided, however, that if such termination shall result from the willful failure of any Party to fulfill a condition to the performance of any other Party or to perform a covenant of this Agreement or from a material breach by any Party to this Agreement, then such Party shall (subject to the limitations set forth in Section 12.1(c) and Section 12.1(d)) be fully liable for any and all damages sustained or incurred by the other Party. If either Party to this Agreement resorts to legal proceedings to enforce this Agreement, the prevailing Party in such proceedings shall be entitled to recover all costs incurred by such Party including reasonable attorney's fees, in addition to any other relief to which such Party may be entitled. 33 ARTICLE XI Taxes Section 11 .1. Seller Tax Representations and Warranties. (a) Seller represents and warrants with respect to the Company that, except as set forth or disclosed in Section 11.1(a) of Seller's Disclosure Schedule (i) all Tax Returns in respect of the Company and the Transmission Business required to be filed have been filed or requests for extensions have been timely filed, (ii) all such Tax Returns are true and correct in all material respects, and (iii) all Taxes shown to be due on such Tax Returns have been timely paid in full. Except as set forth in Section 11.1(a) of the Seller's Disclosure Schedule, all ad valorem taxes that are due and payable have been paid, and there is not any property that has been omitted from the assessment rolls of the applicable taxing authorities. Except as set forth in Section 11.1(a) of Seller's Disclosure Schedule, no notice of deficiency or assessment has been asserted, proposed or threatened from any Governmental Authority with respect to liabilities for Taxes of the Company or relating to the Company Assets that have not been fully paid or finally settled, and any such deficiency shown in Section 11.1(a) of Seller's Disclosure Schedule is being contested in good faith through appropriate proceedings. Except as set in Section 11.1(a) of Seller's Disclosure Schedule, there is not in force any extension of time with respect to the due date for the filing of any Tax Return and there are no outstanding agreements or waivers extending the applicable statutory periods of limitation for Taxes of the Company for any period of time. Except as set forth in Section 11.1(a) of Seller's Disclosure Schedule, no audits or other administrative proceedings or court proceedings are presently pending with regard to any Taxes or Tax Returns of the Company, and neither the Seller nor the Company has any knowledge of any threatened action, audit, or administrative or court proceeding with respect to any Taxes or Tax Returns of the Company. Except as set forth in Section 11.1(a) of the Seller's Disclosure Schedule, no claim has ever been made by a Governmental Authority in a jurisdiction where the Company does not file Tax Returns that it is or may be subject to Taxes in that jurisdiction, and the Company has not entered into any agreement or arrangement with any Governmental Authority that requires the Company to take any action or refrain from taking any action. (b) Seller and the Company are and will be members of an "affiliated group" within the meaning of Section 1504 of the Code as of the Closing Date. Except as set forth in Section 11.1(b) of the Seller's Disclosure Schedule, the Company has no liability for the Taxes of any Person (other than the Seller and the Company) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract, or otherwise. (c) Except as set forth in Section 11.1(c) of Seller's Disclosure Schedule, neither Seller nor the Company is a party to any allocation, indemnification or sharing agreement, whether written or unwritten, regarding Taxes with any Person. 34 (d) Seller is not a nonresident alien individual or foreign corporation within the meaning of Section 897 of the Code and Purchaser is not required to withhold Tax on the Purchase Price by reason of Section 1445 of the Code or any other provision. (e) Except as set forth in Section 11.1(e) of Seller's Disclosure Schedule, there are no powers of attorney in effect relating to Taxes of the Company. (f) Except as set forth in Section 11.1(f) of Seller's Disclosure Schedule, there is no dispute or claim as to the Tax liability of any other person as to which the Company has an indemnification obligation. (g) The Company has not participated in any transaction required to be reported under Treasury Regulation Section 1.6011-4T or a successor or predecessor thereto. Section 11.2. Tax Covenants and Indemnification. (a) Transfer Taxes. Seller shall be liable for all state and local transfer, sales, use, documentary, recording, registration, stamp transfer or similar Taxes, assessments or fees arising from the LLC Conversion. Seller and Purchaser shall each be liable for 50% of all state and local transfer Taxes arising from the transactions contemplated by this Agreement. Except as provided in the foregoing sentences, Purchaser shall be liable for all state and local, sales, use, documentary, recording, registration, stamp transfer or similar Taxes, assessments or fees arising from the transactions contemplated by this Agreement. (b) Information. Seller and Purchaser will make available to each other, and to any Governmental Authority, all information, records, or documents relating to the liability or potential liability for Pre-Closing Taxes that may be reasonably requested by a Party and will preserve such information, records or documents until the expiration of any applicable statute of limitations or extensions thereof, provided Seller and Purchaser shall reserve the confidentiality of any such information, records or documents. (c) Seller Indemnification. Seller shall be responsible for and shall indemnify and hold harmless Purchaser, its subsidiaries and the Company from and against any and all Tax claims, including any reasonable out-of-pocket costs and expenses ("Tax losses"), resulting from, arising out of or relating to: (i) any and all Taxes imposed on or incurred by Purchaser or the Company as a result of a breach of the representations and warranties made in Section 11.1 of this Article; (ii) any and all Pre-Closing Taxes imposed on, incurred by or attributed to the Company, including Taxes arising from Section 2.2, except to the extent any such Taxes are taken into account in determining the adjustment to the Purchase Price pursuant to Section 3.2 and (iii) any liability imposed on the Company or any of its Subsidiaries as a result of its membership in an affiliated, consolidated, combined or unitary group for Tax purposes, other than a group the common parent of which was the Company (pursuant to Treas. Reg. ss. 1.1502-6 or any analogous state, local or foreign law or regulation) for any taxable period or portion thereof ending on or prior to the Closing Date. 35 (d) Purchaser Indemnification. Purchaser shall be responsible for and shall indemnify and hold harmless Seller from and against any and all Tax claims or Tax losses resulting from, arising out of or relating to any and all Post-Closing Taxes imposed on or incurred by the Company. (e) Procedures for Indemnification. The procedures for indemnification pursuant to this Article XI shall be conducted in a manner consistent with Section 12.1 hereof. (f) Proration of Tax Items. The Parties agree that for purposes of allocating Tax items of the Company between Seller and Purchaser for the Tax year that includes the Closing Date, such Tax items for such Tax year shall be apportioned between Seller and Purchaser based upon the actual operations of the Company during the portion of such period ending on the Closing Date and the portion of such period beginning on the day following the Closing Date, and each portion of such period shall be deemed to be a taxable period (whether or not it is in fact a taxable period); provided, that ad valorem Taxes shall be prorated on a daily basis. (g) Filing Responsibility. Purchaser and the Company shall be responsible for filing all Tax Returns and paying all Taxes due with respect to periods ending after the Closing Date. To the extent the law permits or requires a short period return for the period or portion thereof ending on or before the Closing Date, Seller shall be responsible for filing such returns and paying all Taxes due with respect to such period. Purchaser will take such steps as are reasonably requested by Seller so that Seller will have the authority necessary for Seller to be able to execute and timely file the Tax Returns required to be filed by Seller. (h) Tax Refunds and Tax Benefits. Any Tax refunds that are received by Purchaser or the Company, and any amounts credited against Tax to which Purchaser or the Company become entitled, that relate to Tax periods or portions thereof ending on or before the Closing Date shall be for the account of Seller, and Purchaser shall pay over to Seller any such refund or the amount of any such credit within fifteen (15) days after receipt or entitlement thereto. In addition, to the extent that a claim for refund or a proceeding results in a payment or credit against any Tax by a Governmental Authority to the Purchaser or the Company of any amount accrued as of the Closing Date, Purchaser shall pay such amount to Seller within fifteen (15) days after receipt or entitlement thereto. (i) Control of Tax Audits. Seller shall have the right, at its own expense, to control any audit or examination by any taxing authority ("Tax Audit"), initiate any claim for refund, contest, resolve and defend against any assessment, notice of deficiency, or other adjustment or proposed adjustment relating to any and all Taxes for any taxable period ending on or before the Closing Date and relating to the Company. With respect to the items described in the preceding sentence, Seller shall consult with Purchaser with respect to the resolution of any such issue that would adversely affect Purchaser, and with respect to Taxes other than income Taxes will not settle any such issue, or file any amended return relating to such issue, without the consent of Purchaser, which consent shall not be unreasonably withheld. Seller will not enter into any binding agreement with any taxing authority with respect to Taxes (other than income Taxes) for Tax periods ending or beginning after the Closing Date. Purchaser shall have the right, at its own expense, to control any other Tax Audit, initiate any other claim for refund, and contest, resolve and defend against any other assessment, notice of deficiency, or other adjustment or proposed adjustment relating to any Taxes for any taxable period beginning 36 before the Closing Date and ending after the Closing Date, provided, that Purchaser shall consult with Seller with respect to the resolution of any issue that would adversely affect Seller, and, with respect to Taxes, other than income Taxes, will not settle any such issue, or file any amended return relating to any such issue, without the consent of Seller, which consent shall not unreasonably be withheld. Where consent to a settlement is withheld by the other Party pursuant to this Section, such other Party may continue or initiate any further proceedings at its own expense, provided that the liability of the first Party, after giving effect to this Agreement, shall not exceed the liability that would have resulted from the settlement or amended return. (j) Cooperation on Tax Matters. (i) Purchaser, the Company and Seller shall use reasonable efforts to cooperate fully, as and to the extent reasonably requested by the other Party, in connection with the filing of Tax Returns pursuant to this Agreement and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other Party's request) the preservation of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Seller agrees (A) to retain all books and records in its possession with respect to Tax matters pertinent to the Company relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by Purchaser or Seller, any extensions thereof) of the respective taxable periods, and to abide by all record retention requirements or agreements entered into with any taxing authority, and (B) to give the other Party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other Party so requests, Seller shall allow Purchaser to take possession of such books and records. (ii) Purchaser and Seller further agree, upon request, to provide the other Party with all information that either Party may be required to report pursuant to Section 6043 of the Code and all Treasury Regulations promulgated thereunder with respect to the transactions contemplated by this Agreement. (k) Survival of Obligations. The obligations of the Parties set forth in this Article XI shall be unconditional and absolute and shall remain in effect until 30 days after the expiration of the applicable statute(s) of limitations. ARTICLE XII Indemnification Section 12.1. Indemnification. (a) Subject to Section 12.1(c), and except for those matters (i) set forth in Article XI which shall be governed by the terms of Article XI and (ii) set forth in Section 13.3 which shall be governed by the terms of Section 13.3, Purchaser shall indemnify, defend and hold harmless the Seller Indemnitees from and against any and all claims, liabilities, losses, 37 causes of actions, costs and expenses (including, without limitation, involving theories of negligence or strict liability and including court costs and attorneys' fees) ("Losses") asserted against, resulting from, imposed upon or incurred by any of the Seller Indemnitees as a result of, or arising out of, the breach of any of the representations and warranties (without giving effect to any qualifications as to materiality contained therein), covenants or agreements of Purchaser contained in this Agreement, including any failure of the certificate delivered pursuant to Section 8.3(b) to be true and correct. (b) (i) Subject to Section 12.1(d), and except for those matters (A) set forth in Article XI which shall be governed by the terms of Article XI and (B) set forth in Section 13.3, Seller shall indemnify, defend and hold harmless the Purchaser Indemnitees from and against all Losses asserted against, resulting from, imposed upon or incurred by any of the Purchaser Indemnitees as a result of, or arising out of the breach of any of the representations and warranties (without giving effect to any qualifications as to materiality contained therein other than the "Material Adverse Effect" qualification contained in Section 4.9(h)), covenants or agreements of Seller contained in this Agreement, including any failure of the certificate delivered pursuant to Section 8.4(b) to be true and correct. (ii) Seller shall indemnify, defend and hold harmless the Purchaser Indemnitees from and against all Losses asserted against, resulting from, imposed upon or incurred by any of the Purchaser Indemnitees as a result of, or arising out of assets or liabilities, including the Excluded Assets and Excluded Obligations, which are not Company Assets or which are not being transferred to Purchaser indirectly through the purchase of the Company Equity Interests. Seller's indemnity obligations set forth in this Section 12.1(b)(ii) shall not be subject to any thresholds, de minimus amounts, deductibles or caps pursuant to Section 12.1(d). (c) Notwithstanding anything to the contrary in this Agreement, the liability of Purchaser under this Agreement and any documents delivered in connection herewith or contemplated hereby (other than the Operating Documents) shall be limited as follows: (i) In no event shall any amounts be recovered from Purchaser under Section 12.1(a) or otherwise for any matter for which a Claim Notice is not delivered to Purchaser, in the case of indemnity for breach of a representation, warranty, covenant or agreement, prior to the close of business on the date of termination of such representation, warranty, covenant or agreement pursuant to Section 12.1(c)(ii). (ii) Except as otherwise specified, the representations, warranties, covenants and agreements of Purchaser set forth in this Agreement shall survive the Closing for a period of two years and shall terminate at 5:00 p.m., local time in Alaska, on the second anniversary of the Closing Date; provided, however, that any such representation, warranty, covenant or agreement that is the subject of a proper Claim Notice delivered in good faith shall survive with respect only to the specific matter described in such Claim Notice until the earlier to occur of (A) the date on which a final nonappealable resolution of the matter described in such Claim Notice has been reached or (B) the date on which the matter described in such Claim Notice has otherwise reached final resolution. 38 (iii) Notwithstanding anything to the contrary in this Agreement other than Section 12.1(b)(ii), Article XI and Section 13.3, in no event shall Purchaser indemnify the Seller Indemnitees, or be otherwise liable in any way whatsoever to the Seller Indemnitees, for any Losses until the Seller Indemnitees have suffered Losses in the aggregate in excess of a threshold in an amount equal to $500,000, after which point Purchaser will be obligated to indemnify the Seller Indemnitees from and against all Losses; provided that the Seller Indemnitees shall not submit to Purchaser a claim for any Loss, the value of which is below $25,000. (iv) Notwithstanding anything to the contrary herein, in no event shall Purchaser indemnify the Seller Indemnitees, or be otherwise liable in any way whatsoever to the Seller Indemnitees, for any Losses in excess of an amount equal to $10,000,000. (d) Notwithstanding anything to the contrary in this Agreement other than Section 12.1(b)(ii) and Article XI, the liability of Seller under this Agreement and any documents delivered in connection herewith or contemplated hereby (other than the Operating Documents) shall be limited as follows: (i) In no event shall any amounts be recovered from Seller under Section 12.1(b) or otherwise for any matter for which a Claim Notice is not delivered to Seller in the case of indemnity for breach of a representation, warranty, covenant or agreement, prior to the close of business on the date of termination of such representation, warranty covenant or agreement pursuant to Section 12.1(d)(ii). (ii) The representations, warranties and covenants of Seller set forth in this Agreement shall survive the Closing for a period of two years and shall terminate at 5:00 p.m., local time in Alaska, on the second anniversary of the Closing Date; provided, however, that any such representation, warranty, covenant or agreement that is the subject of a proper Claim Notice delivered in good faith shall survive with respect only to the specific matter described in such Claim Notice until the earlier to occur of (A) the date on which a final nonappealable resolution of the matter described in such Claim Notice has been reached or (B) the date on which the matter described in such Claim Notice has otherwise reached final resolution. (iii) Notwithstanding anything to the contrary in this Agreement other than Section 12.1(b)(ii), Article XI and Section 13.3, in no event shall Seller indemnify the Purchaser Indemnitees, or be otherwise liable in any way whatsoever to the Purchaser Indemnitees, for any Losses until the Purchaser Indemnitees have suffered Losses in the aggregate in excess of a threshold in an amount equal to $500,000, after which point Seller will be obligated to indemnify the Purchaser Indemnitees from and against all Losses; provided that the Purchaser Indemnitees shall not submit to Seller a claim for any Loss, the value of which is below $25,000. 39 (iv) Notwithstanding anything to the contrary herein other than Section 12.1(b)(ii), Article XI and Section 13.3, in no event shall Seller indemnify the Purchaser Indemnitees, or be otherwise liable in any way whatsoever to the Purchaser Indemnitees, for any Losses in excess of an amount equal to the Purchase Price (before giving effect to any adjustments provided for pursuant to this Agreement). (v) Seller shall have no liability for any claim to the extent that such claim is covered by insurance maintained by or for the benefit of Seller (including any such insurance coverage applicable to the Transmission Business, the benefit of which the Company will realize) and Purchaser or the Company actually receive the proceeds of such insurance. (vi) Seller shall have no liability in respect of its representation or warranty contained in Section 4.9(h) in respect of any event, circumstance or condition known to Purchaser or disclosed by Seller to Purchaser in writing prior to the Closing. (e) NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, IN NO EVENT SHALL A PARTY BE LIABLE FOR ANY EXEMPLARY, PUNITIVE, SPECIAL, INDIRECT, CONSEQUENTIAL, REMOTE OR SPECULATIVE DAMAGES; provided, however, that if an Indemnified Party is held liable to a third party for any of such damages and Purchaser or Seller, as the case may be, is obligated to indemnify such Indemnified Party for the matter that gave rise to such damages, then Purchaser or Seller, as the case may be, shall be liable for, and obligated to reimburse such Indemnified Party for such damages. (f) All claims for indemnification under Sections 12.1(a) or 12.1(b) shall be asserted and resolved pursuant to this Section 12.1(f). Any Person claiming indemnification hereunder is hereinafter referred to as the "Indemnified Party" and any Person against whom such claims are asserted hereunder is hereinafter referred to as the "Indemnifying Party." In the event that any Losses are asserted against or sought to be collected from an Indemnified Party by a third party, said Indemnified Party shall with reasonable promptness provide to the Indemnifying Party a Claim Notice. The Indemnifying Party shall not be obligated to indemnify the Indemnified Party with respect to any such Losses if the Indemnified Party fails to notify the Indemnifying Party thereof in accordance with the provisions of this Agreement in reasonably sufficient time so that the Indemnifying Party's ability to defend against the Losses is not prejudiced. The Indemnifying Party shall have 30 calendar days from the personal delivery or receipt of the Claim Notice (the "Notice Period") to notify the Indemnified Party (i) whether or not it disputes the liability of the Indemnifying Party to the Indemnified Party hereunder with respect to such Losses and/or (ii) whether or not it desires, at the sole cost and expense of the Indemnifying Party, to defend the Indemnified Party against such Losses; provided, however, that any Indemnified Party is hereby authorized prior to and during the Notice Period to file any motion, answer or other pleading that it shall deem necessary or appropriate to protect its interests or those of the Indemnifying Party (and of which it shall have given notice and opportunity to comment to the Indemnifying Party) and not prejudicial to the Indemnifying 40 Party. In the event that the Indemnifying Party notifies the Indemnified Party within the Notice Period that it desires to defend the Indemnified Party against such Losses, the Indemnifying Party shall have the right to defend all appropriate proceedings, and with counsel of its own choosing, which proceedings shall be promptly settled or prosecuted by them to a final conclusion. If the Indemnified Party desires to participate in, but not control, any such defense or settlement it may do so at its sole cost and expense. If requested by the Indemnifying Party, the Indemnified Party agrees to use reasonable efforts to cooperate with the Indemnifying Party and its counsel in contesting any Losses that the Indemnifying Party elects to contest or, if appropriate and related to the claim in question, in making any counterclaim against the Person asserting the third party Losses, or any cross-complaint against any Person. No claim may be settled or otherwise compromised without the prior written consent of the Indemnifying Party, and no claim may be settled or otherwise compromised without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld, conditioned or delayed) unless the sole relief provided is monetary damages that are paid in full by the Indemnifying Party. (g) The rights, remedies and obligations of the Purchaser Indemnitees and the Seller Indemnitees set forth in this Section 12.1 and Article XI will be the exclusive rights, remedies and obligations of such Persons after the Closing with respect to this Agreement, the events giving rise to this Agreement and the transactions provided for herein or contemplated hereby or thereby. (h) WITHOUT LIMITING OR ENLARGING THE SCOPE OF THE INDEMNIFICATION OBLIGATIONS SET FORTH IN THIS AGREEMENT, AN INDEMNIFIED PARTY SHALL BE ENTITLED TO INDEMNIFICATION HEREUNDER IN ACCORDANCE WITH THE TERMS HEREOF, REGARDLESS OF WHETHER THE LOSS OR CLAIM GIVING RISE TO SUCH INDEMNIFICATION OBLIGATION IS THE RESULT OF THE SOLE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY, VIOLATION OF ANY LAW OR OTHER LEGAL FAULT OF OR BY SUCH INDEMNIFIED PARTY. THE PARTIES AGREE THAT THIS PARAGRAPH CONSTITUTES A CONSPICUOUS LEGEND. Section 12.2. Disclaimer Regarding Transmission Business. Except as otherwise expressly provided in this Agreement, Purchaser ACKNOWLEDGES THAT SELLER HAS NOT MADE, AND SELLER HEREBY EXPRESSLY DISCLAIMS AND NEGATES, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, RELATING TO THE CONDITION OF ANY REAL PROPERTY, EQUIPMENT, INVENTORY, MACHINERY, FIXTURES AND PERSONAL PROPERTY CONSTITUTING PART OF THE COMPANY ASSETS INCLUDING, WITHOUT LIMITATION, (A) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (B) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, (C) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, (D) ANY RIGHTS OF PURCHASER UNDER APPROPRIATE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION OR RETURN OF THE PURCHASE PRICE, (E) ANY IMPLIED OR EXPRESS WARRANTY OF FREEDOM FROM VICES OR DEFECTS, WHETHER KNOWN OR UNKNOWN, (F) ANY IMPLIED OR EXPRESS WARRANTY OF FREEDOM FROM PATENT OR TRADEMARK INFRINGEMENT, (G) ANY AND ALL IMPLIED WARRANTIES EXISTING UNDER APPLICABLE LAW NOW OR HEREAFTER IN EFFECT, AND (H) ANY IMPLIED OR EXPRESS WARRANTY REGARDING ENVIRONMENTAL LAWS, THE RELEASE OF 41 MATERIALS INTO THE ENVIRONMENT OR PROTECTION OF THE ENVIRONMENT OR HEALTH, IT BEING THE EXPRESS INTENTION OF PURCHASER AND SELLER THAT (EXCEPT TO THE EXTENT EXPRESSLY PROVIDED IN ARTICLES IV AND XI) THE COMPANY ASSETS SHALL BE INDIRECTLY CONVEYED TO PURCHASER "AS IS," "WHERE IS" AND IN THEIR PRESENT CONDITION AND STATE OF REPAIR AND PURCHASER REPRESENTS TO SELLER THAT PURCHASER HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS WITH RESPECT TO THE COMPANY ASSETS AS PURCHASER DEEMS APPROPRIATE AND PURCHASER WILL ACCEPT THE COMPANY ASSETS "AS IS," "WHERE IS" AND IN THEIR PRESENT CONDITION AND STATE OF REPAIR. ARTICLE XIII Miscellaneous Section 13.1. Modification. This Agreement may be modified, amended or supplemented in any manner and at any time only by a written instrument executed by Purchaser and Seller. Section 13.2. Entire Agreement. This Agreement supersedes any and all other agreements, oral or written, among the Parties in respect of the subject matter of this Agreement. Section 13.3. Expenses. Whether or not the transactions contemplated herein shall be consummated, each Party shall (except as otherwise specifically provided herein) pay its own expenses incident to the preparation and performance of this Agreement, including broker's and finder's fees and commissions; and each Party shall indemnify and hold harmless the other Party with respect to broker's and finder's fees and commissions incurred by the indemnifying party in connection with the transactions contemplated by this Agreement. Section 13.4. Extension and Waiver. The Parties may, to the extent legally allowed (a) extend the time for the performance of any of the obligations or other acts of the other Parties; (b) waive any inaccuracies by the other Party in the representations and warranties contained herein or in any document delivered pursuant hereto; and (c) waive compliance by the other Party with any of the agreements or conditions contained herein. Any agreement on the part of a Party to any such extension or waiver shall be valid only if set forth in a written instrument signed by the Party or Parties to be bound thereby, but such extension, waiver or failure to insist on strict compliance with an obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. The failure of any Party to assert any of its rights hereunder shall not constitute a waiver of such rights. Section 13.5. Further Actions. From time to time after the Closing Date, each Party shall execute and deliver such other certificates, agreements, conveyances, certificates of title, and other documents and take such other actions as may reasonably be requested by the other Parties in order to consummate or implement the transactions contemplated by this Agreement. Section 13.6. Notices. Any and all notices or other communications required or permitted under this Agreement shall be given in writing and delivered in person or sent by United States certified or registered mail, 42 postage prepaid, return receipt requested, or by overnight express mail, or by telex, facsimile or telecopy to the address of such Party set forth below. Any such notice shall be effective upon receipt or three days after placed in the mail, whichever is earlier. If to Purchaser: Atlas Pipeline Partners, L.P. 311 Rouser Road Moon Township, PA 15108 Attention: President Telecopy Number: (215) 546-4785 with copies to: APC Acquisition, LLC 311 Rouser Road Moon Township, PA 15108 Telecopy Number: (215) 546-4785 and Vinson & Elkins L.L.P. 2300 First City Tower 1001 Fannin Houston, TX 77002-6760 Attention: Douglas Bland Telecopy Number: (713) 615-5649 If to Seller: SEMCO Energy, Inc. 405 Water Street Port Huron, MI 48060 Attention: Gene Dubay Telecopy Number: (810) 989-4099 with copies to: SEMCO Energy, Inc. 28470 13 Mile Road Farmington Hills, MI 48334 Attention: Mark Prendeville Telecopy Number: (248) 702-6304 and 43 LeBoeuf, Lamb, Greene & MacRae, L.L.P. 125 West 55th Street New York, NY 10019-5389 Attention: Thomas J. Moore Telecopy Number: (212) 424-8000 Any Party may, by notice so delivered, change its address for notice purposes hereunder. Section 13.7. Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned, by operation of law or otherwise, by any Party without the prior written consent of the other Party; provided, however, (i) Purchaser may assign its right to purchase the Company Equity Interests to any Person in which it owns an equity interest and with respect to which it has the right to appoint 50% or more of the members of the board of directors, management committee or equivalent governing body, but no such assignment shall affect Purchaser's obligations hereunder, and (ii) in the event of any such assignment by a Party by operation of law without the consent of the other Party as required above, such other Party may consent to such assignment after it has occurred and, in such event, this Agreement and all the provisions hereof shall be binding upon the Person receiving such assignment by operation of law. Section 13.8. No Third Party Beneficiaries. Nothing in this Agreement shall provide any benefit to any third party or entitle any third party to any claim, cause of action, remedy or right of any kind, it being the intent of the Parties that this Agreement shall not be construed as a third party beneficiary contract; provided, however, that the indemnification provisions in Section 12.1 shall inure to the benefit of the Purchaser Indemnitees and the Seller Indemnitees as provided therein. Section 13.9. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any adverse manner to either Party. Upon such determination that any term or other provisions is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. Section 13.10. Counterparts. This Agreement may be executed in multiple counterparts, all of which shall constitute one and the same instrument. Section 13.11. Applicable Law; Alternative Dispute Resolution. (a) This Agreement shall be governed by and construed in accordance with the domestic laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 44 (b) Any dispute arising under this Agreement or otherwise in connection with or relating to the transactions contemplated hereby shall be resolved pursuant to this Section 13.11(b): (i) Any Party has the right to request the other to meet to discuss a dispute. The Party requesting the meeting will give at least 10 Business Days notice in writing of the subject it wishes to discuss, provide a written statement of the dispute, and designate an officer of the Party with complete power to resolve the dispute to attend the meeting. Within five Business Days after receipt to such request, the Party receiving the request will provide a responsive written statement and will designate an officer of the Party who will attend the meeting with complete power to resolve the dispute. (ii) If the meeting fails to resolve the dispute by a signed agreement among the officers, either Party may submit the dispute for binding arbitration administered by the American Arbitration Association ("AAA") under its Commercial Arbitration Rules before a single arbitrator, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (iii) The Parties agree to make discovery and disclosure of all matters relevant to the dispute to the extent and in the manner provided by the Federal Rules of Civil Procedure. The arbitrator will rule on all requests for discovery and disclosure and discovery shall be completed within 90 days of the date of the first notice pursuant to Section 13.11(b)(i). The arbitrator may consider any matter relevant to the subject to the dispute and shall follow the statutes and decisions of the substantive law of New York relevant to the subject. The arbitrator shall not have the authority or power to alter, amend or modify any of the terms and conditions of this Agreement. The arbitrator shall issue a final ruling within 180 days of the date of the first notice pursuant to Section 13.11(b)(i). (iv) The ruling of the arbitrator shall be in writing and signed and shall be final and binding upon the Parties. The fees and expenses of counsel, witnesses and employees of the Parties and all other costs and expenses incurred exclusively for the benefit of the Party incurring the same shall be borne by the Party incurring such fees and expenses. All other fees and expenses including, without limitation, compensation for the judge, shall be divided equally between the Parties. All meetings and arbitrations held pursuant to this Section 13.11 shall take place in the Borough of Manhattan, New York, New York. Section 13.12. Publicity. From the date hereof until the Closing Date, all press releases or other public communications of any nature whatsoever relating to the transactions contemplated by this Agreement and the Operative Documents, and the method of the release for publication thereof, shall be subject to the prior mutual approval of Seller and Purchaser which approval shall not be unreasonably withheld by any Party; provided, however, that, nothing herein shall prevent any party from publishing such press releases or other public communications as such Party may consider necessary in order to satisfy such Party's legal or contractual obligations after such consultation with the other Parties hereto as is reasonable under the circumstances. 45 IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed as of the date first above written. SELLER SEMCO ENERGY, INC. By: ____________________________________ Name: Marcus Jackson Title: Chairman, President and Chief Executive Officer PURCHASER ATLAS PIPELINE PARTNERS, L.P. By: ATLAS PIPELINE PARTNERS GP, LLC By: __________________________ Name: Michael L. Staines Title:President 46 EXHIBIT A OPERATION AND MAINTENANCE AND ADMINISTRATIVE SERVICES AGREEMENT by and between ALASKA PIPELINE COMPANY, LLC and ENSTAR NATURAL GAS COMPANY, A DIVISION OF SEMCO ENERGY, INC. Dated as of _________, 2004 TABLE OF CONTENTS
ARTICLE I Definitions.................................................................................1 Section 1.1 Definitions............................................................................1 ARTICLE II Services to Be Provided.....................................................................5 Section 2.1 Operation and Maintenance Services.....................................................5 Section 2.2 Capital Improvements Services..........................................................6 Section 2.3 Facilities Available to Operator.......................................................6 ARTICLE III Operator's Covenants........................................................................6 Section 3.1 Operator's Ability to Provide Services.................................................6 Section 3.2 Standards for the Provision of Services................................................6 Section 3.3 No Breach..............................................................................7 Section 3.4 Consents...............................................................................7 ARTICLE IV Capital Improvements........................................................................7 Section 4.1 Capital Improvements Budget............................................................7 Section 4.2 Emergency Capital Improvements.........................................................8 Section 4.3 Making Capital Improvements............................................................8 Section 4.4 Scope of Capital Improvements Services.................................................8 Section 4.5 Status Reporting, Adjustments to Budgets...............................................9 Section 4.6 Rights in Data and Work................................................................9 Section 4.7 Susitna River Crossing.................................................................9 ARTICLE V Service Term, Suspension and Early Termination..............................................9 Section 5.1 Service Term; Extension of Service Term................................................9 Section 5.2 Operator's and Owner's Right to Suspend Performance or to Terminate the Agreement.....10 Section 5.3 Transfer of Parts, Supplies and Consumables...........................................10 Section 5.4 Cooperation in Connection with Expiration or Termination..............................10 ARTICLE VI Compensation...............................................................................11 Section 6.1 Compensation for Operation and Maintenance Services...................................11 Section 6.2 Adjustment of Monthly O&M Payment on Change of Law....................................12 Section 6.3 Reimbursement for Capital Improvements Services.......................................12 ARTICLE VII Billing and Payment of Costs Services......................................................12 Section 7.1 Invoices for Services.................................................................12 Section 7.2 Resolution of Disputes of Invoices....................................................12 Section 7.3 Owner's Audit Rights..................................................................13 ARTICLE VIII Dispute Resolution.........................................................................13 Section 8.1 General...............................................................................13 ARTICLE IX Administration of Agreement................................................................14 Section 9.1 Contract Administration Officers......................................................14 Section 9.2 Replacement of Contract Administration Officers.......................................14
ARTICLE X Confidentiality of Information.............................................................15 Section 10.1 General...............................................................................15 Section 10.2 Operator's Obligations................................................................15 Section 10.3 Owner's Obligations...................................................................15 Section 10.4 Compulsory Disclosure.................................................................15 Section 10.5 Injunction............................................................................16 ARTICLE XI Relationship BETWEEN the Parties...........................................................16 Section 11.1 No Joint Venture......................................................................16 Section 11.2 Certain Labor Matters.................................................................16 ARTICLE XII Regulatory Matters.........................................................................17 Section 12.1 Compliance with Regulatory Requirements...............................................17 ARTICLE XIII Indemnification; Release; Limit on Liability...............................................17 Section 13.1 Indemnification by Operator...........................................................17 Section 13.2 Indemnification by Owner..............................................................17 Section 13.3 Procedures............................................................................18 Section 13.4 Indemnification Payments..............................................................18 Section 13.5 Survival..............................................................................18 Section 13.6 Release and Limit on Liability........................................................18 ARTICLE XIV Books and records..........................................................................19 Section 14.1 Maintenance of Books and Records......................................................19 Section 14.2 Ownership of Books and Records........................................................19 ARTICLE XV Required Insurance.........................................................................20 Section 15.1 Required Insurance....................................................................20 Section 15.2 Owner's Property Insurance............................................................21 Section 15.3 Provision of Owner's Insurance By Operator............................................21 ARTICLE XVI Miscellaneous Provisions...................................................................21 Section 16.1 Agency of Operator....................................................................21 Section 16.2 Force Majeure.........................................................................22 Section 16.3 Notices...............................................................................22 Section 16.4 Successors and Assigns................................................................23 Section 16.5 Survival..............................................................................23 Section 16.6 Signatures, Counterparts..............................................................23 Section 16.7 Amendments............................................................................23 Section 16.8 Governing Law.........................................................................23 Section 16.9 Entire Agreement......................................................................24 Section 16.10 Negotiated Agreement..................................................................24 Section 16.11 Waiver................................................................................24 Section 16.12 Severability..........................................................................24 Section 16.13 No Third Party Beneficiaries..........................................................24
ii Exhibits and Schedules - ---------------------- Exhibit A Description of Pipeline System Exhibit B Categories of O&M Services Costs and Expenses Schedule 4.1 2003 and 2004 Capital Improvement Budget [2003 Capital Improvement Budget attached, 2004 Capital Improvement Budget to be attached at Closing] iii OPERATION AND MAINTENANCE AND ADMINISTRATIVE SERVICES AGREEMENT This OPERATION AND MAINTENANCE AND ADMINISTRATIVE SERVICES AGREEMENT (this "Agreement") is entered into as of ____________, 2004, by and between Alaska Pipeline Company, LLC, a Delaware limited liability company ("Owner"), and the ENSTAR Natural Gas Company, a Division of SEMCO Energy, Inc., a Michigan corporation ("Operator"). Recitals Owner owns the Pipeline System and provides natural gas transportation and related services to Operator and may in the future provide natural gas transmission and related services to other customers (the "Transmission "). Owner desires to retain Operator to provide certain services to Owner in respect of the operation and maintenance of the Pipeline System and in respect of the administration of the Transmission Business, and Operator is willing to do so on the terms and subject to the conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I Definitions Section 1.1. Definitions. The following capitalized terms when used herein shall have the following meanings: "AAA" is defined in Section 8.1(b). "Accepted Gas Pipeline Practices" shall mean those practices, methods and acts that (i) are generally engaged in by a significant portion of the natural gas pipeline industry during the term of this Agreement with respect to assets and facilities having similar characteristics to the Facilities and reasonably accounting for local conditions and (ii) which, in the exercise of reasonable judgment in light of the facts known or that reasonably should have been known at the time a decision is made, would be expected to accomplish a desired result at a reasonable cost consistent with good business practices, reliability, safety, environmental protection and expedition. Accepted Gas Pipeline Practices are not intended to be limited to the optimum practice, method or act to the exclusion of others, but rather to those practices, methods and acts generally engaged in by a significant portion of the natural gas pipeline industry in the relevant geographic region during the term of this Agreement and include taking reasonable steps to provide for: (a) adequate materials, resources and supplies being available to meet the needs of the Pipeline System under reasonably anticipated conditions; (b) sufficient operating personnel being available, adequately experienced and trained to operate the Pipeline System properly and efficiently, and such maintenance and repairs being performed by knowledgeable, trained and experienced personnel utilizing proper equipment, tools and procedures; (c) appropriate monitoring and testing being performed to determine that equipment is functioning as designed and can reasonably be expected to function properly under reasonably anticipated conditions; and (d) equipment being operated in a manner safe to workers, the general public, the environment, and the Facilities. "Annual Capital Improvements Budget" is defined in Section 4.1. "Business Day" shall mean any day except Saturday, Sunday and any other day on which banking institutions located in the City of New York, New York or the City of Anchorage, Alaska, are required or authorized to close. "Capital Improvements" shall mean replacements of or additions to the Facilities that are of a nature that the cost thereof is appropriately capitalized under applicable regulatory accounting rules. "Capital Improvements Services" is defined in Section 2.2. "Company" is defined in Section 10.1. "Confidential Information" is defined in Section 10.1. "Contract Administration Officers" is defined in Section 9.1. "CPI Inflator" shall mean the quotient obtained by dividing the Inflation Index for the calendar year immediately preceding the year for which the Monthly O&M Payment is to be determined by the Inflation Index for calendar year 2003. "Direct Costs" shall mean the costs or expenses actually incurred by Operator directly attributable to the provision of Services pursuant to this Agreement, including, but not limited to: (i) the salary and benefits for personnel performing Services (calculated using Operator's standard loading methodology and in compliance with applicable Laws and Governmental Approvals), (ii) the cost of rental of offices and related facilities occupied and used by Operator in the performance of Services, (iii) the cost of supplies, materials and other goods purchased and consumed by Operator in the performance of Services, (iv) the cost to Operator of any outside vendor services provided to it in order for Operator to perform Services, and (v) insurance and Tax costs; provided, however, that "Direct Costs" shall not include any costs and expenses that comprise part of the Indirect Costs. 2 "Effective Date" shall mean the date of this Agreement. "Facilities" shall mean the pipelines, compressors, compressor stations, metering and measurement equipment and facilities, rights of way and real property, machinery and equipment, including trucks and automobiles and other means of conveyance of personnel or material owned or leased by Owner for the purposes of carrying on the Transmission Business. "Force Majeure Event" shall mean an act of God, fire, flood, earthquake, storm, lightning, an act of Governmental Authority, or necessity for compliance with any Laws, a strike, lockout or other industrial disturbance, not directed exclusively at a Party or the Transmission Business, an act of the public enemy, sabotage, war, act of terrorism, insurrection or blockade, riot or other civil disturbance, epidemic, explosions, and any other similar event that, in each such case, (i) affects and prevents, in whole or in part, the performance of a Party's obligations under this Agreement, (ii) is not reasonably within the control of the affected Party, (iii) which by the exercise of commercially reasonable efforts the affected Party is unable to overcome or prevent and (iv) is not the direct or indirect result of the affected Party's negligence or the failure of such Party to perform any of its obligations under this Agreement. "Gas" shall mean natural gas. "Gas Control Agreement" shall mean the Gas Control Services Agreement of even date herewith by and between Owner and Operator, as amended or modified from time to time. "Gas Control Services" shall have the meaning set forth in the Gas Control Agreement. "Gas Transmission Agreement" shall mean the Gas Transmission Agreement dated September [__], 2003 by and between Owner and SEMCO Energy, Inc, as amended or modified from time to time. "Governmental Approval" shall mean any consent, authorization, certificate, permit, right of way grant or approval of any Governmental Authority that is necessary for the ownership and operation of the Pipeline System or the Transmission Business in accordance with applicable Laws. "Governmental Authority" shall mean any court or tribunal in any jurisdiction or any federal, state, tribal, municipal or local government or other governmental body, agency, authority, department, commission, board, bureau, instrumentality, arbitrator or arbitral body or any quasi-governmental or private body lawfully exercising any regulatory or taxing authority, including, without limitation, the Regulatory Commission of Alaska. "Indemnified Party" is defined in Section 13.3. "Indemnifying Party" is defined in Section 13.3. "Indirect Costs" shall mean indirect costs, such as, without limitation, Operator's general and administrative costs. Operator's Indirect Costs for purposes of the reimbursement contemplated in Section 6.3 shall be deemed to equal the percentage of the Direct Costs allowed by the Alaska Department of Transportation for overhead on construction contracts, reduced, to the extent necessary, to reflect the fact that Indirect Costs do not include AFUDC. 3 "Inflation Index" means the Gross Domestic Product Implicit Price Deflator Seasonally Adjusted Annual Rate (currently, 1996=100) published in Survey of Current Business by the U.S. Department of Commerce, Bureau of Economic Analysis (source http:/www.bea.doc.gov/bea/pubs.htm), or if publication of that index ceases a similar index published by such other organization as Owner and Operator may mutually agree. "Interest Rate" is defined in Section 7.1. "Laws" shall mean any applicable statute, common law, rule, regulation, judgment, order, ordinance, writ, injunction or decree issued or promulgated by any Governmental Authority having jurisdiction with respect to the applicable subject matter. "Loss" is defined in Section 13.1. "Monthly O&M Payment" is defined in Section 6.1. "Operation and Maintenance Services" is defined in Section 2.1. "Operator" is defined in the introductory paragraph hereof. "Operator Indemnified Party" is defined in Section 13.2. "Operator Parties" is defined in Section 13.6. "Owner" is defined in the introductory paragraph hereof. "Owner Indemnified Party" is defined in Section 13.1. "Party" shall mean either Owner or Operator. "Pipeline System" shall mean the natural gas transmission pipeline described on Exhibit A to this Agreement, and any Capital Improvements added or made to the Pipeline System during the Service Term. "Proposed Annual Capital Improvements Budget" is defined in Section 4.1. "Service Term" shall mean the term beginning on midnight prevailing Alaska time on the Effective Date and ending at 11:59:59 prevailing Alaska time on the last day of the sixtieth (60th) succeeding full calendar month, subject to extension or early termination in accordance with ARTICLE V. "Services" shall mean any or all of the Operation and Maintenance Services and the Capital Improvements Services. 4 "Special Contract" shall mean the Special Contract for Gas Transportation dated September [___], 2003 by and between Owner and ENSTAR Natural Gas Company, a division of SEMCO Energy, Inc., as amended or modified from time to time. "Successor Operator" is defined in Section 5.4. "Tax" shall mean any tax, duty, imposition, levy of any nature (whether central, territorial, federal, state or local) whatsoever and whenever charged, levied or imposed, together with any interest and penalties in relation thereto. "Transmission Business" is defined in the Recitals hereto. "2004 Monthly Indirect Costs" is defined in Section 6.1(a). ARTICLE II Services to Be Provided Section 2.1. Operation and Maintenance Services. Operator agrees to provide to Owner (and its successors and assigns), at no cost to Owner other than as provided in Article VI, all supplies, materials, personnel, assets (tangible and intangible), insurance coverage, goods and services that are necessary or appropriate for the physical operation and maintenance of the Pipeline System and the administration of the Transmission Business consistent with Owner's obligations under the Gas Transmission Agreement and the Special Contract; and, without limiting the generality of the foregoing, Operator's responsibilities and the Services shall include (i) nominations and scheduling of receipts of Gas into the Pipeline System, (ii) the transportation of Gas through the Pipeline System; (iii) the delivery of Gas to or for the account of the customers of the Pipeline System; (iv) all inspections, routine testing, engineering, mechanical, repair, replacement and maintenance, right of way, and other services necessary to maintain the physical integrity and safety of the Pipeline System and the current operating capacity of the Pipeline System to receive, transport and deliver Gas, to the extent not requiring any Capital Improvements; (v) the provision of all supplies, goods, equipment, spare parts, tools, consumables, raw materials and other items and services that are reasonably necessary for the conduct of the Transmission Business in the ordinary course to the extent not requiring any Capital Improvements; (vi) the administration of the Transmission Business and day to day customer services and communications; (vii) information systems services and information technology services relating to the administration and operation of the Transmission Business necessary to effect or support any of the services described herein; (viii) regulatory, pipeline safety, metering, occupational health and safety, security, and environmental services in connection with the physical operation of the Pipeline System and obtaining and maintaining any and all Governmental Approvals required for the operation of the Pipeline System or the conduct of the Transmission Business, but excluding the processing of any rate, tariff and other similar regulatory proceedings; (ix) tax, customer billing, payments to gas suppliers and collection, accounting, human resources, legal, claims and other administrative services required for the operation of the Pipeline System or the conduct of the Transmission Business; (x) arranging for the provision of all insurance required to be maintained by Owner pursuant to Section 15.1 or 15.2, and (xi) the payment of all Taxes (other than income Taxes) incurred by the Transmission Business or the Pipeline System (collectively the "Operation and Maintenance Services"). Notwithstanding the foregoing, Operation and Maintenance Services shall not include any of the Gas Control Services provided under the Gas Control Agreement. 5 Section 2.2. Capital Improvements Services. To the extent requested by Owner, Operator agrees to provide to Owner all services requested by Owner for the design, construction, testing and placing in service of all Capital Improvements as more fully described in Section 4.4 ("Capital Improvements Services"); provided, however, that Operator shall have no obligation with respect to any Capital Improvements that Owner has not committed to fund pursuant to Article IV. Owner may, at its election, contract with third parties to provide Capital Improvement Services provided that use of third parties does not unreasonably interfere with the provision of Operation and Maintenance Services by Operator. Section 2.3. Facilities Available to Operator. Throughout the Service Term, Owner shall make available to Operator for purposes of performing the Services pursuant to this Agreement, all of the Facilities that comprise the Pipeline System. ARTICLE III Operator's Covenants Section 3.1. Operator's Ability to Provide Services. Operator agrees that it shall, throughout the Service Term, (a) maintain and cause to be devoted to the provision of Services under this Agreement, sufficient personnel and financial resources to provide Services (i) in the same manner as during the twelve (12) months immediately prior to the Effective Date, (ii) in accordance with Accepted Gas Pipeline Practices and applicable Laws, (iii) as required to satisfy Owner's contractual obligations to its customers, and (iv) in accordance with the terms of this Agreement; (b) pay all Direct Costs and Indirect Costs associated with the provision of Services under this Agreement, and (c) not place or permit to be placed on the Pipeline System or any of the Facilities any lien, security interest, mortgage, easement, license or other encumbrance, other than inchoate liens in favor of providers of goods or services securing amounts not yet due and payable or which are being contested by Operator in good faith. Section 3.2. Standards for the Provision of Services. Operator agrees that it will perform the Services (a) in good faith on a commercially reasonable basis; (b) in accordance with (i) Accepted Gas Pipeline Practices and applicable Governmental Approvals and Laws, and consistent with all applicable orders, judgments, decrees, rulings or injunctions; (ii) manufacturers' warranties for the Pipeline System; (iii) Owner's contractual obligations to its customers; (iv) the terms of this Agreement; and (v) the terms of Operator's and Owner's insurance policies; and (c) using at least the same standard of care used in the performance of such services for the Pipeline System during the twelve (12) months immediately prior to the Effective Date. EXCEPT AS SET FORTH IN THIS SECTION, OPERATOR MAKES NO REPRESENTATION, WARRANTY OR GUARANTY, EXPRESS OR IMPLIED, OF ANY KIND CONCERNING THE SERVICES, OR ANY RESULTS OR WORK PRODUCT OF SUCH SERVICES, AND SPECIFICALLY MAKES NO WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND NONE SHALL BE IMPLIED. ALL OTHER REPRESENTATIONS, WARRANTIES OR GUARANTEES, WRITTEN OR ORAL, EXPRESS OR IMPLIED IN FACT OR IN LAW, AND WHETHER OR NOT BASED ON STATUTE, ARE EXCLUDED. OWNER ACKNOWLEDGES AND AGREES THAT THE LEVEL OF COMPENSATION OPERATOR HAS AGREED TO ACCEPT FOR PERFORMANCE OF ITS OBLIGATIONS HEREUNDER IS PREDICATED ON THIS LIMITATION OF LIABILITY AND DISCLAIMER OF WARRANTIES. 6 Section 3.3. No Breach. Notwithstanding anything to the contrary contained herein, Operator shall not be deemed to be in breach of its obligations hereunder to the extent such breach is caused by any of the following: (a) the failure of Owner to grant its consent within a reasonable time after a request by Operator therefor to any matter requiring such consent prior to Operator's performance of its obligations with respect to such matter, (b) the failure of Owner to provide funds that are required by the terms of this Agreement to be provided by Owner, (c) the failure of Owner to approve any Capital Improvements that are necessary for Operator to perform such obligations in accordance with the terms hereof, or (d) any acts of Operator based solely in reliance upon a direction of Owner. Section 3.4. Consents. In the event that Owner is entitled to grant or withhold any consent or approval under this Agreement, such consent or approval shall not be unreasonably withheld, delayed or conditioned. ARTICLE IV Capital Improvements Section 4.1. Capital Improvements Budget. (a) The Parties agree that the capital improvements budget attached hereto as Schedule 4.1 is the approved capital improvements budget for the remainder of 2003 and for calendar year 2004 and shall be the "Annual Capital Improvements Budget" for such periods. (b) On or before each October 1, beginning October 1, 2004, Operator shall submit to Owner a written budget for any Capital Improvements to the Pipeline System (the "Proposed Annual Capital Improvements Budget") to be made during the next calendar year (A) that Operator deems reasonably necessary to ensure that (i) the Pipeline System has the capability to serve its customers in accordance with its obligations to those customers, and (ii) Operator can continue to operate the Pipeline System in accordance with applicable Laws and Accepted Gas Pipeline Practices, or (B) that Operator believes to be desirable to enhance the efficiency and/or profitability of the Pipeline System. The Proposed Annual Capital Improvements Budget shall set forth the categories of expenditures, and the total amount of each category for all Capital Improvements that Operator proposes to make to the Pipeline System during the calendar year covered by the Proposed Annual Capital Improvements Budget and shall include both Direct Costs and Indirect Costs. Owner shall approve or disapprove each category of expenditures for Capital Improvements and the total amount of such expenditures for each category by written notice to Operator received within sixty (60) days after Owner's receipt of such Proposed Annual Capital Improvements Budget, and the budget as approved by the Owner shall be the "Annual Capital Improvements Budget" for the period covered thereby. Should Owner desire any Capital Improvements that are not covered by the current Annual Capital Expenditure Budget, Owner may at any time request that Operator prepare and submit to Owner plans for such requested Capital Improvements, including a budget for the construction thereof. Upon receipt of such plans, budget and schedule, Owner shall approve such plans or notify Operator of Owner's decision not to proceed with such requested Capital Improvements. 7 Section 4.2. Emergency Capital Improvements. In the event that due to an explosion, fire, storm, earthquake or other emergency, the Pipeline System suffers damage which might threaten life or property, and emergency repairs in the nature of Capital Improvements are required to avoid injury to life or property, Operator may make such emergency Capital Improvements as are necessary to prevent injury to life or property without Owner's prior approval and shall be entitled to reimbursement by Owner for such expenditures, but shall notify Owner of the expected scope and cost of such Capital Improvements and seek Owner's approval as promptly as practicable. Section 4.3. Making Capital Improvements. Except for Capital Improvements necessitated by emergency as provided for in Section 4.2, no Capital Improvements shall be made to the Pipeline System unless covered by the Annual Capital Improvements Budget or approved in writing by Owner. Section 4.4. Scope of Capital Improvements Services. Operator shall provide or cause to be provided all labor, services, supervision, inspection, testing, training, systems, equipment, machinery, materials and supplies that are necessary to (a) obtain all easements and rights of way required for the construction and operation of each Capital Improvement, (b) obtain and maintain in the name of Owner all Governmental Approvals required for the design, construction, ownership and operation of each Capital Improvement, and (c) accomplish the performance and completion of the construction of each Capital Improvement. Operator shall use commercially reasonable efforts to perform and complete the construction of each Capital Improvement in accordance with the budget approved therefor by Owner, but Operator does not guarantee performance of such activities within the approved budget. If Operator determines that an approved Capital Improvement cannot be completed within the budget therefor, Operator shall promptly notify Owner and propose any necessary modifications to the budget. If Owner does not agree to increase the budget by the amount of any estimated overage, Operator shall have the right to abandon work on the affected Capital Improvement upon completion of all of the work that can be performed within the original budget. Section 4.5. Status Reporting, Adjustments to Budgets. Operator shall notify Owner in a reasonable amount of time of any delay in the schedule of any approved or emergency Capital Improvement, and of any event, occurrence, condition or circumstance that is reasonably likely to cause a material increase in the cost of any Capital Improvement. In the event of an occurrence that causes the costs of a Capital Improvement to materially exceed the approved budget therefor, the Contract Administration Officers shall meet at the earliest mutually convenient date and agree on the proper course of action and to make any adjustments to the affected Annual Capital Improvements Budget. Section 4.6. Rights in Data and Work. Capital Improvements to the Pipeline System, including all plans, drawings, specifications, calculations, manuals and other documents and work product prepared by or for Operator in connection with the design, engineering, construction, testing and placing in service of any Capital Improvement, shall be owned by Owner. 8 Section 4.7. Susitna River Crossing. Owner and Operator agree that an appropriate budget for all of the Capital Improvement Services necessary in connection with the relocation of the Beluga line where it crosses the Susitna River, as set out in the document entitled "Scope of Work: Susitna River Crossing" dated [date to be inserted at Closing], is $5,200,000. Notwithstanding anything contained in this Article IV to the contrary, if the aggregate cost of such Capital Improvement Services (including all Direct Costs and Indirect Costs) exceeds $5,200,000, Operator shall be entitled to reimbursement for only 10% of such costs in excess of $5,200,000, and if the aggregate of such costs is less than $5,200,000, Operator shall be entitled (and Owner shall pay to Operator) a bonus of 90% of the difference between $5,200,000 and such costs. The Owner acknowledges that Operator may be required to commence the work contemplated by this Section prior to the date hereof, and Owner agrees on the date hereof to reimburse Operator for any such amounts expended by Operator, subject to the limitations as to an amount contained in this Section 4.7. ARTICLE V Service Term, Suspension and Early Termination Section 5.1. Service Term; Extension of Service Term. The term of this Agreement shall be the Service Term. The Service Term may be extended upon mutual agreement by Owner and Operator. Section 5.2. Operator's and Owner's Right to Suspend Performance or to Terminate the Agreement. Operator shall have the right to suspend the performance of its obligations under this Agreement in the event of Owner's failure to make payments due to Operator and not disputed in good faith pursuant to Article VII, and such failure has not been cured within ten (10) days after written notice of such failure to Owner. Operator shall have the right to terminate this Agreement in the event such failure to make payment has not been cured within thirty (30) days after written notice of such failure to Owner. Owner shall have the right to terminate this Agreement, in addition to all other remedies available to it under law and in equity, if Operator (a) breaches in any material respect any of its obligations under this Agreement and such breach has not been cured within thirty (30) days after written notice of such breach to Operator; (b) is or becomes insolvent or bankrupt or ceases to pay its debts as they become due or consents to or acquiesces in the appointment of a receiver, trustee or liquidator for a substantial part of its property; (c) institutes a voluntary bankruptcy, winding up, reorganization, insolvency or similar proceeding; (d) has an involuntary bankruptcy, winding up, reorganization, insolvency or similar proceeding instituted against it that is not stayed, dismissed or terminated within ninety (90) days after commencement; or (e) ceases to carry on its business. Section 5.3. Transfer of Parts, Supplies and Consumables. Upon the expiration or earlier termination of this Agreement, Operator shall transfer and deliver, and shall cause each of Operator's third party vendors to transfer and deliver, all parts, supplies and consumables procured for Owner in connection with the Services, the cost of which has been included in any invoice submitted to, and paid by, Owner. 9 Section 5.4. Cooperation in Connection with Expiration or Termination. (a) During the final three (3) months prior to the expiration of the Service Term, and during the period of three (3) months following the termination of this Agreement under Section 5.2 hereof, Operator shall cooperate with Owner and its representatives in (i) the appointment and training of a successor operator ("Successor Operator") to take over the operation and maintenance of the Pipeline System and the administration of the Transmission Business and (ii) the turnover of the operation and maintenance of the Pipeline System and the administration of the Transmission Business to such Successor Operator. During such period, Operator shall provide Owner and Successor Operator and their respective representatives full access to all information, data and records relating to the Pipeline System and the Transmission Business, and Operator shall comply with all reasonable requests by Owner or Successor Operator in connection with taking over the operation and maintenance and administration duties, including the execution and delivery of documents and taking of other actions, in each case as shall be necessary to facilitate the orderly transition of duties from Operator to Successor Operator. (b) Promptly after the expiration or termination of this Agreement under this Article V, Operator shall deliver to (and shall, with effect from the expiration or termination, hold in trust for) Owner or Successor Operator (if so directed by Owner), all work, property, recorded information and relevant Governmental Approvals that are in Operator's possession or under Operator's control. Operator shall use all reasonable efforts to transfer to Owner or Successor Operator, from the expiration or termination date, its right and obligations under all contracts entered into in connection with the performance of its obligations under this Agreement or relating to the operation and maintenance of the Pipeline System and the administration of the Transmission Business and all relevant Governmental Approvals held by Operator; provided, however, that Owner shall assume, or shall cause Successor Operator to assume, all of Operator's rights and obligations under such contracts and Governmental Approvals and shall indemnify, hold harmless and defend Operator from and against any and all Losses which (i) are entirely caused subsequent to such assumption, (ii) arise out of, result from or relate to such contracts or Governmental Approvals and (iii) are not the direct or indirect result of acts or omissions by Operator. (c) At the request of Owner, upon the expiration or termination of this Agreement under this Article V, Operator shall not assert its rights, if any, to retain its personnel who spend 75% or more of their time on matters relating to the Pipeline System or the Transmission Business and shall otherwise permit such personnel to transfer to the employ of Successor Operator and will offer to sell Owner any equipment and other items of personal property used by Operator primarily to provide Services under this Agreement for a price equal to the book value thereof on Operator's books. 10 ARTICLE VI Compensation Section 6.1. Compensation for Operation and Maintenance Services. (a) As compensation for all Operation and Maintenance Services during the first three years of the Service Term, Owner shall pay Operator $334,000 per calendar month (the "Monthly O&M Payment") (with appropriate proration for partial months). For the fourth and fifth years of the Service Term, the Monthly O&M Payment shall be an amount determined by multiplying the difference between $334,000 and 1/12 of the Operator's actual Direct Costs for Taxes and insurance for the first year of the Service Term by the CPI Inflator for such year, and in addition, Owner shall reimburse Operator for Operator's actual Direct Costs for Taxes and insurance in such years, appropriately pro rated if assessed or changed for a period different than such years. (b) Payment for the calendar month in which the Effective Date occurs shall be due on the Effective Date. Payment of the Monthly O&M Payment for each succeeding calendar month during the first three years of the Service Term, and after the amount thereof has been determined, the fourth and fifth years of the Service Term, shall be due, without invoice, on the first Business Day of such month. Payment for Taxes and insurance during the fourth and fifth years of the Service Term shall be due ten (10) days after receipt by the Owner of an invoice therefore. The compensation payable to Operator for the provision of Operation and Maintenance Services is intended to reimburse Operator for all Direct Costs and Indirect Costs of providing such Services, and Operator shall be solely responsible for payment of such costs, including, but not limited to all of the costs related to the categories specified in Exhibit B. All past due payments for Operation and Maintenance Services shall bear interest at the Interest Rate from the due date until paid. Section 6.2. Adjustment of Monthly O&M Payment on Change of Law. The Monthly O&M Payment is intended to remain the fixed payment specified in Section 6.1 for each year of the Service Term regardless of Operator's actual costs of providing Operations and Maintenance Services. Notwithstanding the foregoing, however, if as a result of a change in applicable Laws, Operator's costs are materially increased or decreased, the Monthly O&M Payment shall be increased or decreased, as applicable, by the amount necessary to compensate Operator for its increased costs or reduce the compensation to Operator for its decreased costs attributable to such change of Law. Section 6.3. Reimbursement for Capital Improvements Services. All Capital Improvements Services shall be performed by Operator on a cost reimbursement basis, and Owner shall reimburse Operator for all Direct Costs and Indirect Costs of providing such Services. ARTICLE VII Billing and Payment of Costs Services Section 7.1. Invoices for Services. On or before the fifteenth day of each month, Operator shall provide to Owner one or more written invoices, setting out the total amount due Operator for Capital Improvements Services during the preceding month, showing a comparison of the invoiced costs for each category to the amounts budgeted for such category, together with such supporting documentation for all such costs as shall be reasonably requested by Owner. Items properly invoiced and not disputed in good faith by Owner are due and payable within ten (10) days of Owner's receipt of such invoice. Owner shall give written notice on or before the due date of any invoice of any good faith dispute of all or any portion of such invoice, with the particulars of such dispute. Owner shall pay interest on any unpaid portion of the undisputed amount of an invoice from the due date thereof up to and including the date when such amount and interest thereon are paid in full, at the rate per annum for the first 10 days equal to the rate published as the "prime rate" in The Wall Street Journal for the first business day of the month in which such invoice is due, plus 2%, and thereafter, at a rate per annum equal to 15%, but in no event at any rate that is greater than the maximum interest rate allowed by applicable Laws (such rate, the "Interest Rate"). 11 Section 7.2. Resolution of Disputes of Invoices. Owner shall provide to the Contract Administration Officers a copy of any notice to Operator of a dispute with respect to an Operator invoice. The Contract Administration Officers shall promptly meet and attempt to resolve any invoice dispute by mutual agreement. If the Parties are unable to agree upon a settlement of the invoice dispute, the dispute shall be addressed in accordance with Article VIII. If any invoice dispute is resolved in favor of Operator, Owner shall pay any amount owed with interest from the date such disputed invoice was due to the date of payment of such amount, at the Interest Rate. Section 7.3. Owner's Audit Rights. Owner shall have the right, at any time within one (1) year after the date of any Operator invoice for reimbursement of costs of Capital Improvements Services, to audit those books and records of Operator that relate to the Capital Improvements Services covered by such invoice, to verify the costs reflected on such invoice. Any such audit shall be conducted by Owner or its designated auditor after ten (10) days prior written notice to Operator, at Owner's cost and expense, during normal business hours in the offices of Operator, or such other location as may be appropriate. Operator shall cooperate with and provide reasonable assistance to Owner or its auditor in connection with the performance of any such audit, at Operator's sole cost and expense. Owner shall assert any claim for refund of the cost of Capital Improvements Services reimbursed to Operator under the audited invoice within sixty (60) days after the receipt of the audit report. Unless Operator notifies Owner of any dispute to Owner's claim for refund relating to any such audit within thirty (30) days of receipt of such refund claim, the amount of such refund claim shall be due and payable by Operator to Owner forty (40) days after Operator's receipt of such refund claim, together with interest at the Interest Rate from the date of any overpayment to Operator until the date of refund of such overpayment by Operator. Should Operator dispute the claim and refuse to pay any refund claim by Owner resulting from the exercise of Owner's audit rights, the dispute shall be addressed in accordance with Article VIII. ARTICLE VIII Dispute Resolution Section 8.1. General. Any dispute arising under this Agreement or otherwise in connection with this Agreement shall be resolved pursuant to this Section 8.1. (a) Any Party has the right to request the other to meet to discuss a dispute. The Party requesting the meeting will give at least ten (10) Business Days notice in writing of the subject it wishes to discuss, provide a written statement of the dispute, and designate an officer of the Party with complete power to resolve the dispute to attend the meeting. Within five (5) Business Days after receipt of such request, the Party receiving the request will provide a responsive written statement and will designate an officer of the Party who will attend the meeting with complete power to resolve the dispute. 12 (b) If the meeting fails to resolve the dispute by a signed agreement among the officers, either Party may submit the dispute for binding arbitration administered by the American Arbitration Association ("AAA") under its Commercial Arbitration Rules before a single arbitrator, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (c) The Parties agree to make discovery and disclosure of all matters relevant to the dispute to the extent and in the manner provided by the Federal Rules of Civil Procedure. The arbitrator will rule on all requests for discovery and disclosure and discovery shall be completed within 60 days after the date of appointment of the arbitrator. The arbitrator may consider any matter relevant to the subject to the dispute and shall follow the statutes and decisions of the substantive law of Alaska relevant to the subject. The arbitrator shall not have the authority or power to alter, amend or modify any of the terms and conditions of this Agreement. The arbitrator shall issue a final ruling within 150 days after the date of appointment of the arbitrators. (d) The ruling of the arbitrator shall be in writing and signed and shall be final and binding upon the Parties. The fees and expenses of counsel, witnesses and employees of the Parties and all other costs and expenses incurred exclusively for the benefit of the Party incurring the same shall be borne by the Party incurring such fees and expenses. All other fees and expenses including, without limitation, compensation for the arbitrator, shall be divided equally between the Parties. All meetings and arbitrations held pursuant to this Section 8.1 shall take place in Anchorage, Alaska. ARTICLE IX Administration of Agreement Section 9.1. Contract Administration Officers. Operator and Owner shall each designate in writing a person or persons to act as contract administration officers ("Contract Administration Officers"), who shall perform the following functions under this Agreement for their respective principals: (a) reporting to senior management of their respective principals with respect to matters relating to the administration of this Agreement, the provision of Operation and Maintenance Services and Capital Improvements Services hereunder and any outstanding invoice disputes; (b) resolving any disputes with respect to proposed Capital Improvements; and (c) monitoring the costs of Capital Improvements Services. 13 Section 9.2. Replacement of Contract Administration Officers. Each Party may replace its Contract Administration Officers from time to time upon notice to the other Party. The Contract Administration Officers will have authority to represent the position of, but will not have authority to bind their respective contracting Parties with respect to, questions that may arise during the performance of this Agreement. ARTICLE X Confidentiality of Information Section 10.1. General. As used in this Article X (and in Section 14.2), "Confidential Information" shall mean any information not in the public domain or generally known in the industry, in any form relating to the business and operations of Owner or Operator (each such entity, for purposes of this Article X, a "Company"), including but not limited to information regarding customers, vendors, suppliers, trade secrets, training programs, manuals or materials, technical information, contracts, systems, procedures, mailing lists, know-how, trade names, improvements, price lists, financial or other data (including the revenues, costs or profits associated with any of such Company's services), business plans, code books, invoices and other financial statements, computer programs, software systems, databases, disks and printouts, plans (business, technical or otherwise), customer and industry lists, correspondence, internal reports, personnel files, sales and advertising material, telephone numbers, names, addresses or any other compilation of information, written or unwritten, which is or was used by such Company, regardless of whether such information was or is owned during the term of this Agreement by such Company. Section 10.2. Operator's Obligations. Operator shall maintain the confidentiality of any Confidential Information of Owner acquired by Operator during the term of this Agreement, and except as otherwise provided in this Agreement, shall not use such Confidential Information for any purpose other than the performance of this Agreement; provided, however, Operator may use any Confidential Information in the resolution of any disputes under this Agreement. Upon termination of this Agreement, except as otherwise provided in this Agreement, Operator agrees to turn over such Confidential Information to Owner or to destroy such Confidential Information, but only in accordance with the instructions of Owner; provided, however, that Operator may maintain one archive copy of all of such Confidential Information in a secure data storage facility. Section 10.3. Owner's Obligations. Owner shall maintain the confidentiality of any Confidential Information of Operator acquired by Owner during the term of this Agreement, and except as otherwise provided in this Agreement, shall not use such Confidential Information for any purpose other than the performance of this Agreement; provided, however, Owner may disclose invoices and other similar financial information concerning the cost of the Services to any prospective purchaser of Owner or the Transmission Business, and may use any Confidential Information in the resolution of any disputes under this Agreement. Upon termination of this Agreement, except as otherwise provided in this Agreement, Owner agrees to turn over such Confidential Information to Operator or to destroy such Confidential Information in accordance with the instructions of Operator; provided, however, that Owner may maintain one archive copy of all of such Confidential Information in a secure data storage facility. 14 Section 10.4. Compulsory Disclosure. If any Company is requested or required to disclose Confidential Information of another unaffiliated Company pursuant to any judicial or administrative process, law, regulation or statute, then such receiving Company shall promptly notify the other unaffiliated Company to this Agreement in writing of such request or requirement. The Company whose Confidential Information is requested or required to be disclosed shall either (i) promptly seek protective relief from such disclosure obligation or (ii) direct the receiving Company to comply with such request or requirement. If, after a reasonable opportunity to seek protective relief, such relief is not obtained by the Company whose Confidential Information is subject to discovery or disclosure, or if such Company fails to obtain such relief, the receiving Company may disclose such portion of such Confidential Information that such Company reasonably believes it is legally obligated to disclose. Section 10.5. Injunction. Each Company agrees that the breach by another unaffiliated Company of its obligations under this Article X would cause significant and irreparable harm to the aggrieved Company, which may be difficult to measure with certainty or to compensate through money damages. Each Company acknowledges that the aggrieved Company shall be entitled, without proof of irreparable harm and without waiving any other right or remedy available to it, to such injunctive and equitable relief as may be deemed proper by a court of competent jurisdiction. ARTICLE XI Relationship BETWEEN the Parties Section 11.1. No Joint Venture. It is the intent of the Parties that with respect to the provision of the Services pursuant to this Agreement, Owner and Operator are independent contractors. Except to the extent Operator executes contracts or documents as the agent of Owner pursuant to the terms of Section 16.1, nothing in this Agreement shall cause the relationship between Operator and Owner to be deemed to constitute an agency, partnership or joint venture. The terms of this Agreement are not intended to constitute a joint employer for any purpose between any of the Parties and their affiliates. Each of the Parties agrees that the provisions of this Agreement as a whole are not intended to, and do not, constitute control of the other Party (or any affiliates thereof) or provide it with the ability to control such other Party (or any affiliates thereof), and each Party hereto expressly disclaims any right or power under this Agreement to exercise any power whatsoever over the management or policies of the other (or any affiliates thereof). Nothing in this Agreement shall oblige either Party hereto to act in breach of the requirements of applicable Laws or Governmental Approvals. Section 11.2. Certain Labor Matters. The Parties recognize that Operator is subject to collective bargaining agreements covering certain of its employees and will perform the Services under this Agreement in compliance with the terms of such collective bargaining agreements. Operator shall ensure that upon the termination of the Service Term, Owner shall have no obligation or liability in respect of such collective bargaining agreements. 15 ARTICLE XII Regulatory Matters Section 12.1. Compliance with Regulatory Requirements. Operator will cooperate with Owner and any Governmental Authority that regulates Owner and/or the Pipeline System to satisfy any regulatory requirements applicable to the Pipeline System. ARTICLE XIII Indemnification; Release; Limit on Liability Section 13.1. Indemnification by Operator. Operator shall indemnify, defend and hold harmless Owner, and each of its officers, directors, employees, agents, and affiliates (and the officers, directors, employees and agents of such affiliates) ("Owner Indemnified Party") if any such Owner Indemnified Party shall at any time or from time to time suffer any damage, judgment, fine, penalty, demand, settlement, liability, loss, cost, expense (including reasonable attorneys', consultants' and experts' fees), claim or cause of action (each, a "Loss") arising out of, relating to or resulting from the Operator's performance of this Agreement, to the extent such Loss results from any breach of this Agreement or the fault, tortuous act, negligence, strict liability, gross negligence or willful misconduct of Operator. Further, Operator shall indemnify and hold Owner harmless and defend Owner from (i) any and all claims, costs, damages, injuries, demands and causes of action commenced by an employee of Operator (or his or her estate or legal representative) which arises directly or indirectly from the performance of Services except to the extent that such Loss directly results from the gross negligence or willful misconduct of Owner, and (ii) any and all Losses arising out of or resulting from any collective bargaining agreements covering employees of Operator, including, without limitation, those collective bargaining agreements referenced in Section 11.2. Section 13.2. Indemnification by Owner. Owner shall indemnify, defend and hold harmless Operator, and each of its officers, directors, employees, agents, and affiliates (and the officers, directors, employees and agents of such affiliates) ("Operator Indemnified Party") if any such Operator Indemnified Party shall at any time or from time to time suffer any Loss arising out of, relating to or resulting from Owner's performance of this Agreement, to the extent such Loss results from any breach of this Agreement or the fault, tortuous act, negligence, strict liability, gross negligence or willful misconduct of Owner. Further, Owner shall indemnify and hold Operator harmless and defend Operator from any and all claims, costs, damages, injuries, demands and causes of action commenced by an employee of Owner (or his or her estate or legal representative), except to the extent that (i) such Loss directly results from the gross negligence or willful misconduct of Operator, or (ii) Owner is entitled to indemnity from Operator under Section 13.1. 16 Section 13.3. Procedures. Any Party asserting a claim for indemnification hereunder (such Party seeking indemnification, the "Indemnified Party") shall notify the other Party (the "Indemnifying Party") (with reasonable specificity) promptly after it becomes aware of facts supporting a claim or action for indemnification under this Article XIII, and shall provide to the Indemnifying Party as soon as practicable thereafter all information and documentation reasonably necessary to support and verify any Losses associated with such claim or action. The failure to so notify or provide information to the Indemnifying Party shall not relieve the Indemnifying Party of any liability that it may have to any Indemnified Party, except to the extent that the Indemnifying Party demonstrates that it has been materially prejudiced by the Indemnified Party's failure to give such notice, in which case the Indemnifying Party shall be relieved from its obligations hereunder to the extent of such material prejudice. The Indemnifying Party may, and, at the request of the Indemnified Party, shall participate in and defend, contest or otherwise protect the Indemnified Party against any such claim or action by counsel of the Indemnifying Party's choice at its sole cost and expense; provided, however, that the Indemnifying Party shall not make any settlement or compromise without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld, conditioned or delayed) unless the sole relief provided is monetary damages that are paid in full by the Indemnifying Party. The Indemnified Party shall have the right, but not the obligation, to participate at its own expense in the defense thereof by counsel of the Indemnified Party's choice and shall in any event use its reasonable best efforts to cooperate with and assist the Indemnifying Party. If the Indemnifying Party fails timely to defend, contest or otherwise protect against such suit, action, investigation, claim or proceeding, the Indemnified Party shall have the right to do so, including, without limitation, the right to make any compromise or settlement thereof, and the Indemnified Party shall be entitled to recover the entire cost thereof from the Indemnifying Party, including, without limitation, reasonable attorneys' fees, disbursements and amounts paid as the result of such suit, action, investigation, claim or proceeding. Section 13.4. Indemnification Payments. Any payment hereunder shall be made by wire transfer of immediately available funds to such account or accounts as the Indemnified Party shall designate to the Indemnifying Party in writing. Section 13.5. Survival. The provisions of this Article XIII shall survive the termination of this Agreement for claims made within a period of three (3) years after the expiration date of the Service Term. Section 13.6. Release and Limit on Liability. Operator shall not be liable to Owner for, and Owner hereby releases Operator and its affiliates, and each officer, director, employee and agent of Operator and/or any of its affiliates (the "Operator Parties") from, any Loss arising from any act or omission of Operator in connection with the Services, except to the extent any such Loss results from an event for which Owner is entitled to indemnification under Section 13.1. Owner shall not be liable to Operator for, and Operator hereby releases Owner and its affiliates, and each officer, director, employee and agent of Owner and/or any of its affiliates (the "Owner Parties") from, any Loss arising from any act or omission of Owner in connection with the Services, except to the extent any such Loss results from an event for which Operator is entitled to indemnification under Section 13.2. Notwithstanding anything in this Agreement to the contrary, the aggregate liability of the Operator Parties under this Agreement (other than with respect to Operator's indemnity obligations set out in clause (ii) of the last sentence of Section 13.1, which shall not be so limited) shall not exceed the sum of (i) the aggregate amount of payments received by Operator pursuant to Section 6.1 hereof (excluding Direct Cost payments to vendors and other third parties), and (ii) any payments actually received by Operator or paid to any third party on behalf of Operator in respect to such liabilities under policies of insurance. IN NO EVENT SHALL ANY OF THE OPERATOR PARTIES BE LIABLE TO ANY OF THE OWNER PARTIES, NOR SHALL ANY OF THE OWNER PARTIES BE LIABLE TO ANY OF THE OPERATOR PARTIES, FOR SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE LOSS, DAMAGES OR EXPENSES (INCLUDING LOST PROFITS OR SAVINGS) ARISING FROM THIS AGREEMENT. 17 ARTICLE XIV Books and records Section 14.1. Maintenance of Books and Records. (a) In addition to any reporting and record keeping requirements set forth in this Agreement or otherwise agreed to by the Parties, Operator shall maintain on a current basis proper, accurate and complete books, records and accounts relating to the operation and maintenance of the Pipeline System, the conduct of the Transmission Business and the performance of the Services and Operator's other obligations hereunder (including all operating data and operating logs) as shall be required to comply with any contractual obligations of Owner and as necessary to verify the incurring and payment of all capital and operating expenditures and Operator's performance of the Services and its other obligations hereunder. All books, records and accounts referred to in this Section 14.1 shall be established and maintained in accordance with generally accepted accounting principles in the United States consistently applied, and shall be in a format sufficient to permit the verification referred to in the preceding sentence. Operator shall ensure that such books and records of account are kept separate from Operator's own corporate books and records. (b) Operator shall maintain all books and records it is required to maintain hereunder for a period of at least six (6) years following the creation thereof and in all events for however long as may be required by applicable Law. Section 14.2. Ownership of Books and Records. All books, records and accounts maintained by Operator in connection with the Transmission Business hereunder shall at all times be the exclusive property of Owner, and Operator shall not have any rights, title or interest therein. All books, records and accounts of Operator that Operator maintains in its own behalf in connection with its provision of services under this Agreement shall at all times be the exclusive property of Operator, and Owner shall not have any right, title or interest therein, except for Owners' right to review supporting information related to the cost of Capital Improvements Services and the monthly invoicing process under Article VII, with a right to retain copies thereof (subject to the confidentiality provisions of Article X). Upon termination of the provision of any or all Services by Operator under this Agreement, all books, records, and accounts solely relating to the Services described in the first sentence of this Section 14.2 shall be promptly delivered to Owner at its address set forth below and Operator shall retain no copies thereof, except that Operator shall be entitled to retain one copy thereof solely for archival purposes and such copy shall be treated and protected by Operator as Confidential Information of Owner pursuant to Article X. 18 ARTICLE XV Required Insurance Section 15.1. Required Insurance. Until the expiration of the Service Term, each Party shall maintain on behalf of itself and all of its employees, the following minimum insurance coverage, with the cost of Owner's policies being paid by Operator: (a) Workers Compensation insurance complying with all applicable Laws, and Employer's Liability insurance with limits of not less than the Alaskan statutory limit. Each Party and their parent, subsidiary and affiliated companies and their respective employees shall be provided a waiver of all rights of subrogation under this insurance. Either Party under this Agreement shall have the right at their sole option to be a qualified self-insurer for worker's compensation insurance. (b) Commercial or comprehensive general liability insurance with a combined single limit of not less than $1,000,000 per occurrence for bodily injury and property damage, including coverage for premises-operations, blanket contractual liability, broad form property damage liability, personal injury liability, advertising injury liability, independent contractor coverage, products/completed operations, sudden and accidental pollution liability and the explosion, collapse and underground hazards. (c) Automobile liability insurance with a combined single limit of not less than $1,000,000 per occurrence for bodily injury and property damage including coverage for all owned, non-owned and hired vehicles. (d) Umbrella and/or excess liability insurance with a combined single limit of not less than $25,000,000 per occurrence for bodily injury and property damage covering excess of the employer's liability, general liability and automobile liability insurance required above. (e) Any of the above-required liability insurance that is maintained on a claims made basis shall have a retroactive date the same as the date of this Agreement or earlier, and shall remain in effect for at least three years following, or shall provide for a three year discovery and reporting period following, the termination of the Service Term. (f) Operator shall be named as an additional insured and shall be provided with a waiver of all rights of subrogation under the Owner's insurance required in (b), (c) and (d) above to the extent of Owner's indemnification obligations and liabilities assumed under this Agreement. Owner and its lenders shall be named as additional insureds and shall be provided with a waiver of all rights of subrogation under Operator's insurance required in (b), (c) and (d) above to the extent of Operator's indemnification obligations and liabilities assumed under this Agreement. (g) Upon request of one Party under this Agreement, certificates of insurance evidencing the above-required insurance shall be provided to the other Party under this Agreement. 19 Section 15.2. Owner's Property Insurance. Owner shall maintain, at Operator's cost, all-risk property, builder's all-risk and time element insurance covering the Pipeline System and the Facilities on a commercially reasonable basis with coverages, limits, deductibles, terms and conditions as the Owner would maintain in the prudent management of its property, or would be maintained by others similarly situated in respect of property similar to the Pipeline System and the Facilities. Operator shall be provided a waiver of all rights of subrogation under such insurance, and a certificate of insurance evidencing such insurance upon request. Section 15.3. Provision of Owner's Insurance By Operator. As part of the Operations and Maintenance Services, Operator agrees to procure for Owner, at Operator's sole cost and expense, the insurance required by Owner pursuant to Section 15.1 and 15.2, and agrees to comply, as Owner's agent, with the requirement of Section 7.7 of the Gas Transmission Agreement. All such policies of insurance shall list Owner as a loss payee and a named insured and Owner's lenders as loss payees and additional insureds, and if Operator receives any payments in respect of such policies in respect of APC, it shall promptly remit such payments to Owner in the form received. Operator also shall cooperate with Owner in connection with any modifications and enhancements of the insurance contemplated in Sections 15.1 and 15.2 requested by Owner, including any increases in coverage or reductions in deductibles, provided that any additional premiums resulting from such modifications and enhancements shall be paid for by Owner. ARTICLE XVI Miscellaneous Provisions Section 16.1. Agency of Operator. Owner hereby appoints Operator to act as its agent for the performance of Services in accordance with, and as limited by, the applicable terms and provisions of this Agreement; provided, however, that Operator shall not, without the prior written approval of an Owner, have any authority under this Agreement to: (i) jointly employ any person who is employed by Owner; (ii) borrow money from or on behalf of, or lend money to, Owner; (iii) create any lien or encumbrance on the Pipeline System or Facilities other than inchoate liens in favor of providers of goods or services securing amounts not yet due and payable or which are being contested by Operator in good faith; (iv) make any filing with any Governmental Authority or execute, terminate or amend any Governmental Approval relating to the Pipeline System or the Facilities other than with respect to Governmental Approvals to be obtained in the ordinary course of the Transmission Business or with respect to Capital Improvements; (v) file or settle any litigation relating to the Pipeline System or the Transmission Business; or (vi) retain outside legal counsel or public accountants to provide services to Owner; or 20 (vii) enter into any agreement binding upon Owner that exceeds the term of this Agreement. Section 16.2. Force Majeure. If by reason of a Force Majeure Event either Party is rendered unable, in whole or in part, to perform its obligations under this Agreement, other than the obligation to make payments of money then due, such Party shall be excused from such performance to the extent it is prevented by, and during the continuance of, such Force Majeure Event. The Party whose performance is affected by an Force Majeure Event shall (i) give the other Party notice of the occurrence of such Force Majeure Event as soon as practicable and (ii) use all commercially reasonable efforts to remedy the cause(s) and effect(s) of such Force Majeure Event with all reasonable dispatch; provided, however, that the affected Party shall not be obligated to undertake unreasonable or uneconomic costs or burdens, in order to overcome the effects of the Force Majeure Event and reinstate full performance of its obligations under this Agreement. Section 16.3. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be deemed given if delivered personally, by facsimile (which is confirmed) or sent by overnight courier (providing proof of delivery), to the Parties at the following address: If to Operator: [_______________________________________ _______________________________________ _______________________________________ _______________________________________] If to Owner: [_______________________________________ _______________________________________ _______________________________________ _______________________________________] Any Party may, by notice given in accordance with this Section 16.3 to the other Parties, designate another address or person for receipt of notices hereunder provided that notice of such a change shall be effective upon receipt. Section 16.4. Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the Parties and their respective successors, assigns and legal representatives (whether by acquisition, merger, operation of law, other transaction constituting a change of control or otherwise). No Party may assign this Agreement or any right or obligation hereunder without the prior written consent of the other Party, and any assignment without such consent shall be void; provided, however, that nothing in this Agreement shall prohibit a transfer of a Party's rights and obligations hereunder by acquisition of substantially all of the assets of such Party, merger or operation of law, but if any such transfer is made by Operator without Owner's prior written consent, Owner shall have the right to terminate this Agreement and neither Party shall have any future obligation hereunder except for obligations to pay in respect of services performed through the date of termination. 21 Section 16.5. Survival. Any provision of this Agreement that expressly or by implication comes into or remains in force following the termination or expiration of this Agreement shall survive for a period of three (3) years after the expiration of the Service Term. Section 16.6. Signatures, Counterparts. Facsimile transmission of any signed original document and/or retransmission of any signed facsimile transmission shall be the same as delivery of an original. On request, a Party will confirm its facsimile transmission by signing a duplicate original document. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. Section 16.7. Amendments. This Agreement may be amended, modified or supplemented only by a written instrument executed by the Parties. Section 16.8. Governing Law. THIS AGREEMENT WILL BE GOVERNED AS TO FORMATION, PERFORMANCE, INTERPRETATION AND ENFORCEMENT BY THE LAWS OF THE STATE OF ALASKA WITHOUT GIVING EFFECT TO ITS CONFLICT OF LAWS PRINCIPLES. Section 16.9. Entire Agreement. This Agreement constitutes the entire agreement between the Parties hereto relating to the subject matter hereof and supersede all prior and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, of the Parties, and there are no general or specific warranties, representations or other agreements by or among the Parties in connection with the entering into of this Agreement or the subject matter hereof except as specifically set forth or contemplated herein or therein. Section 16.10. Negotiated Agreement. This Agreement has been negotiated by the Parties and the fact that the initial and final draft will have been prepared by either Party will not give rise to any presumption for or against any party to this Agreement or be used in any respect or forum in the construction or interpretation of this Agreement or any of its provisions. Section 16.11. Waiver. No consent or waiver, express or implied, by any Party to or of any breach or default by any other Party in the performance by such other Party of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance of obligations hereunder by such other Party hereunder. Failure on the part of any Party to complain of any act or failure to act of any other Party or to declare any other Party in default, irrespective of how long such failure continues, shall not constitute a waiver by such first Party of any of its rights hereunder. Section 16.12. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, each Party directs that such court interpret and apply the remainder of this Agreement in the manner that it determines most closely effectuates the Parties' intent in entering into this Agreement, and in doing so particularly take into account the relative importance of the term, provision, covenant or restriction being held invalid, void or unenforceable. Section 16.13. No Third Party Beneficiaries. Except as set forth in Article XIII, nothing in this Agreement is intended or shall be construed to give any person, other than the Parties hereto, their successors and permitted assigns, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 22 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. OWNER ALASKA PIPELINE COMPANY, LLC By:____________________________________ Name: Title: OPERATOR ENSTAR NATURAL GAS COMPANY, A DIVISION OF SEMCO ENERGY, INC. By:____________________________________ Name: Title: 23 EXHIBIT A DESCRIPTION OF TRANSPORTATION SYSTEM The APC's System consists of the following: Kenai Pipeline System: The Kenai Pipeline System consists of combined 142 miles of looped12-inch and 16-inch diameter pipeline, including a nine mile twin crossing of the Turnagain Arm of the Cook Inlet, plus 25 miles of 8-inch diameter pipeline known as the Royalty Lateral and six miles of 12-inch, 6-inch, and 4-inch diameter lateral pipelines connecting to the Royalty Lateral. All lines have a maximum allowable operating pressure (MAOP) of 300 pounds per square inch gage (psig) or greater. The Kenai Pipeline has two compressor stations totaling 8,400 horsepower. Beluga Pipeline System: The Beluga Pipeline System consists of 102 miles of 20-inch pipeline and 23 miles of 6-inch and 4-inch diameter lateral pipelines connecting to the 20-inch pipeline. All lines have a MAOP of 300 psig or greater. It does not have any compression capacity. The Anchorage Pipeline System: The Anchorage Pipeline system consists of 55 miles of 12-inch, 10-inch, 8-inch, 6-inch and 4-inch diameter pipelines and lateral pipelines in the greater Anchorage area interconnecting with the Kenai Pipeline System at Potter Station and with the Beluga Pipeline System at East Anchorage City Gas Station. All lines have a MAOP of 300 psig or greater. The locations of the Kenai Pipeline System, the Beluga Pipeline System and the Anchorage Pipeline System are shown on the attached map. APC PIPELINE SUMMARY
Milepost Designation - ---------------------------------------------------------------------------------------------------------------------------------- Sys. Pipeline Name Year ER # Pipe Size From To Length Length Miles Installed (miles) (feet) - ---------------------------------------------------------------------------------------------------------------------------------- Kenai Pipeline - ---------------------------------------------------------------------------------------------------------------------------------- K "A" Kalifonski to Burnt Island 1960 12" 2.3 64.5 62.12 327,977 - ---------------------------------------------------------------------------------------------------------------------------------- K "A" Turnagain Crossing 1960 12" 64.5 73.2 8.68 45,841 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Turnagain Crossing 1960 12" 64.5 73.2 8.58 45,289 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp Kalifonski to Kenai River 1975 74-513.2 12" & 16" 2.3 6.7 4.40 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp Gutenrath to MP50.5 1975 74-513.2 12" & 16" 21.4 50.5 29.10 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp Kenai River to MP 21.4 1978 78-1831.03 12" & 16" 6.7 21.4 14.70 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp MP 50.5 to MP 64.5 1978 78-1831.03 12" & 16" 50.5 64.5 14.00 - ---------------------------------------------------------------------------------------------------------------------------------- Kenai Sub Total 141.58 - ---------------------------------------------------------------------------------------------------------------------------------- North Kenai Lateral - ---------------------------------------------------------------------------------------------------------------------------------- K KPL Junction to East Forelands 1966 66-3074 4" & 6" 24.6 28.5 3.90 - ---------------------------------------------------------------------------------------------------------------------------------- K CEA Bernice Power Plant S/L 1972 72-2190 4" 0 0.14 0.14 - ---------------------------------------------------------------------------------------------------------------------------------- K Nikiski (Tesoro) to KPL 1977 77-1728.00 6" 23.8 24.6 0.75 3,979 - ---------------------------------------------------------------------------------------------------------------------------------- K Robinson Lp to Nikiski (Tesoro) 1977 77-1728.04 8" 0 23.8 24.01 126,765 - ---------------------------------------------------------------------------------------------------------------------------------- K KPL to Bernice Lake Loop 1981 81-2180.03 6" 24.6 24.8 0.20 - ---------------------------------------------------------------------------------------------------------------------------------- K Beaver Creek Line 1982 82-2290.02 12" 0 0.15 0.15 - ---------------------------------------------------------------------------------------------------------------------------------- K HEA Lateral 1985 85-8500.04 6" 0 0.8 0.83 4,356 - ---------------------------------------------------------------------------------------------------------------------------------- K Sterling Gas Field Lateral 1993 9320.09 4" 0 0.64 0.64 3,397 - ---------------------------------------------------------------------------------------------------------------------------------- K N. Kenai Lateral Bypass 1995 9520.02 8" 0.92 4,835 - ---------------------------------------------------------------------------------------------------------------------------------- N Kenai Sub Total 31.54 - ---------------------------------------------------------------------------------------------------------------------------------- Anchorage Pipeline System - ---------------------------------------------------------------------------------------------------------------------------------- A City Gate Pipeline 1961 12" 73.2 82.7 9.51 50,203 - ---------------------------------------------------------------------------------------------------------------------------------- A Tudor Lateral 1968 68-417 12" 0 3.1 3.10 - ---------------------------------------------------------------------------------------------------------------------------------- A Muldoon Loop (Muldoon) 1968 68-416 12" 0 3.7 3.70 - ---------------------------------------------------------------------------------------------------------------------------------- A Oilwell Rd. Lateral 1968 68-416 10" & 12" 0 3.08 3.08 - ---------------------------------------------------------------------------------------------------------------------------------- A Fort Richardson Power Plant 1968 68-416 8" 0 1.06 1.06 - ---------------------------------------------------------------------------------------------------------------------------------- A Fort Richardson Army Base 1971 71-470 6" 0 3.3 3.30 - ---------------------------------------------------------------------------------------------------------------------------------- A Muldoon Loop (Hillside) 1971 71-451 12" 0 10.94 10.94 - ---------------------------------------------------------------------------------------------------------------------------------- A International Airport Lateral 1967 67-4021 4" & 6" 0 1.33 1.33 - ---------------------------------------------------------------------------------------------------------------------------------- A West Side Feeder (Potter to Dim) 1976 76-570 8" 0 4.1 4.10 - ---------------------------------------------------------------------------------------------------------------------------------- A West Side Feeder (Dim. to Minn.) 1978 78-827 8" 0 6.4 6.40 - ---------------------------------------------------------------------------------------------------------------------------------- A City Gate Loop (Potter Valley) 1983 83-2340.01 16" 0 2.6 2.60 - ---------------------------------------------------------------------------------------------------------------------------------- A 64th Lateral 1989 89-8940.02 12" 0 3.37 3.37 17,790 - ---------------------------------------------------------------------------------------------------------------------------------- A Raspberry Lateral 1990 90-9080.01 6" 0 0.87 0.87 4,573 - ---------------------------------------------------------------------------------------------------------------------------------- A International Airport Lateral 2001 501167000100 6" & 8" 1.33 3 1.67 8,800 - ---------------------------------------------------------------------------------------------------------------------------------- Anch. Sub Total 55.02 - ---------------------------------------------------------------------------------------------------------------------------------- Beluga Pipeline System - ---------------------------------------------------------------------------------------------------------------------------------- B Beluga Pipeline 1984 84-30111.01 20" 0 101.6 101.60 - ---------------------------------------------------------------------------------------------------------------------------------- B Eagle River Lateral 1987 87-8557 6" 0 0.18 0.17 923 - ---------------------------------------------------------------------------------------------------------------------------------- B Fire Lake Lateral 1976 76-571 4" 0 3.65 3.65 19,260 - ---------------------------------------------------------------------------------------------------------------------------------- B Hiland Dr. Lateral 1985 77-723, 8543 4" & 6" 0 3.1 3.10 16,368 - ---------------------------------------------------------------------------------------------------------------------------------- B Palmer Lateral 1984 84-30211.01 6" 0 6.2 6.25 32,977 - ---------------------------------------------------------------------------------------------------------------------------------- B Wasilla Lateral 1984 84-30211.11 4" 0 1.8 1.78 9,414 - ---------------------------------------------------------------------------------------------------------------------------------- B Lewis River Lateral 1984 84-8460.01 6" 0 2.1 2.10 11,105 - ---------------------------------------------------------------------------------------------------------------------------------- B Vine Road Lateral 1993 93-9320.03 4" 0 3.22 3.30 17,434 - ---------------------------------------------------------------------------------------------------------------------------------- B North Palmer Lateral 1997 97-9720.04 4" 0 1.94 1.94 10,235 - ---------------------------------------------------------------------------------------------------------------------------------- B Seward Meridian Lateral 1999 99-0420002 4" 0 1.34 1.34 7,095 - ---------------------------------------------------------------------------------------------------------------------------------- Beluga Sub Total 125.24 - ---------------------------------------------------------------------------------------------------------------------------------- APC SYSTEM TOTAL 353.37 353.37 ------------------------------
[GRAPHIC OMITTED] EXHIBIT B Categories of O&M Services Costs & Expenses - ------------------------------------------- Salaries Payroll Accrual Dues & Subscriptions Building Service Telephone Membership Dues Office Supplies Postage & Printing Travel Meals & Entertainment Professional Services Management Fee Property Insurance Injuries & Damage Group Insurance Pension Plans Other Employee Benefits Miscellaneous Employee Expenses Postretirement Medical Benefits Directors Fees Membership Fees/Dues Company Safety Advertising & Pubic Relations Information Systems Expense Training Miscellaneous Equipment, Spare Parts and Consumable expense Subcontractor and Supplier expense Taxes (other than income Taxes) EXHIBIT B SPECIAL CONTRACT FOR GAS TRANSPORTATION Between ALASKA PIPELINE COMPANY and ENSTAR NATURAL GAS COMPANY, A DIVISION OF SEMCO ENERGY, INC. Dated as of September [___], 2003 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS............................................................................................1 1.1. AAA....................................................................................1 1.2. Alaska Clock Time......................................................................1 1.3. Approval Order.........................................................................1 1.4. Base Term..............................................................................1 1.5. Btu....................................................................................1 1.6. Business Day...........................................................................1 1.7. Commencement Date......................................................................1 1.8. Commodity Rate.........................................................................1 1.9. Day....................................................................................1 1.10. Delivered Gas..........................................................................1 1.11. Delivery Point(s)......................................................................2 1.12. Force Majeure..........................................................................2 1.13. Gas....................................................................................2 1.14. Gross Heating Value....................................................................2 1.15. Maximum Daily Quantity.................................................................2 1.16. Mcf....................................................................................2 1.17. Month..................................................................................2 1.18. Purchase Agreement.....................................................................2 1.19. RCA....................................................................................2 1.20. Receipt Point(s).......................................................................2 1.21. Renewal Term...........................................................................2 1.22. Reservation Rate.......................................................................3 1.23. Shipper's System.......................................................................3 1.24. Transporter's System...................................................................3 1.25. Year...................................................................................3 ARTICLE II TRANSPORTATION........................................................................................3 2.1. Shipper Delivers to Receipt Point(s); Transporter Delivers to Delivery Point(s)........3 ARTICLE III PRESSURE.............................................................................................3 3.1. Receipt Point Pressure.................................................................3 ARTICLE IV MEASURING STATIONS....................................................................................3 4.1. Transporter's Obligation to Install, Maintain and Operate Measurement Facilities at the Receipt Point(s).....................................................3 4.2. Allocation of Gas Streams at Receipt Point(s)..........................................4 4.3. Transporter's Obligation to Install, Maintain and Operate Measurement Facilities at the Delivery Point(s)....................................................4 4.4. Estimated Volumes When Meters Are Inaccurate or Out of Service.........................4 4.5. Verification of Accuracy of Equipment..................................................4 4.6. Accuracy Requirements: Correction......................................................4 4.7. Preservation of Records................................................................4
ARTICLE V MEASUREMENTS...........................................................................................5 5.1. Parameters of Measurement..............................................................5 ARTICLE VI QUALITY...............................................................................................5 6.1. Heating Value of Gas...................................................................5 6.2. Deleterious Matter: Specification......................................................6 6.3. Transporter's Right to Refuse Gas......................................................6 ARTICLE VII CHARGES & BILLING....................................................................................6 7.1. Reservation Rate and Commodity Rate....................................................6 7.2. Billing and Payment....................................................................6 7.3. Reimbursement for Fees and Taxes.......................................................7 ARTICLE VIII TERM................................................................................................7 8.1. Term...................................................................................7 ARTICLE IX WARRANTY OF TITLE.....................................................................................8 9.1. Title and Custody of Gas...............................................................8 ARTICLE X DISPUTE RESOLUTION.....................................................................................8 10.1. General................................................................................8 ARTICLE XI RCA APPROVAL..........................................................................................9 11.1. RCA Approval...........................................................................9 ARTICLE XII FORCE MAJEURE........................................................................................9 12.1. Definition of Force Majeure............................................................9 12.2. Effect of Force Majeure................................................................9 ARTICLE XIII ADDRESSES..........................................................................................10 13.1. Notices...............................................................................10 ARTICLE XIV MISCELLANEOUS.......................................................................................10 14.1. Assignments...........................................................................10 14.2. Binding Effect........................................................................10 14.3. Indemnification of Transporter........................................................10 14.4. Waiver................................................................................10 14.5. Governing Law.........................................................................11 14.6. No Third Party Beneficiary............................................................11 14.7. No Incidental or Consequential Damages................................................11 14.8. Prior Agreements Superseded...........................................................11 14.9. Amendment.............................................................................11 14.10. Counterparts..........................................................................11 14.11. Agreement Not to be Construed Against Either Party as Drafter.........................11 14.12. Headings..............................................................................11 14.13. Retention of Records..................................................................11
(ii) Exhibits Exhibit A Receipt Points Exhibit B Transporter's System Exhibit C Applicable Transportation Rates Exhibit D Segment Maximum Daily Quantities (iii) SPECIAL CONTRACT FOR GAS TRANSPORTATION This Special Contract for Gas Transportation (this "Agreement"), dated September [____], 2003 is between Alaska Pipeline Company, an Alaska corporation ("Transporter"), and ENSTAR Natural Gas Company, a Division of SEMCO Energy, Inc., a Michigan corporation ("Shipper"), each sometimes referred to herein as a "Party," and collectively, as the "Parties." In consideration of the covenants and conditions in this Agreement, the parties agree as follows: ARTICLE I DEFINITIONS Section 1.1. AAA. The term "AAA" shall have the meaning set forth in Section 10.1(b) hereof. Section 1.2. Alaska Clock Time. The term "Alaska Clock Time" shall mean Alaska Daylight time when daylight savings time is in effect and Alaska Standard Time when daylight savings time is not in effect. Section 1.3. Approval Order. The term "Approval Order" shall mean an order of the RCA approving this Agreement and meeting to requirements of Sections 8.3(c) and 8.4(c) of the Purchase Agreement. Section 1.4. Base Term. The term "Base Term" shall have the meaning set forth in Article 8 hereof. Section 1.5. Btu. The term "Btu" shall mean British Thermal Unit. Section 1.6. Business Day. The term "Business Day" shall mean any Day except Saturday, Sunday or any other Day on which banking institutions in the City of New York, New York or the City of Anchorage, Alaska, are required or permitted to close. Section 1.7. Commencement Date. The term "Commencement Date" shall mean the Day following the Day on which the closing of the purchase of Transporter occurs pursuant to the Purchase Agreement, following the receipt of the Approval Order. Section 1.8. Commodity Rate. The term "Commodity Rate" shall have the meaning set forth in Section 7.1(b) hereof. Section 1.9. Day. The term "Day" shall mean a period of twenty-four (24) consecutive hours beginning at midnight Alaska Clock Time and ending at 11:59:59 p.m. Alaska Clock Time. Section 1.10. Delivered Gas. The term "Delivered Gas" shall mean the volumes of Gas (in Mcf) transported each Month on Transporter's System. Delivered Gas for a Month shall be equal to 99% of the difference between the volume of Gas delivered by Shipper during such Month as measured at the Receipt Points less the volume of Gas actually consumed by Transporter during such month as metered at the applicable meters where such Gas is consumed. Section 1.11. Delivery Point(s). The term "Delivery Point(s)" shall mean any of the locations of interconnection between Transporter's System and Shipper's gas distribution system at which Transporter delivers Gas to or on behalf of Shipper in accordance with the terms of this Agreement. Section 1.12. Force Majeure. The term "Force Majeure" shall have the meaning set forth in Section 12.1 hereof. Section 1.13. Gas. The term "Gas" shall mean natural gas of the quality described in Article 6. Section 1.14. Gross Heating Value. The term "Gross Heating Value" shall mean the total caloric value, expressed in Btu's, obtained by the complete combustion, at constant pressure, of the amount of Gas which would occupy a volume of one (1) cubic foot at a temperature of sixty (60) degrees Fahrenheit if saturated with water vapor and under a pressure equivalent to 14.7 pounds per square inch with air of the same temperature and pressure as the Gas, when the products of combustion are cooled to the initial temperature of the Gas and air and when the water formed by combustion is condensed to the liquid state. Section 1.15. Maximum Daily Quantity. The term "Maximum Daily Quantity" shall mean the quantity of Gas equal to the maximum design capacity of the relevant segment of Transporter's System at the time Gas transportation is requested but shall not exceed the amounts set out on Exhibit D. Section 1.16. Mcf. The term "Mcf" shall mean one thousand (1,000) cubic feet. Section 1.17. Month. The term "Month" shall mean a period beginning at midnight Alaska Clock Time on the first Day of a calendar month and ending at 11:59:59 p.m. Alaska Clock Time on the last Day of the calendar month. Section 1.18. Purchase Agreement. The term "Purchase Agreement" shall mean the Purchase and Sale Agreement dated September [__], 2003 by and between SEMCO Energy, Inc. and Atlas Pipeline Partners, L.P. Section 1.19. RCA. The term "RCA" shall mean the Regulatory Commission of Alaska or its successors. Section 1.20. Receipt Point(s). The term "Receipt Point(s)" shall mean the locations at which Shipper will tender Gas to Transporter for transportation in accordance with the terms of this Agreement. The Receipt Points are described in Exhibit A. Exhibit A may be amended from time to time as agreed by Shipper and Transporter for additions or deletions of Receipt Points. Section 1.21. Renewal Term. The term "Renewal Term" shall have the meaning set forth in Article 8 hereof. 2 Section 1.22. Reservation Rate. The term "Reservation Rate" shall have the meaning set forth in Section 7.1(a) hereof. Section 1.23. Shipper's System. The term "Shipper's System" shall mean the natural gas distribution system of Shipper connected to Transporter's System. Section 1.24. Transporter's System. The term "Transporter's System" shall mean Transporter's natural gas transmission pipeline system described in Exhibit B to this Agreement and any capital improvements added or made to the Transporter's System during the term of this Agreement. Section 1.25. Year. The term "Year" shall mean a period of twelve (12) consecutive Months beginning at midnight Alaska Clock Time on January 1 and ending at 11:59:59 p.m. Alaska Clock Time on the following December 31. ARTICLE II TRANSPORTATION Section 2.1. Shipper Delivers to Receipt Point(s); Transporter Delivers to Delivery Point(s). Shipper shall tender to the Receipt Points all Gas it wants Transporter to transport, provided, however, that Transporter shall not be obligated to accept more than the Maximum Daily Quantity in any Day. The Transporter will deliver the volume of Gas received from Shipper, less Gas used for compression, lost or otherwise unaccounted for, to the Delivery Points. The Transporter shall never be obligated to deliver during any Day more Gas than the Shipper tenders for transport during that Day. ARTICLE III PRESSURE Section 3.1. Receipt Point Pressure. Shipper shall cause Gas to be delivered to the Receipt Point(s) at a pressure at least equal to the minimum delivery pressure for such Receipt Point(s) and not greater than the maximum allowable pressure specified in Transporter's technical requirements for such Receipt Point(s). Transporter from time to time may adjust the maximum allowable pressure at a Receipt Point and if such adjustment is made, Transporter shall promptly notify Shipper. ARTICLE IV MEASURING STATIONS Section 4.1. Transporter's Obligation to Install, Maintain and Operate Measurement Facilities at the Receipt Point(s). Transporter shall maintain and operate, or cause to be operated, at Transporter's expense, measurement stations in existence on the Commencement Date or subsequently installed pursuant to Section 5.2.1 at or near the Receipt Point(s). Unless otherwise determined by Transporter, a Receipt Point measurement station shall consist of (a) standard measuring equipment conforming to the requirements of American Gas Association Gas Measurement Committee Reports now in effect or as amended or supplemented during the term of this Agreement, (b) appurtenant facilities, (c) hydrometers, and (d) data telemetry equipment. Shipper shall have access to the Receipt Point measurement station(s) at which it tenders Gas at reasonable hours, but Transporter will make or cause to be made, all calibrations, measurements and adjustments. 3 Section 4.2. Allocation of Gas Streams at Receipt Point(s). Shipper's Gas may be commingled and measured in common with other Gas, including Transporter's purchased Gas, at the Receipt Points. Commingled Gas shall be allocated on a fair and reasonable basis, among the various shippers and Transporter, by Transporter. Section 4.3. Transporter's Obligation to Install, Maintain and Operate Measurement Facilities at the Delivery Point(s). The Transporter shall maintain and operate or cause to be operated, at Transporter's expense, the existing measurement facilities at or near the Delivery Point(s). Section 4.4. Estimated Volumes When Meters Are Inaccurate or Out of Service. The volume of Gas delivered hereunder at each Receipt Point shall be calculated in accordance with Section 5.1 and the American Gas Association standards applicable to the type of measurement facilities installed. In the event a meter is out of service or registering inaccurately, the volumes of Gas delivered shall be estimated: (a) by using the registration of Shipper's check meter or meters if installed and accurately registering, or in the absence of (a), (b) by correcting the error if the percentage of error is ascertainable by calibration, test, or mathematical calculations, or in the absence of both (a) and (b), then, (c) by estimating the quantity of deliveries based on deliveries during comparable periods under similar conditions when the meter was registering accurately. Section 4.5. Verification of Accuracy of Equipment. Transporter will test the accuracy of the measuring equipment for Receipt Points at least once a month. If either party notifies the other that it desires a special test of the accuracy of any measuring equipment, the parties will test promptly. Each Party shall bear the cost of its own transportation and related expenses involved in the testing of meters. Section 4.6. Accuracy Requirements: Correction. If, upon test, any measuring equipment is found to be not more than one percent (1%) inaccurate, previous records of such equipment shall be considered accurate. In the event any measuring equipment is found to be inaccurate by more than one percent (1%), at a recording corresponding to the average hourly rate of Gas flow for the period since the last preceding test, any previous records of the equipment will be corrected to zero error for any period known definitely or agreed upon. If a period of inaccuracy is not definitely known or agreed upon, the correction shall be made for a period of the lesser of sixteen (16) Days or one-half (1/2) of the time elapsed since the date of last test. The correction shall fully settle all claims based on the inaccuracy. Any measuring equipment found by test to be inaccurate will be adjusted at once to measure accurately. Section 4.7. Preservation of Records. The Transporter shall preserve for a period of at least six (6) Years all test data, charts, and other similar records. 4 ARTICLE V MEASUREMENTS Section 5.1. Parameters of Measurement. The calculation of the volumes of Gas transported hereunder shall be governed by the following: (a) The unit of volume measurement shall be one (1) cubic foot of Gas at the base temperature of sixty degrees Fahrenheit (60(degree)F.) and at a pressure of fourteen and sixty-five hundredths (14.65) pounds per inch absolute with correction for deviation from the Ideal Gas Law according to ANSI/API 2530 or AGA Report No. 8, as applicable. (b) The average absolute atmospheric pressure shall be assumed to be fourteen and seven-tenths (14.7) pounds per square inch, irrespective of actual elevation or location of the measurement point above sea level or variations in actual atmospheric pressure. (c) The specific gravity of Gas shall be determined by the use of a spot test method or, if the parties later agree in writing, by the use of a recording gravitometer generally accepted in the industry. If a recording gravitometer is used, the arithmetic average of the specific gravity of Gas flowing through the meters shall be used in computing Gas volumes. If a spot test method is used, the specific gravity of the Gas shall be determined at quarterly intervals, or more often if changes in specific gravity indicate that it is necessary. Any such test shall determine the specific gravity to be used in computation of volumes effective the first Day of the following Month and shall be used until changed in like manner by subsequent test. (d) Where determined necessary by Transporter, the actual temperature of Gas shall be determined by a recording thermometer so installed that it will record the temperature of the Gas flowing through the meters. The average of the recorded temperatures to the nearest one degree Fahrenheit (1(degree)F.) obtained while Gas is being delivered shall be used in computing measurements for that Day. ARTICLE VI QUALITY Section 6.1. Heating Value of Gas. (a) Gas shall have a Gross Heating Value of not less than nine hundred fifty (950) Btu's per cubic foot nor more than one thousand fifty (1,050) Btu's per cubic foot. Transporter shall have the right to waive such Btu's per cubit foot content limits if Transporter is able to accept Gas outside such limits without affecting Transporter's operations. (b) The Gross Heating Value of Gas shall be determined from a representative composite Gas sample taken at the point of measurement by periodic tests to be conducted monthly by Transporter or at such other intervals as the parties may mutually agree. The determination shall be made by means of a calorimeter by calculation from the component analysis using NGPA Publication 2145, as it may be revised, entitled "Physical Constants of Paraffin Hydrocarbons or Other Compounds of Natural Gas." 5 Section 6.2. Deleterious Matter: Specification. Gas shall be commercially free of dust, gum, gum-forming constituents, or other liquid or solid matter which may separate from the Gas in transportation, shall not exceed one hundred twenty degrees Fahrenheit (120(degree) F.), and shall not contain: (a) more than four (4) pounds of water per million cubic feet of Gas; (b) more than one (1) grain of hydrogen sulfide per one hundred (100) cubic feet of Gas; (c) more than twenty (20) grains of sulphur per one hundred (100) cubic feet of Gas; (d) in excess of: (i) three percent (3%) by volume of carbon dioxide; or (ii) one percent (1%) by volume of oxygen. Section 6.3. Transporter's Right to Refuse Gas. Transporter shall have the right to refuse to accept delivery of any Gas failing to meet the quality requirements of this Article VI. ARTICLE VII CHARGES & BILLING Section 7.1. Reservation Rate and Commodity Rate. For each Month during the Base Term and any Renewal Term, Shipper shall pay and Transporter shall accept as payment for Transportation service provided in accordance with this Agreement the sum of the following amounts, each computed by use of the applicable rates set forth on Exhibit C : (a) The amount of the Reservation Rate set forth on Exhibit C (the "Reservation Rate"); plus (b) the amount, calculated by multiplying the Commodity Rate, set forth on Exhibit C (the "Commodity Rate"), by the volumes, stated in Mcf, of Delivered Gas during the Month. Section 7.2. Billing and Payment. (a) Payment of the Reservation Rate for the Month in which the Commencement Date occurs shall be due on the Commencement Date. Payment of the Reservation Rate for each succeeding Month shall be due, without invoice, on the first Business Day of such Month. (b) With respect to amounts payable other than the Reservation Rate, Transporter shall deliver to Shipper a monthly statement for Transportation services for the preceding Month, which shall detail all charges payable by Shipper during the preceding Month and the basis for the calculation of the amount due. Shipper shall pay Transporter the full amount due by wire transfer of immediately available funds to the account designated by Transporter no later than ten (10) days after Shipper's receipt of such statement. 6 (c) If Shipper disagrees with any statement, it shall promptly notify Transporter in writing of its disagreement and the facts providing the basis therefor. If the Parties are unable to agree upon a settlement of the contested portion of a statement, the dispute shall be addressed in accordance with Article 10. The existence of a dispute with regard to any portion of a payment due shall not relieve Shipper of the obligation to pay any uncontested amounts due under this Agreement or to perform any other obligation under this Agreement. Shipper shall pay, no later than ten (10) days after Shipper's receipt of the statement, any disputed amount into a separate interest bearing account at First National Bank of Alaska or its successor and shall notify Transporter of such deposit. Any interest which may accrue in such account shall be payable to the Party in whose favor the dispute is resolved, and any such interest actually paid shall reduce the interest payments required to be made pursuant to subparagraph (e) to this Section 7.2 accordingly. (d) Each Party shall have the right during normal business hours to examine the books, records and charts of the other Party to the extent necessary to verify the accuracy of any invoice related to this Agreement. Claims for adjustments on account of subsequently discovered errors must be made within twelve (12) Months of the date the statement was issued. The Party discovering such an error shall promptly notify the other Party in writing of the errors believed in good faith to have occurred and the facts providing the basis for such belief. Adjustment of overpayments or underpayments shall be made within ten (10) days after resolution of such subsequently discovered errors. (e) If either Party shall fail to make any payment required by this Agreement when due, including contested portions of bills, or if any Party makes an overpayment requiring a refund by the other Party, the amount due shall bear interest, from the due date of the payment or the date on which the overpayment was made until the date of payment, at a rate for the first 10 days equal to the rate published as the "prime rate" in The Wall Street Journal for the first Business Day of the month in which such invoice is due, plus 2%, and thereafter, at a rate per annum equal to 15%, but in no event at any rate that is greater than the maximum interest rate allowed by applicable Laws. If the due date of any payment is not a Business Day, then the next Business Day shall be the last day on which payment can be paid without interest charges being assessed. Section 7.3. Reimbursement for Fees and Taxes. In addition to the transportation charges provided for in Article 7.1, Shipper will reimburse Transporter for all user fees, taxes (except income and ad valorem taxes), and the like, levied upon the transportation of the Gas. ARTICLE VIII TERM Section 8.1. Term. Although this Agreement has been executed prior to the Commencement Date, neither party shall have any obligation hereunder until the Commencement Date. Unless earlier terminated, this Agreement shall remain in full force and effect for a period of ten years from the Commencement Date (the "Base Term"). The Base Term automatically shall be extended for successive additional one-year periods (each, a "Renewal Term"), unless either Party gives the other Party notice of its intention to terminate this Agreement at least one year prior to the end of the Base Term or 180 days prior to the end of the then current Renewal Term. If the Purchase Agreement is terminated without the purchase of Transporter contemplated therein occurring, this Agreement shall terminate on the same date as the Purchase Agreement terminates and no Party shall have any liability hereunder. 7 ARTICLE IX WARRANTY OF TITLE Section 9.1. Title and Custody of Gas. As between Transporter and Shipper, Shipper shall be deemed to be in exclusive possession and control of the Gas being transported pursuant to this Agreement until such Gas is tendered to Transporter at the Delivery Point(s) and after such Gas has been redelivered to or for the account of Shipper at the Delivery Point(s). Shipper warrants that it has, or will have at the time of tender of Gas to Transporter at the Receipt Point(s), good title to such Gas. Shipper further represents and warrants that the Gas will remain free from all liens, encumbrances and other adverse claims while in the custody of Transporter. Custody of Shipper's Gas will pass to Transporter at the Receipt Point(s) and custody will pass from Transporter to Shipper at the Delivery Point(s). Title to Shipper's Gas will remain with Shipper at all times. Transporter shall have the right to reject any Gas the title to which is in dispute, or which is encumbered by a lien, encumbrance or other adverse claim of any kind. ARTICLE X DISPUTE RESOLUTION Section 10.1. General. Any dispute arising under this Agreement or otherwise in connection with this Agreement (other than a dispute as to rates which shall be subject to the exclusive jurisdiction of the RCA) shall be resolved pursuant to this Section 10.1. (a) Any Party has the right to request the other to meet to discuss a dispute. The Party requesting the meeting will give at least ten (10) Business Days notice in writing of the subject it wishes to discuss, provide a written statement of the dispute, and designate an officer of the Party with complete power to resolve the dispute to attend the meeting. Within five (5) Business Days after receipt of such request, the Party receiving the request will provide a responsive written statement and will designate an officer of the Party who will attend the meeting with complete power to resolve the dispute. (b) If the meeting fails to resolve the dispute by a signed agreement among the officers, either Party may submit the dispute for binding arbitration administered by the American Arbitration Association ("AAA") under its Commercial Arbitration Rules before a single arbitrator, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (c) The Parties agree to make discovery and disclosure of all matters relevant to the dispute to the extent and in the manner provided by the Federal Rules of Civil Procedure. The arbitrator will rule on all requests for discovery and disclosure and discovery shall be completed within 60 days after the date of selection of the arbitrator. The arbitrator may consider any matter relevant to the subject to the dispute and shall follow the statutes and decisions of the substantive law of Alaska relevant to the subject. The arbitrator shall not have the authority or power to alter, amend or modify any of the terms and conditions of this Agreement. The arbitrator shall issue a final ruling within 150 days after the date of selection of the arbitrator. 8 (d) The ruling of the arbitrator shall be in writing and signed and shall be final and binding upon the Parties. The fees and expenses of counsel, witnesses and employees of the Parties and all other costs and expenses incurred exclusively for the benefit of the Party incurring the same shall be borne by the Party incurring such fees and expenses. All other fees and expenses including compensation for the arbitrator shall be divided equally between the Parties. All meetings and arbitrations held pursuant to this Section 10.1 shall take place in Anchorage, Alaska. ARTICLE XI RCA APPROVAL Section 11.1. RCA Approval. This Agreement is subject to approval by the RCA by issuance of the Approval Order. This Agreement is subject to amendment by the RCA after giving the parties notice and an opportunity to be heard. ARTICLE XII FORCE MAJEURE Section 12.1. Definition of Force Majeure. The term "Force Majeure" shall mean: (a) acts of God; (b) governmental action, acts of the public enemy, wars, blockades, insurrections, riots or epidemics; (c) strikes, lockouts or other industrial disturbances of third parties; (d) volcanic eruptions, landslides, lightning, earthquakes, fires, hurricanes, tornadoes, high winds, storms, storm warnings, floods, tsunami, or washouts; (e) arrests and restraints of governments and people, or civil disturbances; (f) explosions, breakage or accidents to machinery or lines of pipe; and (g) any other causes, whether of the kind enumerated or otherwise, not reasonably within the control of the Party and which by the exercise of due diligence the Party is unable to prevent or overcome. "Force Majeure" shall also include: (a) in those instances where either Party is required to obtain servitudes, right-of-way grants, permits or licenses to enable the Party to fulfill its obligations, the inability of the Party to acquire, or the delays encountered by the Party, despite the best efforts, in acquiring, at reasonable cost, the servitudes, right-of-way grants, permits or licenses; (b) in those instances where either Party is required to furnish materials and supplies for the purpose of constructing, repairing or maintaining facilities or is required to secure permits or permission from any governmental agency to enable the Party to fulfill its obligations, the inability of the Party to acquire, or the delays encountered by the Party, despite its best efforts in acquiring at reasonable cost the materials and supplies, permits and permissions; and (c) any "Force Majeure Event" under the Operation and Maintenance and Administrative Services Agreement dated as of the Commencement Date between Shipper and Transporter. Section 12.2. Effect of Force Majeure. If by reason of Force Majeure, a Party is rendered unable, wholly or in part, to carry out its obligations under this Agreement, the Party shall give the other Party notice of the Force Majeure as soon as reasonably possible. The obligations (except the obligation to make payments when due) which the Party cannot fulfill because of the Force Majeure and its effects shall be suspended for the duration of the Force Majeure and its effects, but for no longer period. A Party affected by Force Majeure shall use due diligence to remedy its effects as quickly as possible. 9 ARTICLE XIII ADDRESSES Section 13.1. Notices. Notices provided in this Agreement shall be in writing, unless other means are specified, and shall be effective upon delivery by hand, by U.S. mail first class postage prepaid, or facsimile or electronic communication before 5 p.m. Alaska Clock Time at the addresses provided by such Party prior to the Commencement Date. Each Party shall promptly notify the other party in writing of any change in persons to receive notice or the addresses to which notices should be delivered. ARTICLE XIV MISCELLANEOUS Section 14.1. Assignments. Any company which shall succeed by purchase, merger or consolidation to all or substantially all of the System of a Party shall be entitled to the rights and shall be subject to the obligations of its predecessor in title under this Agreement. Either Party may also assign or pledge this Agreement under the provisions of any mortgage, deed of trust, indenture, or similar instrument which it has executed or may execute hereafter covering substantially all of its properties. Except as permitted by this Section 14.1, neither Party shall assign this Agreement or any of its rights hereunder unless it first shall have obtained the consent thereto in writing of the other Party, which consent shall not be unreasonably withheld, conditioned or delayed; provided, further, however, that neither Party shall be released from its obligations hereunder without the consent in writing of the other Party. Section 14.2. Binding Effect. This Agreement shall inure to the benefit of and shall be binding upon the Parties and their respective permitted successors and assigns. Section 14.3. Indemnification of Transporter. In the absence of gross negligence or willful misconduct by Transporter, Shipper waives any claims that it may have against Transporter arising out of or in any way connected with (a) the quality, use or condition of the Gas after delivery from Transporter's System at the Delivery Point(s) and (b) any losses or shrinkage of Gas during or resulting from transportation hereunder. Shipper agrees to provide Transporter with a waiver of subrogation of Shipper's insurance company for all claims subject to the indemnification provisions of this paragraph. Section 14.4. Waiver. No omission or delay in the exercise of any right under this Agreement shall impair any such right or shall be taken, construed or considered as a waiver or relinquishment thereof, but any such right may be exercised from time to time and as often as may be deemed expedient. In the event that any agreement or covenant herein shall be breached and thereafter waived, such waiver shall be limited to the particular breach so waived and shall not operate or be construed as a waiver of any future default or defaults, whether of a like or a different character. 10 Section 14.5. Governing Law. This Agreement shall be interpreted, performed and enforced in accordance with the laws of the State of Alaska, without giving effect to its conflict of laws principles. Section 14.6. No Third Party Beneficiary. It is expressly agreed that there is no third party beneficiary of this Agreement, and that this Agreement does not impart enforceable rights to anyone other than a Party or a permitted successor or assign of a Party. Section 14.7. No Incidental or Consequential Damages. Neither party shall have any liability to the other for incidental or consequential damages resulting from this Agreement. Section 14.8. Prior Agreements Superseded. This Agreement shall completely and fully supersede all prior understandings or agreements, written and oral, between the Parties relating to the subject matter hereof. Section 14.9. Amendment. This Agreement shall not be amended unless such amendment is in writing and signed by the Parties. Section 14.10. Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 14.11. Agreement Not to be Construed Against Either Party as Drafter. The parties recognize that this Agreement is the product of the joint efforts of the parties and agree that it shall be construed according to its plain meaning and shall not be construed against either party as drafter. Section 14.12. Headings. The headings used for Articles and Sections herein are for convenience and reference purpose only and shall in no way affect the meaning or interpretation of this Agreement. Section 14.13. Retention of Records. Each Party shall maintain and preserve all records of data and information necessary to calculate payments or evidence of fulfillment of obligations under this Agreement or pertaining to facilities associated with performance of obligations under this Agreement for a period of not less than six (6) years, or such longer period as may be required by any governmental or other regulatory authority with jurisdiction over a Party or this Agreement. IN WITNESS WHEREOF, the Parties have executed this Agreement in three (3) originals. Alaska Pipeline Company ENSTAR Natural Gas Company, A Division of SEMCO Energy, Inc. By: By: ---------------------------------- ------------------------------- Title: Title: ------------------------------- ---------------------------- Date: Date: -------------------------------- ----------------------------- 11 EXHIBIT A TO SPECIAL CONTRACT FOR GAS TRANSPORTATION The following points are the "Receipt Points" for receipt of gas deliveries: 1. Beluga-Anchorage Pipeline a. Beluga Unit Area Connection (ENSTAR/APC Station B601, Meters 170 A & B) At the upstream flange of Alaska Pipeline Company's meter at or near the inlet of Alaska Pipeline Company's Beluga-Anchorage pipeline located within the West 1/2, Southwest 1/4, of Section 26, Township 13 North, Range 10 West, Kenai Peninsula Borough, Seward Meridian, State of Alaska. b. Beluga Pipeline Company Connection (ENSTAR/APC Station B605, Meters 700 & 701) At the upstream flange of Alaska Pipeline Company's meter at or near the connection of Alaska Pipeline Company's Beluga-Anchorage pipeline and Beluga Pipeline Company's Granite Point-Beluga pipeline located within the West 1/2 of the Southwest 1/4 of Section 26, Township 13 North, Range 10 West, Kenai Peninsula Borough, Seward Meridian, State of Alaska. c. Pretty Creek Unit Connection (ENSTAR/APC Station B602, Meters 189 A & B) At the upstream flange of Alaska Pipeline Company's meter at or near the connection of the pipeline from the Pretty Creek Unit and Alaska Pipeline Company's Beluga-Anchorage pipeline located in the South 1/2 of Section 28 Township 14 North, Range 9 West, Matanuska-Susitna Borough, Seward Meridian, State of Alaska. d. Lewis River Unit Connection (ENSTAR/APC Station B603, Meters 168 A &B) At the upstream flange of Alaska Pipeline Company's meter at or near the connection of the pipeline from the Lewis River Unit and Alaska Pipeline Company's Beluga-Anchorage pipeline located in the Northwest 1/4 of Section 2, Township 14 North, Range 9 West, Matanuska-Susitna Borough, Seward Meridian, State of Alaska. e. Stump Lake/Ivan River Connection (ENSTAR/APC Station B604, Meters 600 & 601) At the upstream flange of Alaska Pipeline Company's meter located at or near the connection of the pipeline from the Stump Lake and Ivan River units and Alaska Pipeline Company's Beluga-Anchorage pipeline the Southeast 1/4 of the Northwest 1/4 of the Northeast 1/4 of the Southwest 1/4 of Section 22, Township 14 North, Range 9 West, Seward Meridian, State of Alaska. 2. Kenai-Anchorage Pipeline a. Kenai Unit Area Connection (ENSTAR/APC Station K670, Meters 500 & 505) At the upstream flange of the Alaska Pipeline Company's master meter located at or near the inlet of the Alaska Pipeline Company's Kenai-Anchorage pipeline in Section 30, Township 5 North, Range 11 West, Kenai Peninsula Borough, Seward Meridian, State of Alaska. b. Beaver Creek Unit Area Connection (ENSTAR/APC Station K671, Meter 1100 A) At the upstream flange of the Alaska Pipeline Company's meter at or near the connection of the pipeline from the Beaver Creek Unit and Alaska Pipeline Company's Royalty Pipeline located in the Northwest 1/4 of the Southwest 1/4 of Section 7, Township 6 North, Range 10 West, Kenai Peninsula Borough, Seward Meridian, State of Alaska. c. CIGGS/KNPL Pipeline Connection (ENSTAR/APC Station K673, Meters 209 & 413) At the upstream flange of the Alaska Pipeline Company's meter at or near the connection of the Alaska Pipeline Company's Royalty Pipeline and the CIGGS and KNPL pipelines located in the Northeast 1/4 of the Northeast 1/4 of Section 21, Township 7 North, Range 12 West, Kenai Peninsula Borough, Seward Meridian, State of Alaska. d. Kenai City Gate Connection (ENSTAR/APC Station K674, Meter 404) At the upstream flange of the Alaska Pipeline Company's meter at or near the connection of the Kenai-Nikiski pipeline located in the Northeast 1/4 of Section 5, Township 5 North, Range 11 West, City of Kenai, Kenai Peninsula Borough, Seward Meridian, State of Alaska. e. Wildwood Station Connection (ENSTAR/APC Station K675, Meter 412) At the upstream flange of the Alaska Pipeline Company's meter at or near the connection of the Kenai-Nikiski pipeline located in the Southeast 1/4 of Section 26, Township 6 North, Range 12 West, City of Kenai, Kenai Peninsula Borough, Seward Meridian, State of Alaska. f. West Fork Connection (ENSTAR/APC Station K676, Meters 924 & 925) At the upstream flange of Alaska Pipeline Company's meter at or near the connection of the pipeline from the West Fork field and Alaska Pipeline Company's Kenai-Anchorage pipeline located in the South 60 feet of the Northwest 1/4 of the Northwest 1/4 of Section 12, Township 5 North, Range 9 West, Kenai Peninsula Borough, Seward Meridian, State of Alaska. g. Sterling Unit Connection (ENSTAR/APC Station K677, Meter 9100) At the upstream flange of the Alaska Pipeline Company's meter at or near the connection of the pipeline from the Sterling Unit and Alaska Pipeline Company's Royalty Pipeline located within the Northeast 1/4 of Section 9, Township 5 North, Range 10 West, Kenai Peninsula Borough, Seward Meridian, State of Alaska. EXHIBIT B TO SPECIAL CONTRACT FOR GAS TRANSPORTATION DESCRIPTION OF TRANSPORTATION SYSTEM The APC's System consists of the following: Kenai Pipeline System: The Kenai Pipeline System consists of combined 142 miles of looped 12-inch and 16-inch diameter pipeline, including a nine mile twin crossing of the Turnagain Arm of the Cook Inlet, plus 25 miles of 8-inch diameter pipeline known as the Royalty Lateral and six miles of 12-inch, 6-inch, and 4-inch diameter lateral pipelines connecting to the Royalty Lateral. All lines have a maximum allowable operating pressure (MAOP) of 300 pounds per square inch gage (psig) or greater. The Kenai Pipeline has two compressor stations totaling 8,400 horsepower. Beluga Pipeline System: The Beluga Pipeline System consists of 102 miles of 20-inch pipeline and 23 miles of 6-inch and 4-inch diameter lateral pipelines connecting to the 20-inch pipeline. All lines have a MAOP of 300 psig or greater. It does not have any compression capacity. The Anchorage Pipeline System: The Anchorage Pipeline system consists of 55 miles of 12-inch, 10-inch, 8-inch, 6-inch and 4-inch diameter pipelines and lateral pipelines in the greater Anchorage area interconnecting with the Kenai Pipeline System at Potter Station and with the Beluga Pipeline System at East Anchorage City Gas Station. All lines have a MAOP of 300 psig or greater. The locations of the Kenai Pipeline System, the Beluga Pipeline System and the Anchorage Pipeline System are shown on the attached map. APC PIPELINE SUMMARY
Milepost Designation - ---------------------------------------------------------------------------------------------------------------------------------- Sys. Pipeline Name Year ER # Pipe Size From To Length Length Miles Installed (miles) (feet) - ---------------------------------------------------------------------------------------------------------------------------------- Kenai Pipeline - ---------------------------------------------------------------------------------------------------------------------------------- K "A" Kalifonski to Burnt Island 1960 12" 2.3 64.5 62.12 327,977 - ---------------------------------------------------------------------------------------------------------------------------------- K "A" Turnagain Crossing 1960 12" 64.5 73.2 8.68 45,841 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Turnagain Crossing 1960 12" 64.5 73.2 8.58 45,289 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp Kalifonski to Kenai River 1975 74-513.2 12" & 16" 2.3 6.7 4.40 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp Gutenrath to MP50.5 1975 74-513.2 12" & 16" 21.4 50.5 29.10 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp Kenai River to MP 21.4 1978 78-1831.03 12" & 16" 6.7 21.4 14.70 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp MP 50.5 to MP 64.5 1978 78-1831.03 12" & 16" 50.5 64.5 14.00 - ---------------------------------------------------------------------------------------------------------------------------------- Kenai Sub Total 141.58 - ---------------------------------------------------------------------------------------------------------------------------------- North Kenai Lateral - ---------------------------------------------------------------------------------------------------------------------------------- K KPL Junction to East Forelands 1966 66-3074 4" & 6" 24.6 28.5 3.90 - ---------------------------------------------------------------------------------------------------------------------------------- K CEA Bernice Power Plant S/L 1972 72-2190 4" 0 0.14 0.14 - ---------------------------------------------------------------------------------------------------------------------------------- K Nikiski (Tesoro) to KPL 1977 77-1728.00 6" 23.8 24.6 0.75 3,979 - ---------------------------------------------------------------------------------------------------------------------------------- K Robinson Lp to Nikiski (Tesoro) 1977 77-1728.04 8" 0 23.8 24.01 126,765 - ---------------------------------------------------------------------------------------------------------------------------------- K KPL to Bernice Lake Loop 1981 81-2180.03 6" 24.6 24.8 0.20 - ---------------------------------------------------------------------------------------------------------------------------------- K Beaver Creek Line 1982 82-2290.02 12" 0 0.15 0.15 - ---------------------------------------------------------------------------------------------------------------------------------- K HEA Lateral 1985 85-8500.04 6" 0 0.8 0.83 4,356 - ---------------------------------------------------------------------------------------------------------------------------------- K Sterling Gas Field Lateral 1993 9320.09 4" 0 0.64 0.64 3,397 - ---------------------------------------------------------------------------------------------------------------------------------- K N. Kenai Lateral Bypass 1995 9520.02 8" 0.92 4,835 - ---------------------------------------------------------------------------------------------------------------------------------- N Kenai Sub Total 31.54 - ---------------------------------------------------------------------------------------------------------------------------------- Anchorage Pipeline System - ---------------------------------------------------------------------------------------------------------------------------------- A City Gate Pipeline 1961 12" 73.2 82.7 9.51 50,203 - ---------------------------------------------------------------------------------------------------------------------------------- A Tudor Lateral 1968 68-417 12" 0 3.1 3.10 - ---------------------------------------------------------------------------------------------------------------------------------- A Muldoon Loop (Muldoon) 1968 68-416 12" 0 3.7 3.70 - ---------------------------------------------------------------------------------------------------------------------------------- A Oilwell Rd. Lateral 1968 68-416 10" & 12" 0 3.08 3.08 - ---------------------------------------------------------------------------------------------------------------------------------- A Fort Richardson Power Plant 1968 68-416 8" 0 1.06 1.06 - ---------------------------------------------------------------------------------------------------------------------------------- A Fort Richardson Army Base 1971 71-470 6" 0 3.3 3.30 - ---------------------------------------------------------------------------------------------------------------------------------- A Muldoon Loop (Hillside) 1971 71-451 12" 0 10.94 10.94 - ---------------------------------------------------------------------------------------------------------------------------------- A International Airport Lateral 1967 67-4021 4" & 6" 0 1.33 1.33 - ---------------------------------------------------------------------------------------------------------------------------------- A West Side Feeder (Potter to Dim) 1976 76-570 8" 0 4.1 4.10 - ---------------------------------------------------------------------------------------------------------------------------------- A West Side Feeder (Dim. to Minn.) 1978 78-827 8" 0 6.4 6.40 - ---------------------------------------------------------------------------------------------------------------------------------- A City Gate Loop (Potter Valley) 1983 83-2340.01 16" 0 2.6 2.60 - ---------------------------------------------------------------------------------------------------------------------------------- A 64th Lateral 1989 89-8940.02 12" 0 3.37 3.37 17,790 - ---------------------------------------------------------------------------------------------------------------------------------- A Raspberry Lateral 1990 90-9080.01 6" 0 0.87 0.87 4,573 - ---------------------------------------------------------------------------------------------------------------------------------- A International Airport Lateral 2001 501167000100 6" & 8" 1.33 3 1.67 8,800 - ---------------------------------------------------------------------------------------------------------------------------------- Anch. Sub Total 55.02 - ---------------------------------------------------------------------------------------------------------------------------------- Beluga Pipeline System - ---------------------------------------------------------------------------------------------------------------------------------- B Beluga Pipeline 1984 84-30111.01 20" 0 101.6 101.60 - ---------------------------------------------------------------------------------------------------------------------------------- B Eagle River Lateral 1987 87-8557 6" 0 0.18 0.17 923 - ---------------------------------------------------------------------------------------------------------------------------------- B Fire Lake Lateral 1976 76-571 4" 0 3.65 3.65 19,260 - ---------------------------------------------------------------------------------------------------------------------------------- B Hiland Dr. Lateral 1985 77-723, 8543 4" & 6" 0 3.1 3.10 16,368 - ---------------------------------------------------------------------------------------------------------------------------------- B Palmer Lateral 1984 84-30211.01 6" 0 6.2 6.25 32,977 - ---------------------------------------------------------------------------------------------------------------------------------- B Wasilla Lateral 1984 84-30211.11 4" 0 1.8 1.78 9,414 - ---------------------------------------------------------------------------------------------------------------------------------- B Lewis River Lateral 1984 84-8460.01 6" 0 2.1 2.10 11,105 - ---------------------------------------------------------------------------------------------------------------------------------- B Vine Road Lateral 1993 93-9320.03 4" 0 3.22 3.30 17,434 - ---------------------------------------------------------------------------------------------------------------------------------- B North Palmer Lateral 1997 97-9720.04 4" 0 1.94 1.94 10,235 - ---------------------------------------------------------------------------------------------------------------------------------- B Seward Meridian Lateral 1999 99-0420002 4" 0 1.34 1.34 7,095 - ---------------------------------------------------------------------------------------------------------------------------------- Beluga Sub Total 125.24 - ---------------------------------------------------------------------------------------------------------------------------------- APC SYSTEM TOTAL 353.37 353.37 ------------------------------
[GRAPHIC OMITTED] EXHIBIT C TO SPECIAL CONTRACT FOR GAS TRANSPORTATION Reservation Rate $943,000/month Commodity Rate $0.075/Mcf EXHIBIT D TO SPECIAL CONTRACT FOR GAS TRANSPORTATION MAXIMUM DAILY QUANTITIES The following segments of Transporter's System have the following Maximum Daily Quantities: Segment Maximum Daily Quantity ------- ---------------------- Kenai Pipeline 210 MMcf/d Beluga Pipeline 200 MMcf/d EXHIBIT C GAS TRANSMISSION AGREEMENT between ALASKA PIPELINE COMPANY and SEMCO ENERGY, INC. Dated as of September [___], 2003 TABLE OF CONTENTS
ARTICLE I DEFINITIONS.................................................................................1 1.1 Definitions............................................................................1 1.2 Rules of Construction..................................................................4 ARTICLE II TERM........................................................................................4 2.1 Base Term and Renewal Term.............................................................4 ARTICLE III TRANSPORTATION RELATED SERVICES.............................................................5 3.1 SEMCO's Rights and Obligations.........................................................5 3.2 APC's Rights and Obligations...........................................................6 ARTICLE IV SPECIAL PAYMENT TERMS.......................................................................6 4.1 Reservation Rate and Commodity Rate....................................................6 4.2 Credit for Amounts Paid under Special Contract.........................................6 4.3 Special Payment Agreement..............................................................6 4.4 Billing and Payment....................................................................7 4.5 Reimbursement for Fees and Taxes.......................................................8 ARTICLE V DEFAULT AND REMEDIES........................................................................8 5.1 Event of Default.......................................................................8 5.2 Notice and Opportunity To Cure.........................................................9 5.3 Remedies...............................................................................9 5.4 Election of Remedies...................................................................9 ARTICLE VI DISPUTE RESOLUTION..........................................................................9 6.1 General................................................................................9 ARTICLE VII INDEMNIFICATION AND INSURANCE..............................................................10 7.1 Indemnification.......................................................................10 7.2 Notice................................................................................11 7.3 Defense of Legal Actions..............................................................11 7.4 Survival..............................................................................11 7.5 Limitation on Damages.................................................................11 7.6 Insurance.............................................................................12 7.7 Coverage of SEMCO and Endorsement.....................................................12 7.8 Application of Property Insurance Proceeds............................................12 ARTICLE VIII EFFECTIVENESS..............................................................................12 8.1 Conditions to Effectiveness...........................................................12
i
ARTICLE IX MISCELLANEOUS..............................................................................12 9.1 Assignments...........................................................................12 9.2 Warranty of Title.....................................................................13 9.3 Indemnification of APC................................................................13 9.4 Force Majeure.........................................................................13 9.5 Restrictions on Adjustment of Payment Terms...........................................14 9.6 Binding Effect........................................................................14 9.7 Waiver................................................................................14 9.8 Severability..........................................................................14 9.9 Notices...............................................................................14 9.10 Retention of Records..................................................................14 9.11 Headings..............................................................................14 9.12 Governing Law.........................................................................14 9.13 No Third Party Beneficiary............................................................15 9.14 Prior Agreements Superseded...........................................................15 9.15 Amendment.............................................................................15 9.16 Counterparts..........................................................................15
Exhibits Exhibit A Description of Transportation System Exhibit B Special Contract Exhibit C Maximum Daily Quantities Exhitit D Rates Exhibit E Insurance Exhibit F Gas Supply Contracts ii GAS TRANSMISSION agreement This Gas Transmission Agreement (this "Agreement") entered into as of September [___], 2003, by and between Alaska Pipeline Company, a corporation organized and existing under the laws of the State of Alaska and having its principal place of business at 3000 Spenard Road, P.O. Box 190288, Anchorage, Alaska 99519-0288 ("APC"), and SEMCO Energy, Inc., a corporation organized and existing under the laws of the State of Michigan and having its principal place of business at 28470 13 Mile Road, Farmington Hills, Michigan 48334 ("SEMCO"), each herein referred to as a "Party," and collectively, referred to as the "Parties." RECITALS APC owns the intrastate natural gas transmission pipeline and associated facilities described on Exhibit A hereto, and any capital improvements added or made thereto during the term of this Agreement (the "APC System"). ENSTAR Natural Gas Company, a division of SEMCO ("ENSTAR"), provides natural gas distribution services to customers, utilizing facilities which are connected with the APC System (the "ENSTAR System"). APC and ENSTAR have entered into a Special Contract for Gas Transportation (subject to Commission approval) (the "Special Contract"), which is attached as Exhibit B. APC and SEMCO desire to provide for additional transportation related arrangements with respect to APC's existing Transportation Capacity on the APC System pursuant to the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein and other good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound, APC and SEMCO hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1. Definitions. The following terms shall have the meanings set forth below: "AAA" is defined in Section 6.1.3. "Alaska Clock Time" shall mean Alaska Daylight time when daylight savings time is in effect and Alaska Standard Time when daylight savings time is not in effect. "APC" is defined in the introductory paragraph hereof. "APC System" is defined in the Recitals hereto. "Base Term" is defined in Section 2.1. 1 "Base Year" is defined in Section 3.1.2. "Business Day" shall mean any Day except Saturday, Sunday or any other Day on which banking institutions in the City of New York, New York or the City of Anchorage, Alaska, are required or permitted to close. "Buyer" shall mean Atlas Pipeline Partners, L.P. or its designee. "Commencement Date" shall mean the Day following the date APC is acquired by Buyer pursuant to the Purchase Agreement. "Commission" shall mean the Regulatory Commission of Alaska or any successor commission or agency. "Commodity Rate" is defined in Section 4.1.2. "Day" shall mean a period of twenty-four (24) consecutive hours beginning at midnight Alaska Clock Time and ending at 11:59:59 p.m. Alaska Clock Time. "Delivered Gas" shall mean the volumes of Gas (in Mcf) transported each Month in APC's System. Delivered Gas for a Month shall be equal to 99% of the difference between the volume of Gas delivered by ENSTAR during such Month as measured at the Receipt Points, less the volume of Gas actually consumed by APC during such Month as metered at the applicable meters where such Gas is consumed. "Delivery Point" shall mean any of the locations of interconnection between the APC System and the ENSTAR System at which APC delivers Gas to or on behalf of ENSTAR in accordance with the terms of the Special Contract. "Displacement" shall mean the method by which equivalent volumes of Gas are delivered from one point on APC System to another point on APC System without the physical movement of Gas from the first point to the second point. "ENSTAR" is defined in the Recitals hereto. "ENSTAR System" is defined in the Recitals hereto. "Gas" shall mean natural gas of the quality described in Article VI of the Special Contract. "Governmental Approval" shall mean any consent, authorization, certificate, permit, right of way grant or approval of any Governmental Authority that is necessary for the ownership and operation of the APC System in accordance with applicable Laws. "Governmental Authority" shall mean any court or tribunal in any jurisdiction or any federal, state, tribal, municipal or local government or other governmental body, agency, authority, department, commission, board, bureau, instrumentality, arbitrator or arbitral body or any quasi-governmental or private body lawfully exercising any regulatory or taxing authority, including, without limitation, the Commission. 2 "Laws" shall mean any applicable statute, common law, rule, regulation, judgment, order, ordinance, writ, injunction or decree issued or promulgated by any Governmental Authority having jurisdiction with respect to the applicable subject matter. "Lost Volumes" is defined in Section 3.1.2. "Maximum Daily Quantity" shall mean the quantity of Gas equal to the maximum design Transportation Capacity of the relevant segment of APC System at the time Transportation service is requested, but not more than the quantity or quantities set out in Exhibit C hereto as being the portion of the Transportation Capacity over each segment of APC System being purchased by SEMCO for ENSTAR pursuant to this Agreement. "Mcf" shall mean one thousand (1000) cubic feet of Gas measured as provided in the Special Contract. "Month" shall mean a period beginning at midnight Alaska Clock Time on the first Day of a calendar month and ending at 11:59:59 Alaska Clock Time on the last Day of the calendar month. "O&M Agreement" shall mean the Operation and Maintenance and Administrative Services Agreement to be dated as of the Commencement Date by and between APC and ENSTAR. "Party" and "Parties" are defined in the introductory paragraph hereof. "Receipt Point" shall mean a location on APC System at which ENSTAR will tender Gas to APC for transportation on APC System in accordance with the terms of the Special Contract. "Renewal Term" is defined in Section 2.1. "Reservation Rate" is defined in Section 4.1.1. "SEMCO" is defined in the introductory paragraph hereof. "Special Contract" is defined in the Recitals hereto. "State" shall mean the State of Alaska. "System" shall mean the APC System or the ENSTAR System. "Transportation" shall mean the movement of Gas from a Receipt Point to a Delivery Point and may include delivery of Gas by Displacement. 3 "Transportation Capacity" of the APC System at any time shall mean the maximum quantity of Gas that a segment of the APC System is capable of transporting at such time. "Year" shall mean a period of twelve (12) consecutive Months beginning at midnight Alaska Clock Time on January 1 and ending at 11:59:59 Alaska Clock Time on December 31. Section 1.2. Rules of Construction. In construing this Agreement: (a) No consideration shall be given to the captions of articles, sections, subsections or clauses, which are inserted for convenience in locating the provisions of this Agreement and not as an aid in its construction. (b) No consideration shall be given to the fact or presumption that one Party had a greater or lesser role in drafting this Agreement. (c) The words "include" or "including" and their derivatives shall be construed to be followed by the words "but not limited to." (d) The plural shall be deemed to include the singular, and vice versa. (e) All references to prices, value or monetary amounts refer to United States dollars, unless expressly provided otherwise. (f) The words "this Agreement", "herein", "hereof", "hereby", "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision, unless expressly stated. ARTICLE II TERM Section 2.1. Base Term and Renewal Term. Although this Agreement has been executed prior to the Commencement Date, neither Party shall have any obligation hereunder until the Commencement Date. Unless earlier terminated, this Agreement shall remain in full force and effect for a period of ten years from the Commencement Date (the "Base Term"). The Base Term automatically shall be extended for successive additional one-year periods (each, a "Renewal Term"), unless either Party gives the other Party notice of its intention to terminate this Agreement at least one year prior to the end of the Base Term or 180 days prior to the end of the then current Renewal Term. If the Purchase Agreement is terminated without the purchase of APC contemplated therein occurring, this Agreement shall terminate on the same day as the Purchase Agreement terminates and no Party shall have any liability hereunder. 4 ARTICLE III TRANSPORTATION RELATED SERVICES Section 3.1. SEMCO's Rights and Obligations. (a) SEMCO, acting for its ENSTAR division, shall have the right during the term of this Agreement to obtain Transportation of a daily quantity of Gas equal to the Maximum Daily Quantity on each segment of APC System in accordance with the terms hereof and of the Special Contract. SEMCO shall be entitled to nominate and schedule Transportation service for its ENSTAR division up to the Maximum Daily Quantity for each Day of the Base Term and any Renewal Term. SEMCO's right to obtain Transportation of such quantity of Gas shall be exclusive, and APC shall reserve such portion of the Transportation Capacity solely for SEMCO's use for its ENSTAR division. The Parties agree that if there are ever multiple transporters on the APC System, APC and SEMCO shall agree on the nomination and balancing provisions that shall be applicable to this Agreement and the Special Contract. SEMCO hereby commits to Transportation under this Agreement all Gas purchased by ENSTAR pursuant to the contracts listed in Exhibit F other than Gas delivered to customers directly off of the KKPL pipeline through connections to the ENSTAR System prior to the connection between the KKPL pipeline and the APC System and which either (i) exist prior to the date of this Agreement or (ii) if connected after the date of this Agreement, cannot be economically served from the APC System. (b) The Transportation Capacity purchased by SEMCO for its ENSTAR division pursuant to this Agreement as set forth on Exhibit C is all of the Transportation Capacity of APC System on the date of this Agreement. If APC desires to increase the Transportation Capacity of any segment of APC System, APC shall notify SEMCO. If SEMCO notifies APC within ten (10) days after receipt of such notice that it would be interested in purchasing such increased Transportation Capacity, then APC and SEMCO shall negotiate in good faith the terms under which SEMCO would purchase such increased Transportation Capacity. If APC and SEMCO are unable to reach an agreement on the terms of the purchase by SEMCO of such increased Transportation Capacity within ninety (90) days of the original notice from APC, APC shall be free to offer such increased Transportation Capacity to third parties. If following the sale by APC of Transportation Capacity to a third party, the Yearly deliveries of Gas by SEMCO to such third party is less than the Gas deliveries in the Year immediately prior to the Year in which APC sold capacity to such third party (the "Base Year"), SEMCO and ENSTAR shall be entitled to a credit for such Year to be applied against the next payment amounts due hereunder and under the Special Contract in an amount equal to the sum of the greater of the annual Demand Charge payable pursuant to Article IV of this Agreement or Article VII of the Special Contract multiplied by a fraction, the numerator of which is the lesser of the Gas deliveries by APC to such third party during such Year or the aggregate reduction in Gas deliveries to such third parties for such Year when compared to the Base Year (the "Lost Volumes"), and the denominator of which is the total Gas deliveries in the Base Year. Any terms negotiated between APC and SEMCO for increased Transportation Capacity shall be subject to Commission approval, if required. 5 (c) SEMCO, acting for ENSTAR, shall tender at the Receipt Point(s) the volume of Gas which it desires APC to transport to the ENSTAR System, which total volume shall not exceed the applicable Maximum Daily Quantity. SEMCO shall be responsible for all arrangements (and associated costs and expenses) necessary to make Gas available at the Receipt Point(s). SEMCO shall use its best efforts to notify APC, or cause its suppliers to notify APC, at least four (4) hours prior to terminating, curtailing or interrupting deliveries to a Receipt Point. Section 3.2. APC's Rights and Obligations. (a) APC shall make Transportation service available to SEMCO's ENSTAR division, up to the Maximum Daily Quantity for any segment of APC System, pursuant to the terms of this Agreement and the Special Agreement. (b) APC shall receive at the Receipt Point(s) all Gas up to the Maximum Daily Quantities tendered by SEMCO, acting through its ENSTAR division, and shall deliver an equivalent volume of Gas to the Delivery Point(s) designated by ENSTAR, less Gas used for compression, lost or otherwise unaccounted for. APC shall never be obligated to deliver during any Day more Gas than ENSTAR tenders for delivery during that Day. APC shall deliver Gas to ENSTAR at the Delivery Point(s) at APC's prevailing line pressure as such pressure may vary from time to time. ARTICLE IV SPECIAL PAYMENT TERMS Section 4.1. Reservation Rate and Commodity Rate. For each Month during the Base Term and any Renewal Term, SEMCO shall pay and APC shall accept as payment for Transportation services provided in accordance with this Agreement the sum of the following amounts, each computed by use of the rates set forth on Exhibit D: (a) the amount of the Reservation Rate set forth on Exhibit D (the "Reservation Rate"); plus (b) the amount, calculated by multiplying the Commodity Rate set forth on Exhibit D (the "Commodity Rate") by the Delivered Gas for the Month, as measured in accordance with the measurement provisions in Articles IV and V of the Special Contract. Section 4.2. Credit for Amounts Paid under Special Contract. SEMCO shall receive a credit against the Monthly amounts due to APC under Section 4.1 above in an amount equal to any amounts to be paid by its ENSTAR division pursuant to the terms of the Special Contract. Section 4.3. Special Payment Agreement. SEMCO and APC recognize that the Commission could, in the future, modify the rates or other terms in the Special Contract. Nevertheless, in recognition of the fact that payment of the amounts set forth in Section 4.1 above for the Base Term represent an essential component of the consideration paid by Buyer for the acquisition of APC from SEMCO, SEMCO agrees to pay to APC the amounts set forth in Section 4.1 above for the Base Term (and any Renewal Term) even if the rates in the Special Contract are later reduced or increased by the Commission and regardless of the extent to which ENSTAR is permitted to continue to include such payments in the rates charged to its customers. SEMCO will continue to receive a Monthly credit provided for in Section 4.2 above in the amount of any revised payments under the Special Contract. 6 Section 4.4. Billing and Payment. (a) Payment of the Reservation Rate for the Month in which the Commencement Date occurs shall be due on the Commencement Date. Payment of the Reservation Rate for each succeeding Month shall be due, without invoice, on the first Business Day of such Month. (b) With respect to amounts payable other than the Reservation Rate, APC shall deliver to SEMCO a monthly statement for Transportation services for the preceding Month, which shall detail all charges payable by SEMCO during the preceding Month and the basis for the calculation of the amount due; provided, however, that so long as the Reservation Rate and the Commodity Rate under the Special Contract have not been modified, the statement delivered by APC to ENSTAR pursuant to Article VII of the Special Contract shall satisfy the requirements of this Section 4.4.2. SEMCO shall pay APC the full amount due by wire transfer of immediately available funds to the account designated by APC no later than ten (10) days after SEMCO's receipt of such statement. (c) If SEMCO disagrees with any statement, it shall promptly notify APC in writing of its disagreement and the facts providing the basis therefore. If the Parties are unable to agree upon a settlement of the contested portion of a statement, the dispute shall be addressed in accordance with Article VI. The existence of a dispute with regard to any portion of a payment due shall not relieve SEMCO of the obligation to pay any uncontested amounts due under this Agreement or to perform any other obligation under this Agreement. SEMCO shall pay, no later than ten (10) days after SEMCO's receipt of the statement, any disputed amount into a separate interest bearing account at First National Bank of Alaska or its successor and shall notify APC of such deposit. Any interest which may accrue in such account shall be payable to the Party in whose favor the dispute is resolved, and any such interest actually paid shall reduce the interest payments required to be made pursuant to Section 4.4.5 accordingly. (d) Each Party shall have the right during normal business hours to examine the books, records and charts of the other Party to the extent necessary to verify the accuracy of any invoice related to this Agreement. Claims for adjustments on account of subsequently discovered errors must be made within twelve (12) Months of the date the statement was issued. The Party discovering such an error shall promptly notify the other Party in writing of the errors believed in good faith to have occurred and the facts providing the basis for such belief. Adjustment of overpayments or underpayments shall be made within ten (10) days after resolution of such subsequently discovered errors. (e) If either Party shall fail to make any payment required by this Agreement when due, including contested portions of bills, or if any Party makes an overpayment requiring a refund by the other Party, the amount due shall bear interest, from the due date of the payment or the date on which the overpayment was made until the date of payment, at a rate per annum for the first ten (10) days equal to the rate published as the "prime rate" in The Wall Street Journal for the first Business Day of the month in which such invoice is due, plus 2%, and thereafter at a rate per annum equal to 15%, but in no event at any rate that is greater than the maximum interest rate allowed by applicable Laws. If the due date of any payment is not a Business Day, then the next Business Day shall be the last day on which payment can be paid without interest charges being assessed. 7 Section 4.5. Reimbursement for Fees and Taxes. In addition to the transportation charges provided for in Section 4.1, SEMCO will reimburse APC for all user fees, taxes (except income and ad valorem taxes), and the like, levied upon the transportation of the Gas. ARTICLE V DEFAULT AND REMEDIES Section 5.1. Event of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default" under this Agreement during the continuance of such event: (a) Failure by either APC or SEMCO to make payments for undisputed amounts due hereunder or under the Special Contract when due. (b) Failure by either Party to substantially perform any material obligation under this Agreement or the Special Contract. (c) Revocation by any Governmental Authority of any material Governmental Approval due to APC's failure to comply with applicable statutes or regulations. (d) The dissolution or liquidation of a Party, or the admission in writing of a Party of its inability to pay its debts as they become due; or the failure by a Party to lift any execution, garnishment, or attachment of such consequence as will impair such Party's ability to perform substantially its obligations pursuant to this Agreement; or a filing of a voluntary petition in bankruptcy by a Party under any provision of any federal or state bankruptcy law or the consenting to the filing of any bankruptcy or reorganization petition against such Party under similar law; or the adjudication of a Party as bankrupt; or the making of an assignment by a Party for the benefit of creditors; or the approval by a court of competent jurisdiction of a petition applicable to a Party in any proceeding for the reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar proceeding instituted under the provisions of any bankruptcy act or under any similar act in any domestic or foreign jurisdiction which many not be in effect or hereafter enacted, or within ninety (90) days after the commencement of any such proceeding against a Party such proceeding shall not have been dismissed, or the filing of an answer admitting or not contesting the material allegations of a petition against it in such proceeding; or the appointment by a Party, without the consent or acquiescence of the other Party, of any trustee, receiver, or liquidator of the Party or of any material part of its properties, if within ninety (90) days thereafter such appointment shall not have been vacated, or if the Party shall seek or consent or acquiesce in the appointment of any trustee, receiver or liquidator of itself of any material part of its properties. 8 Section 5.2. Notice and Opportunity To Cure. If a Party claims that an Event of Default has occurred, such Party shall provide the defaulting Party with written notice thereof, specifying the claim of breach and the basis of such claim. Except for any Event of Default described in Section 5.1.4, the alleged defaulting Party shall have a period of thirty (30) days (ten (10) days in the case of a payment default) after receipt of notice, to cure such alleged Event of Default. If any non-payment default (other than a default described in Section 5.1.4) cannot be reasonably cured within such thirty (30) day period, the cure period shall be extended by an additional thirty (30) days, so long as the defaulting Party diligently pursues efforts to cure the default and the non-defaulting Party is paid any actual and direct damages for any injury sustained as a result of such default continuing during the extended cure period. Section 5.3. Remedies. (a) APC shall have the right to terminate this Agreement upon a default by SEMCO that has not been cured within the cure period therefore pursuant to Section 5.2. Upon such termination, APC shall be entitled to such damages as are available at law and equity, subject to Section 7.5. (b) In the case of a default by APC that has not been cured within the cure period therefor, SEMCO shall have the option to either terminate this Agreement or to operate and maintain the APC System in order to receive Transportation service and to make payments pursuant to the terms of this Agreement. SEMCO shall notify APC at least five (5) days before the expiration of the cure period that it intends to exercise its option to operate and maintain the APC System upon expiration of the cure period. Upon exercise of SEMCO's option to operate and maintain the APC System or terminate this Agreement, SEMCO shall be entitled to such damages as are available at law and equity, subject to Section 7.5. If SEMCO pursues its option to operate and maintain the APC System, (a) SEMCO's payments under this Agreement shall be offset by the amount of actual operation and maintenance costs incurred by SEMCO to operate and maintain the APC System if the O&M Agreement has been terminated, and (b) upon the cure by APC of such default, SEMCO shall cease to operate and maintain the APC System pursuant to this Section. Section 5.4. Election of Remedies. The termination of this Agreement or exercise of SEMCO's option to operate and maintain the APC System shall not excuse either Party from obligations which may have accrued under this Agreement prior to such termination or exercise. ARTICLE VI DISPUTE RESOLUTION Section 6.1. General. (a) Any dispute arising under this Agreement or otherwise in connection with this Agreement shall be resolved pursuant to this Section 6.1. (b) Any Party has the right to request the other to meet to discuss a dispute. The Party requesting the meeting will give at least ten (10) Business Days notice in writing of the subject it wishes to discuss, provide a written statement of the dispute, and designate an officer of the Party with complete power to resolve the dispute to attend the meeting. Within five (5) Business Days after receipt of such request, the Party receiving the request will provide a responsive written statement and will designate an officer of the Party who will attend the meeting with complete power to resolve the dispute. 9 (c) If the meeting fails to resolve the dispute by a signed agreement among the officers, either Party may submit the dispute for binding arbitration administered by the American Arbitration Association ("AAA") under its Commercial Arbitration Rules before a single arbitrator, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (d) The Parties agree to make discovery and disclosure of all matters relevant to the dispute to the extent and in the manner provided by the Federal Rules of Civil Procedure. The arbitrator will rule on all requests for discovery and disclosure and discovery shall be completed within 60 days after the date of selection of the arbitrator. The arbitrator may consider any matter relevant to the subject to the dispute and shall follow the statutes and decisions of the substantive law of Alaska relevant to the subject. The arbitrator shall not have the authority or power to alter, amend or modify any of the terms and conditions of this Agreement. The arbitrator shall issue a final ruling within 150 days after the date of selection of the arbitrator. (e) The ruling of the arbitrator shall be in writing and signed and shall be final and binding upon the Parties. The fees and expenses of counsel, witnesses and employees of the Parties and all other costs and expenses incurred exclusively for the benefit of the Party incurring the same shall be borne by the Party incurring such fees and expenses. All other fees and expenses including compensation for the arbitrator, shall be divided equally between the Parties. All meetings and arbitrations held pursuant to this Section 6.1 shall take place in Anchorage, Alaska. ARTICLE VII INDEMNIFICATION AND INSURANCE Section 7.1. Indemnification. Each Party shall indemnify, hold harmless and defend the other Party, its affiliates, successors and assigns and their respective agents, officers, directors, managers, employees, representatives and affiliates, against all claims, demands, losses, judgments, damages and associated costs and expenses (including reasonable fees, disbursements and expenses for attorneys and experts incurred by the indemnified Party in any actions or proceedings between the indemnified Party and a third party), related to property damage, personal injuries or death suffered by third persons resulting from any act or failure to act by such indemnifying Party related to this Agreement, or from the undertaking by such Party of any activity contemplated by this Agreement, regardless of whether attributable in whole or in part to any act, omission, negligence (active, passive, sole, joint or concurrent with that of the indemnified Party or any other person), strict liability, any condition or defect on or in any property, or other fault or responsibility of the indemnified Party or any other person or party (whether such liability is based on contract, warranty, tort, statute or otherwise), except that if the property damage, personal injuries or death are caused in part, but not entirely, by the indemnified Party then the indemnifying Party shall be obligated under this Section 7.1 only to the extent of the percentage of fault attributed to such indemnifying Party and/or its agents, officers, directors, managers, employees, representatives and affiliates. The indemnities provided in this Section shall be the sole and exclusive remedy of the indemnified Party with respect to all matters related to property damage, personal injuries or death resulting from any act or failure to act by an indemnifying Party related to this Agreement. 10 Section 7.2. Notice. If a Party becomes aware of any event or circumstance which might give rise to indemnification under this Agreement, it shall provide the other Party with written notification within the earlier of thirty (30) days after discovery of the event or circumstance or ten (10) days prior to the time any response regarding such event or circumstances is required by law to be made. Section 7.3. Defense of Legal Actions. At the indemnified Party's request, the indemnifying Party shall defend any suit asserting a claim covered by this indemnity and shall pay all costs and expenses (including reasonable fees, disbursements and expenses for attorneys and experts) that may be incurred in enforcing this indemnity. The indemnified Party may, at its own expense, retain separate counsel and participate in the defense of any such suit or action. The indemnifying Party shall not compromise or settle a claim hereunder without the prior written consent of the indemnified Party, provided, however, that if such consent is withheld then the liability of the indemnifying Party shall be limited to the aggregate of the amount of the proposed settlement or compromise, the amount of fees, disbursements and expenses for attorneys and experts outstanding at the time such consent shall have been withheld, and the amount of any outstanding claim against which the indemnification applies and which is not covered by the proposed settlement or compromise (together with all costs and expenses associated with such outstanding claim). Thereafter, the indemnified Party shall hold harmless and reimburse the indemnifying Party, upon demand, for the amount of any additional liability, fees, disbursements and expenses for attorneys and experts incurred by the indemnifying Party in excess of the amounts described above after such consent shall have been withheld. Section 7.4. Survival. Each Party's indemnification and defense of action obligations hereunder for acts or occurrences prior to the expiration or termination of this Agreement shall continue in full force and effect regardless of the expiration or termination of this Agreement. Such obligations shall not be limited in any way by any limitation on insurance, by the amount or types of damages, or by any compensation or benefits payable by the Parties under worker's compensation acts, disability benefit acts or other employee acts. Section 7.5. Limitation on Damages. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR INCIDENTAL, PUNITIVE, SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES CONNECTED WITH OR RESULTING FROM PERFORMANCE OR NON-PERFORMANCE OF THIS AGREEMENT OR ANY ACTION UNDERTAKEN IN CONNECTION WITH, OR RELATED TO THIS AGREEMENT, INCLUDING ANY SUCH DAMAGES WHICH ARE BASED UPON CAUSES OF ACTION FOR BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE AND MISREPRESENTATION), BREACH OF WARRANTY OR STRICT LIABILITY. Notwithstanding the foregoing, if a Party is held liable to a third party for any such damages and the other Party is obligated to provide indemnity for the matter that gave rise to such damages, such indemnity shall obligate the indemnifying Party to pay such damages. 11 Section 7.6. Insurance. APC shall maintain and keep in full force and effect the insurance in the types and amounts listed on Exhibit E. All such insurance polices may contain deductible permitted under the O&M Agreement or otherwise that are amounts standard in the industry. Section 7.7. Coverage of SEMCO and Endorsement. APC shall cause SEMCO to be named as an additional insured on such insurance policies with regard to comprehensive bodily injury and property damage insurance. APC shall require its insurance carriers to send SEMCO a copy of all notices affecting APC's insurance coverage. APC shall provide SEMCO with certificates of all outstanding insurance. APC shall cause SEMCO to receive thirty (30) days prior written notice of non-renewal, cancellation or significant modification to any of the insurance policies listed on Exhibit E. All insurance shall be placed and maintained with insurers authorized to do business in the State of Alaska and who have an A.M. Best rating of "A" or better unless otherwise approved by SEMCO. Section 7.8. Application of Property Insurance Proceeds. Subject to any restrictions imposed by APC's or Buyer's senior secured lenders, all proceeds of property insurance collected by APC as a result of damage caused to the APC System shall be applied to the reconstruction or repair of the APC System. ARTICLE VIII EFFECTIVENESS Section 8.1. Conditions to Effectiveness. Although this Agreement has been executed and delivered prior to the Commencement Date, the performance obligations of the Parties shall not begin until the Commencement Date. ARTICLE IX MISCELLANEOUS Section 9.1. Assignments. Any company which shall succeed by purchase, merger or consolidation to all or substantially all of the APC System, in the case of APC, or the ENSTAR System, in the case of SEMCO, shall be entitled to the rights and shall be subject to the obligations of its predecessor in title under this Agreement. Either Party may also assign or pledge this Agreement under the provisions of any mortgage, deed of trust, indenture, or similar instrument which it has executed or may execute hereafter covering substantially all of its properties. Except as permitted by this Section 9.1, neither Party shall assign this Agreement or any of its rights hereunder unless it first shall have obtained the consent thereto in writing of the other Party, which consent shall not be unreasonably withheld, conditioned or delayed; provided, further, however, that neither Party shall be released from its obligations hereunder without the consent in writing of the other Party. 12 Section 9.2. Warranty of Title. SEMCO shall be deemed in exclusive control and possession of the Gas until such Gas has been tendered to APC at the Receipt Point(s) and after such Gas has been redelivered to or for the account of SEMCO at the Delivery Point(s). SEMCO warrants that it has, or will have at the time of tender of Gas to APC at the Receipt Point, good title to the Gas. SEMCO further represents and warrants that the Gas so tendered shall remain free from all liens, encumbrances and other adverse claims while in the custody of APC. Custody of SEMCO's Gas shall pass to APC at the Receipt Point(s) and custody will pass from APC to SEMCO at the Delivery Point(s). Title to SEMCO's Gas shall remain with SEMCO at all times. APC shall have the right to reject tender of any Gas for which title is in dispute or which is encumbered by a lien, encumbrance or other adverse claim of any kind. Section 9.3. Indemnification of APC. In the absence of gross negligence or willful misconduct by APC, SEMCO waives any claims that it may have against APC arising out of or in any way connected with (a) the quality, use or condition of the Gas after delivery from APC System at the Delivery Point(s) and (b) any losses or shrinkage of Gas during or resulting from transportation hereunder. SEMCO agrees to provide APC with a waiver of subrogation of SEMCO's insurance company for all claims subject to the indemnification provisions of this paragraph. Section 9.4. Force Majeure. (a) The term "Force Majeure" shall mean: (a) acts of God; (b) governmental action, acts of the public enemy, wars, blockades, insurrections, riots or epidemics; (c) strikes, lockouts or other industrial disturbances of third parties; (d) volcanic eruptions, landslides, lightning, earthquakes, fires, hurricanes, tornadoes, high winds, storms, storm warnings, floods, tsunami, or washouts; (e) arrests and restraints of governments and people, or civil disturbances; (f) explosions, breakage or accidents to machinery or lines of pipe; and (g) any other causes, whether of the kind enumerated or otherwise, not reasonably within the control of the Party and which by the exercise of due diligence the Party is unable to prevent or overcome. "Force Majeure" shall also include: (a) in those instances where either Party is required to obtain servitudes, right-of-way grants, permits or licenses to enable the Party to fulfill its obligations, the inability of the Party to acquire, or the delays encountered by the Party, despite the best efforts, in acquiring, at reasonable cost, the servitudes, right-of-way grants, permits or licenses; (b) in those instances where either Party is required to furnish materials and supplies for the purpose of constructing, repairing or maintaining facilities or is required to secure permits or permission from any governmental agency to enable the Party to fulfill its obligations, the inability of the Party to acquire, or the delays encountered by the Party, despite its best efforts in acquiring at reasonable cost the materials and supplies, permits and permissions; and (c) any "Force Majeure Event" under the O&M Agreement. (b) If by reason of Force Majeure, a Party is rendered unable, wholly or in part, to carry out its obligations under this Agreement, the Party shall give the other Party notice of the Force Majeure as soon as reasonably possible. The obligations (except the obligation to make payments when due) which the Party cannot fulfill because of the Force Majeure and its effects shall be suspended for the duration of the Force Majeure and its effects, but for no longer period. A Party affected by Force Majeure shall use due diligence to remedy its effects as quickly as possible. 13 Section 9.5. Restrictions on Adjustment of Payment Terms. Except as provided in this Section 9.5, such Party agrees that during the Base Term and any Renewal Term, without the consent of the other Party, it will not file any application with the Commission to request a change in APC's rates. Notwithstanding the foregoing, APC may file an application with the Commission to increase the rates payable under the Special Contract (but not this Agreement) in order to take into account capital expenditures incurred by APC; provided that such capital expenditures result in a material increase in APC's rate base from the rate base used in its 2000 test year. Section 9.6. Binding Effect. This Agreement shall inure to the benefit of and shall be binding upon the Parties and their respective permitted successors and assigns. Section 9.7. Waiver. No omission or delay in the exercise of any right under this Agreement shall impair any such right or shall be taken, construed or considered as a waiver or relinquishment thereof, but any such right may be exercised from time to time and as often as may be deemed expedient. In the event that any agreement or covenant herein shall be breached and thereafter waived, such waiver shall be limited to the particular breach so waived and shall not operate or be construed as a waiver of any future default or defaults, whether of a like or a different character. Section 9.8. Severability. Except as otherwise stated herein, any provision declared or rendered unlawful by a court of law or regulatory agency with jurisdiction over a Party or this Agreement, or deemed unlawful because of statutory change, will not otherwise affect the lawful obligations that arise under this Agreement. Section 9.9. Notices. Notices provided in this Agreement shall be in writing, unless other means are specified, and shall be effective upon delivery by hand, by U.S. mail first class postage prepaid, or facsimile or electronic communication before 5 p.m. Alaska Clock Time at the addresses provided by such Party prior to the Commencement Date. Each Party shall promptly notify the other Party in writing of any change in persons to receive notice or the addresses to which notices should be delivered. Section 9.10. Retention of Records. Each Party shall maintain and preserve all records of data and information necessary to calculate payments or evidence of fulfillment of obligations under this Agreement or pertaining to facilities associated with performance of obligations under this Agreement for a period of not less than six (6) years, or such longer period as may be required by any governmental or other regulatory authority with jurisdiction over a Party or this Agreement. Section 9.11. Headings. The headings used for Articles and Sections herein are for convenience and reference purpose only and shall in no way affect the meaning or interpretation of this Agreement. Section 9.12. Governing Law. This Agreement shall be interpreted, performed and enforced in accordance with the laws of the State of Alaska, without giving effect to its conflict of laws principles. 14 Section 9.13. No Third Party Beneficiary. It is expressly agreed that there is no third party beneficiary of this Agreement, and that this Agreement does not impart enforceable rights to anyone other than a Party or a permitted successor or assign of a Party. Section 9.14. Prior Agreements Superseded. This Agreement shall completely and fully supersede all prior understandings or agreements, written and oral, between the Parties relating to the subject matter hereof. Section 9.15. Amendment. This Agreement shall not be amended unless such amendment is in writing and signed by the Parties. Section 9.16. Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 15 IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed effective the day first written above by their duly authorized officers. SEMCO ENERGY, INC. By: ________________________ Name: ________________________ Title:________________________ ALASKA PIPELINE COMPANY By: ________________________ Name: ________________________ Title:________________________ 16 EXHIBIT A TO GAS TRANSMISSION AGREEMENT DESCRIPTION OF TRANSPORTATION SYSTEM The APC's System consists of the following: Kenai Pipeline System: The Kenai Pipeline System consists of combined 142 miles of looped 12-inch and 16-inch diameter pipeline, including a nine mile twin crossing of the Turnagain Arm of the Cook Inlet, plus 25 miles of 8-inch diameter pipeline known as the Royalty Lateral and six miles of 12-inch, 6-inch, and 4-inch diameter lateral pipelines connecting to the Royalty Lateral. All lines have a maximum allowable operating pressure (MAOP) of 300 pounds per square inch gage (psig) or greater. The Kenai Pipeline has two compressor stations totaling 8,400 horsepower. Beluga Pipeline System: The Beluga Pipeline System consists of 102 miles of 20-inch pipeline and 23 miles of 6-inch and 4-inch diameter lateral pipelines connecting to the 20-inch pipeline. All lines have a MAOP of 300 psig or greater. It does not have any compression capacity. The Anchorage Pipeline System: The Anchorage Pipeline system consists of 55 miles of 12-inch, 10-inch, 8-inch, 6-inch and 4-inch diameter pipelines and lateral pipelines in the greater Anchorage area interconnecting with the Kenai Pipeline System at Potter Station and with the Beluga Pipeline System at East Anchorage City Gas Station. All lines have a MAOP of 300 psig or greater. The locations of the Kenai Pipeline System, the Beluga Pipeline System and the Anchorage Pipeline System are shown on the attached map. APC PIPELINE SUMMARY
Milepost Designation - ---------------------------------------------------------------------------------------------------------------------------------- Sys. Pipeline Name Year ER # Pipe Size From To Length Length Miles Installed (miles) (feet) - ---------------------------------------------------------------------------------------------------------------------------------- Kenai Pipeline - ---------------------------------------------------------------------------------------------------------------------------------- K "A" Kalifonski to Burnt Island 1960 12" 2.3 64.5 62.12 327,977 - ---------------------------------------------------------------------------------------------------------------------------------- K "A" Turnagain Crossing 1960 12" 64.5 73.2 8.68 45,841 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Turnagain Crossing 1960 12" 64.5 73.2 8.58 45,289 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp Kalifonski to Kenai River 1975 74-513.2 12" & 16" 2.3 6.7 4.40 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp Gutenrath to MP50.5 1975 74-513.2 12" & 16" 21.4 50.5 29.10 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp Kenai River to MP 21.4 1978 78-1831.03 12" & 16" 6.7 21.4 14.70 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp MP 50.5 to MP 64.5 1978 78-1831.03 12" & 16" 50.5 64.5 14.00 - ---------------------------------------------------------------------------------------------------------------------------------- Kenai Sub Total 141.58 - ---------------------------------------------------------------------------------------------------------------------------------- North Kenai Lateral - ---------------------------------------------------------------------------------------------------------------------------------- K KPL Junction to East Forelands 1966 66-3074 4" & 6" 24.6 28.5 3.90 - ---------------------------------------------------------------------------------------------------------------------------------- K CEA Bernice Power Plant S/L 1972 72-2190 4" 0 0.14 0.14 - ---------------------------------------------------------------------------------------------------------------------------------- K Nikiski (Tesoro) to KPL 1977 77-1728.00 6" 23.8 24.6 0.75 3,979 - ---------------------------------------------------------------------------------------------------------------------------------- K Robinson Lp to Nikiski (Tesoro) 1977 77-1728.04 8" 0 23.8 24.01 126,765 - ---------------------------------------------------------------------------------------------------------------------------------- K KPL to Bernice Lake Loop 1981 81-2180.03 6" 24.6 24.8 0.20 - ---------------------------------------------------------------------------------------------------------------------------------- K Beaver Creek Line 1982 82-2290.02 12" 0 0.15 0.15 - ---------------------------------------------------------------------------------------------------------------------------------- K HEA Lateral 1985 85-8500.04 6" 0 0.8 0.83 4,356 - ---------------------------------------------------------------------------------------------------------------------------------- K Sterling Gas Field Lateral 1993 9320.09 4" 0 0.64 0.64 3,397 - ---------------------------------------------------------------------------------------------------------------------------------- K N. Kenai Lateral Bypass 1995 9520.02 8" 0.92 4,835 - ---------------------------------------------------------------------------------------------------------------------------------- N Kenai Sub Total 31.54 - ---------------------------------------------------------------------------------------------------------------------------------- Anchorage Pipeline System - ---------------------------------------------------------------------------------------------------------------------------------- A City Gate Pipeline 1961 12" 73.2 82.7 9.51 50,203 - ---------------------------------------------------------------------------------------------------------------------------------- A Tudor Lateral 1968 68-417 12" 0 3.1 3.10 - ---------------------------------------------------------------------------------------------------------------------------------- A Muldoon Loop (Muldoon) 1968 68-416 12" 0 3.7 3.70 - ---------------------------------------------------------------------------------------------------------------------------------- A Oilwell Rd. Lateral 1968 68-416 10" & 12" 0 3.08 3.08 - ---------------------------------------------------------------------------------------------------------------------------------- A Fort Richardson Power Plant 1968 68-416 8" 0 1.06 1.06 - ---------------------------------------------------------------------------------------------------------------------------------- A Fort Richardson Army Base 1971 71-470 6" 0 3.3 3.30 - ---------------------------------------------------------------------------------------------------------------------------------- A Muldoon Loop (Hillside) 1971 71-451 12" 0 10.94 10.94 - ---------------------------------------------------------------------------------------------------------------------------------- A International Airport Lateral 1967 67-4021 4" & 6" 0 1.33 1.33 - ---------------------------------------------------------------------------------------------------------------------------------- A West Side Feeder (Potter to Dim) 1976 76-570 8" 0 4.1 4.10 - ---------------------------------------------------------------------------------------------------------------------------------- A West Side Feeder (Dim. to Minn.) 1978 78-827 8" 0 6.4 6.40 - ---------------------------------------------------------------------------------------------------------------------------------- A City Gate Loop (Potter Valley) 1983 83-2340.01 16" 0 2.6 2.60 - ---------------------------------------------------------------------------------------------------------------------------------- A 64th Lateral 1989 89-8940.02 12" 0 3.37 3.37 17,790 - ---------------------------------------------------------------------------------------------------------------------------------- A Raspberry Lateral 1990 90-9080.01 6" 0 0.87 0.87 4,573 - ---------------------------------------------------------------------------------------------------------------------------------- A International Airport Lateral 2001 501167000100 6" & 8" 1.33 3 1.67 8,800 - ---------------------------------------------------------------------------------------------------------------------------------- Anch. Sub Total 55.02 - ---------------------------------------------------------------------------------------------------------------------------------- Beluga Pipeline System - ---------------------------------------------------------------------------------------------------------------------------------- B Beluga Pipeline 1984 84-30111.01 20" 0 101.6 101.60 - ---------------------------------------------------------------------------------------------------------------------------------- B Eagle River Lateral 1987 87-8557 6" 0 0.18 0.17 923 - ---------------------------------------------------------------------------------------------------------------------------------- B Fire Lake Lateral 1976 76-571 4" 0 3.65 3.65 19,260 - ---------------------------------------------------------------------------------------------------------------------------------- B Hiland Dr. Lateral 1985 77-723, 8543 4" & 6" 0 3.1 3.10 16,368 - ---------------------------------------------------------------------------------------------------------------------------------- B Palmer Lateral 1984 84-30211.01 6" 0 6.2 6.25 32,977 - ---------------------------------------------------------------------------------------------------------------------------------- B Wasilla Lateral 1984 84-30211.11 4" 0 1.8 1.78 9,414 - ---------------------------------------------------------------------------------------------------------------------------------- B Lewis River Lateral 1984 84-8460.01 6" 0 2.1 2.10 11,105 - ---------------------------------------------------------------------------------------------------------------------------------- B Vine Road Lateral 1993 93-9320.03 4" 0 3.22 3.30 17,434 - ---------------------------------------------------------------------------------------------------------------------------------- B North Palmer Lateral 1997 97-9720.04 4" 0 1.94 1.94 10,235 - ---------------------------------------------------------------------------------------------------------------------------------- B Seward Meridian Lateral 1999 99-0420002 4" 0 1.34 1.34 7,095 - ---------------------------------------------------------------------------------------------------------------------------------- Beluga Sub Total 125.24 - ---------------------------------------------------------------------------------------------------------------------------------- APC SYSTEM TOTAL 353.37 353.37 ------------------------------
[GRAPHIC OMITTED] EXHIBIT B TO GAS TRANSMISSION AGREEMENT SPECIAL CONTRACT FOR GAS TRANSPORTATION EXHIBIT C TO GAS TRANSMISSION AGREEMENT MAXIMUM DAILY QUANTITIES The following segments of Transporter's System have the following Maximum Daily Quantities: Segment Maximum Daily Quantity ------- ---------------------- Kenai Pipeline 210 MMcf/d Beluga Pipeline 200 MMcf/d EXHIBIT D TO GAS TRANSMISSION AGREEMENT Reservation Rate $943,000/month Commodity Rate $0.075/Mcf EXHIBIT E TO GAS TRANSMISSION AGREEMENT INSURANCE (A) Workers Compensation insurance complying with all applicable Laws, and Employer's Liability insurance with limits of not less than the Alaskan statutory limit. Each Party and their parent, subsidiary and affiliated companies and their respective employees shall be provided a waiver of all rights of subrogation under this insurance. Either Party under this Agreement shall have the right at their sole option to be a qualified self-insurer for worker's compensation insurance. (B) Commercial or comprehensive general liability insurance with a combined single limit of not less than $1,000,000 per occurrence for bodily injury and property damage, including coverage for premises-operations, blanket contractual liability, broad form property damage liability, personal injury liability, advertising injury liability, independent contractor coverage, products/completed operations, sudden and accidental pollution liability and the explosion, collapse and underground hazards. (C) Automobile liability insurance with a combined single limit of not less than $1,000,000 per occurrence for bodily injury and property damage including coverage for all owned, non-owned and hired vehicles. (D) Umbrella and/or excess liability insurance with a combined single limit of not less than $25,000,000 per occurrence for bodily injury and property damage covering excess of the employer's liability, general liability and automobile liability insurance required above. Exhibit F To Gas Transmission Agreement GAS SUPPLY CONTRACTS 1. Gas Purchase Contract dated December 20, 1982, between Shell Oil Company and Alaska Pipeline Company, as amended and supplemented. (The current parties to this Agreement are Chevron U.S.A. Inc., ConocoPhillips and the Municipality of Anchorage.) 2. Gas Purchase Agreement dated November 26, 1984, between Phillips Petroleum Company (now ConocoPhillips) and Alaska Pipeline Company, as amended. 3. Gas Purchase Agreement dated May 1, 1988, between Marathon Oil Company and Alaska Pipeline Company, as amended. 4. Gas Purchase Agreement dated May 16, 2000, among Anadarko Petroleum Corporation, Phillips Alaska, Inc. and Alaska Pipeline Company, as amended. (The current party to this Agreement is Aurora Gas, LLC.) 5. Gas Purchase Agreement dated November 17, 2000, between Union Oil Company of California and Alaska Pipeline Company, as amended. EXHIBIT D BILL OF SALE AND ASSIGNMENT AGREEMENT This BILL OF SALE and ASSIGNMENT AGREEMENT (this "Bill of Sale"), dated as of _______________, 2004, is made and entered into by and between [____________], ("Purchaser"), and SEMCO ENERGY, INC., a Michigan corporation ("Seller"). WHEREAS, Atlas Pipeline Partners, L.P. ("Atlas") and Seller have entered into a Purchase and Sale Agreement, dated as of September __, 2003 (the "Purchase Agreement"), pursuant to which Seller has agreed to sell, transfer, convey, assign and deliver to Atlas, and Atlas has agreed to purchase and acquire from Seller, 100% of the membership interests of Alaska Pipeline Company, LLC, a Delaware limited liability company (the "Company Equity Interests"). WHEREAS, Atlas has designated Purchaser to purchase and acquire the Company Equity Interests in accordance with Section 13.7 of the Purchase Agreement. WHEREAS, Seller desires to transfer and assign to Purchaser the Company Equity Interests to Purchaser, and Purchaser desires to accept sale, transfer, conveyance, assignment and delivery thereof. NOW, THEREFORE, for and in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller hereby irrevocably sells, transfers, conveys, assigns and delivers to Purchaser the Company Equity Interests free and clear of all Encumbrances (as defined in the Purchase Agreement), TO HAVE AND TO HOLD THE SAME UNTO Purchaser, its successors and assigns, forever, and Purchaser hereby accepts such assignment. This Bill of Sale may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. This Bill of Sale and all of the provisions hereof shall be binding upon and shall inure the benefit of the respective parties and their assigns, transferees and successors. This Bill of Sale shall be governed by, and construed, interpreted and enforced in accordance with, the substantive law of the State of New York without reference to any principles of conflicts of laws thereof except that if it is necessary in any other jurisdiction to have the law of such other jurisdiction govern this Bill of Sale in order for this Bill of Sale to be effective in any respect, then the laws of such other jurisdiction shall govern this Bill of Sale to such extent. This Bill of Sale is delivered pursuant to the Purchase Agreement. IN WITNESS WHEREOF, the parties have executed this Bill of Sale as of the date first above written. [____________________] By:________________________ Name: Title: SEMCO ENERGY, INC. By:________________________ Name: Title: EXHIBIT E LIMITED LIABILITY COMPANY AGREEMENT OF ALASKA PIPELINE COMPANY, LLC, a Delaware Limited Liability Company This LIMITED LIABILITY COMPANY AGREEMENT of Alaska Pipeline Company, LLC (this "Agreement"), dated as of _____________, 2004, is adopted, executed and agreed to by the sole Member (as defined below). 1. Formation. Alaska Pipeline Company, LLC (the "Company") has been formed as a Delaware limited liability company under and pursuant to the Delaware Limited Liability Company Act (the "Act"). 2. Term. The Company shall have a perpetual existence. 3. Purposes. The purposes of the Company are to carry on any lawful business, purpose or activity for which limited liability companies may be formed under the Act. 4. Sole Member. SEMCO Energy, Inc., a Michigan corporation, shall be the sole member of the Company (the "Member"). 5. Contributions. Without creating any rights in favor of any third party, the Member may, from time to time, make contributions of cash or property to the capital of the Company, but shall have no obligation to do so. 6. Distributions. The Member shall be entitled (a) to receive all distributions (including, without limitation, liquidating distributions) made by the Company and (b) to enjoy all other rights, benefits and interests in the Company. 7. Management. The Management of the Company is fully reserved to the Member, and the Company shall not have "managers," as that term is used in the Act. The powers of the Company shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed under the direction of, the Member, who shall make all decisions and take all actions for the Company. 8. Dissolution. The Company shall dissolve and its affairs shall be wound up at such time, if any, as the Member may elect. No other event (including, without limitation, an event described in Section 18-801(4) of the Act) will cause the Company to dissolve. 9. Governing Law. THIS AGREEMENT IS GOVERNED BY AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE (EXCLUDING ITS CONFLICT-OF-LAWS RULES). [signature on next page] SEMCO ENERGY, INC. By:____________________________________________ Name:__________________________________________ Title:_________________________________________ EXHIBIT F GAS CONTROL SERVICES AGREEMENT BY AND BETWEEN ALASKA PIPELINE COMPANY, LLC and ENSTAR NATURAL GAS COMPANY, A DIVISION OF SEMCO ENERGY, INC. Dated as of _________, 2004 TABLE OF CONTENTS
ARTICLE I Definitions.................................................................................1 Section 1.1 Definitions............................................................................1 ARTICLE II Services to Be Provided.....................................................................3 Section 2.1 Operation and Maintenance Services.....................................................3 Section 2.2 Facilities Available to Operator.......................................................4 ARTICLE III Operator's Covenants........................................................................4 Section 3.1 Operator's Ability to Provide Services.................................................4 Section 3.2 Standards for the Provision of Gas Control Services....................................4 Section 3.3 No Breach..............................................................................5 ARTICLE IV Service Term, Suspension and Early Termination..............................................5 Section 4.1 Service Term; Extension of Service Term................................................5 Section 4.2 Owner's Right to Suspend Performance or to Terminate the Agreement.....................5 Section 4.3 Cooperation in Connection with Expiration or Termination...............................6 ARTICLE V Compensation................................................................................6 Section 5.1 Compensation for Gas Control...........................................................6 ARTICLE VI Dispute Resolution..........................................................................6 Section 6.1 General................................................................................6 ARTICLE VII Confidentiality of Information..............................................................7 Section 7.1 General................................................................................7 Section 7.2 Operator's Obligations.................................................................7 Section 7.3 Owner's Obligations....................................................................8 Section 7.4 Compulsory Disclosure..................................................................8 Section 7.5 Injunction.............................................................................8 ARTICLE VIII Relationship BETWEEN the Parties............................................................9 Section 8.1 No Joint Venture.......................................................................9 ARTICLE IX Indemnification; Release; Limit on Liability................................................9 Section 9.1 Indemnification by Operator............................................................9 Section 9.2 Indemnification by Owner...............................................................9 Section 9.3 Procedures............................................................................10 Section 9.4 Indemnification Payments..............................................................10 Section 9.5 Survival..............................................................................10 Section 9.6 Release and Limit on Liability........................................................11 ARTICLE X Required Insurance.........................................................................11 Section 10.1 Required Insurance....................................................................11 ARTICLE XI Miscellaneous Provisions...................................................................12 Section 11.1 Agency of Operator....................................................................12 Section 11.2 Force Majeure.........................................................................13 Section 11.3 Notices...............................................................................13 Section 11.4 Successors and Assigns................................................................13 Section 11.5 Survival..............................................................................14 Section 11.6 Signatures, Counterparts..............................................................14 Section 11.7 Amendments............................................................................14 Section 11.8 Governing Law.........................................................................14 Section 11.9 Entire Agreement......................................................................14 Section 11.10 Negotiated Agreement..................................................................14 Section 11.11 Waiver................................................................................14 Section 11.12 Severability..........................................................................15 Section 11.13 No Third Party Beneficiaries..........................................................15 Exhibits and Schedules Exhibit A Description of Pipeline System
GAS CONTROL SERVICES AGREEMENT This GAS CONTROL SERVICES AGREEMENT (this "Agreement") is entered into as of ____________, 2004, by and between Alaska Pipeline Company, LLC, a Delaware limited liability company ("Owner"), and ENSTAR Natural Gas Company, a Division of SEMCO Energy, Inc., a Michigan corporation ("Operator"). Recitals Owner owns the Pipeline System and has retained Operator to provide operations, maintenance and administrative services pursuant to the O&M Agreement. In addition to the services provided pursuant to the O&M Agreement, Owner desires to retain Operator to provide Gas Control Services, and Operator is willing to do so on the terms and subject to the conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I Definitions Section 1.1. Definitions. The following capitalized terms when used herein shall have the following meanings: "AAA" is defined in Section 8.1(b). "Accepted Gas Pipeline Practices" shall mean those practices, methods and acts that (i) are generally engaged in by a significant portion of the natural gas pipeline industry during the term of this Agreement with respect to assets and facilities having similar characteristics to the Pipeline System and reasonably accounting for local conditions and (ii) which, in the exercise of reasonable judgment in light of the facts known or that reasonably should have been known at the time a decision is made, would be expected to accomplish a desired result at a reasonable cost consistent with good business practices, reliability, safety, environmental protection and expedition. Accepted Gas Pipeline Practices are not intended to be limited to the optimum practice, method or act to the exclusion of others, but rather to those practices, methods and acts generally engaged in by a significant portion of the natural gas pipeline industry in the relevant geographic region during the term of this Agreement and include taking reasonable steps to provide for: (a) adequate materials, resources and supplies being available to meet the needs of the Pipeline System under reasonably anticipated conditions with respect to Gas Control Services; (b) sufficient operating personnel being available, adequately experienced and trained to provide the Gas Control Services; (c) appropriate monitoring and testing being performed to determine that equipment is functioning as designed and can reasonably be expected to function properly under reasonably anticipated conditions; and (d) equipment being operated in a manner safe to workers, the general public, the environment, and the Pipeline System. "Business Day" shall mean any day except Saturday, Sunday and any other day on which banking institutions located in the City of New York, New York or the City of Anchorage, Alaska, are required or authorized to close. "Company" is defined in Section 10.1. "Confidential Information" is defined in Section 7.1. "Effective Date" shall mean the date of this Agreement. "Force Majeure Event" shall mean an act of God, fire, flood, earthquake, storm, lightning, an act of Governmental Authority, or necessity for compliance with any Laws, a strike, lockout or other industrial disturbance, not directed exclusively at a Party or the Pipeline System, an act of the public enemy, sabotage, war, act of terrorism, insurrection or blockade, riot or other civil disturbance, epidemic, explosions, and any other similar event that, in each such case, (i) affects and prevents, in whole or in part, the performance of a Party's obligations under this Agreement, (ii) is not reasonably within the control of the affected Party, (iii) which by the exercise of commercially reasonable efforts the affected Party is unable to overcome or prevent and (iv) is not the direct or indirect result of the affected Party's negligence or the failure of such Party to perform any of its obligations under this Agreement. "Gas Control Services" is defined in Section 2.1. "Governmental Approval" shall mean any consent, authorization, certificate, permit, right of way grant or approval of any Governmental Authority that is necessary for the ownership and operation of the Pipeline System in accordance with applicable Laws. "Governmental Authority" shall mean any court or tribunal in any jurisdiction or any federal, state, tribal, municipal or local government or other governmental body, agency, authority, department, commission, board, bureau, instrumentality, arbitrator or arbitral body or any quasi-governmental or private body lawfully exercising any regulatory or taxing authority, including, without limitation, the Regulatory Commission of Alaska. "Indemnified Party" is defined in Section 9.3. "Indemnifying Party" is defined in Section 9.3. 2 "Laws" shall mean any applicable statute, common law, rule, regulation, judgment, order, ordinance, writ, injunction or decree issued or promulgated by any Governmental Authority having jurisdiction with respect to the applicable subject matter. "Loss" is defined in Section 9.1. "O&M Agreement" shall mean the Operations and Maintenance and Administrative Services Agreement dated as of the date of this Agreement between Operator and Owner, as amended or modified or supplemented from time to time. "Operator Indemnified Party" is defined in Section 9.2. "Operator Parties" is defined in Section 9.6. "Owner Indemnified Party" is defined in Section 9.1. "Party" shall mean either Owner or Operator. "Pipeline System" shall mean the natural gas transmission pipeline described on Exhibit A to this Agreement, and any capital improvements added or made to the Pipeline System during the Service Term. "Service Term" shall mean the term beginning on midnight prevailing Alaska time on the Effective Date and ending at 11:59:59 prevailing Alaska time on the last day of the one hundred twentieth (120th) succeeding full calendar month, subject to extension in accordance with ARTICLE V. "Tax" shall mean any tax, duty, imposition, levy of any nature (whether central, territorial, federal, state or local) whatsoever and whenever charged, levied or imposed, together with any interest and penalties in relation thereto. ARTICLE II Services to Be Provided Section 2.1. Operation and Maintenance Services. Operator agrees to provide to Owner (and its successors and assigns), at no cost to Owner other than as provided in Article VI, the following services (the "Gas Control Services"): (A) analyses of pressures for irregularities, as received; (B) collecting pressures by telephone, microwave and radio; (C) maintaining pressures at compressor stations, key line junctions and regulating stations to divide the available gas during heavy demand periods; (D) maintaining pressure log sheets; 3 (E) maintaining proper compression ratios at compressor stations, consistent with economical operations; (F) maintaining necessary line pressures consistent with satisfactory service; (G) requesting pressure changes at compressor stations, regulating stations and key line junctions; (H) rerouting gas during emergencies and planned shutdowns; (I) instructing gas suppliers to increase or decrease receipt point pressures and gas flows; and (J) collection, logging and distribution of data pertaining to the pressures, receipts, deliveries, nominations, balancing and scheduling of the pipeline system. Section 2.2. Facilities Available to Operator. Throughout the Service Term, Owner shall make available to Operator for purposes of performing the Gas Control Services pursuant to this Agreement, all of the facilities that comprise the Pipeline System. ARTICLE III Operator's Covenants Section 3.1. Operator's Ability to Provide Services. Operator agrees that it shall, throughout the Service Term, (a) maintain and cause to be devoted to the provision of Gas Control Services under this Agreement, sufficient personnel and financial resources to provide Gas Control Services (i) in the same manner as during the twelve (12) months immediately prior to the Effective Date, (ii) in accordance with Accepted Gas Pipeline Practices and applicable Laws, (iii) as required to satisfy Owner's contractual obligations to its customers, and (iv) in accordance with the terms of this Agreement; (b) pay all direct and indirect costs associated with the provision of Gas Control Services under this Agreement, and (c) not place or permit to be placed on the Pipeline System any lien, security interest, mortgage, easement, license or other encumbrance, other than inchoate liens in favor of providers of goods or services securing amounts not yet due and payable or which are being contested by Operator in good faith. Section 3.2. Standards for the Provision of Gas Control Services. Operator agrees that it will perform the Gas Control Services (a) in good faith on a commercially reasonable basis; (b) in accordance with (i) Accepted Gas Pipeline Practices and applicable Governmental Approvals and Laws, and consistent with all applicable orders, judgments, decrees, rulings or injunctions; (ii) manufacturers' warranties for the Pipeline System; (iii) Owner's contractual obligations to its customers; (iv) the terms of this Agreement; and (v) the terms of Operator's and Owner's insurance policies; and (c) using at least the same standard of care used in the performance of such services for the Pipeline System during the twelve (12) months immediately prior to the Effective Date. EXCEPT AS SET FORTH IN THIS SECTION, OPERATOR MAKES NO REPRESENTATION, WARRANTY OR GUARANTY, EXPRESS OR IMPLIED, OF ANY KIND CONCERNING THE SERVICES, OR ANY RESULTS OR WORK PRODUCT OF SUCH SERVICES, AND SPECIFICALLY MAKES NO WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND NONE SHALL BE IMPLIED. ALL OTHER REPRESENTATIONS, WARRANTIES OR GUARANTEES, WRITTEN OR ORAL, EXPRESS OR IMPLIED IN FACT OR IN LAW, AND WHETHER OR NOT BASED ON STATUTE, ARE EXCLUDED. OWNER ACKNOWLEDGES AND AGREES THAT THE LEVEL OF COMPENSATION OPERATOR HAS AGREED TO ACCEPT FOR PERFORMANCE OF ITS OBLIGATIONS HEREUNDER IS PREDICATED ON THIS LIMITATION OF LIABILITY AND DISCLAIMER OF WARRANTIES. 4 Section 3.3. No Breach. Notwithstanding anything to the contrary contained herein, Operator shall not be deemed to be in breach of its obligations hereunder to the extent such breach is caused by any of the following: (a) the failure of Owner to grant its consent within a reasonable time after a request by Operator therefor to any matter requiring such consent prior to Operator's performance of its obligations with respect to such matter, or (b) any acts of Operator based solely in reliance upon a direction of Owner. ARTICLE IV Service Term, Suspension and Early Termination Section 4.1. Service Term; Extension of Service Term. The term of this Agreement shall be the Service Term; provided, however, that if at the termination of the Service Term, Operator is still providing operations, maintenance and administrative services pursuant to the O&M Agreement, or any replacement agreement for the provision of operations, maintenance and administrative services, the Service Term under this Agreement shall automatically be extended to co-terminous with the then current term of such O&M Agreement. Section 4.2. Owner's Right to Suspend Performance or to Terminate the Agreement. Owner shall have the right to terminate this Agreement, in addition to all other remedies available to it under law and in equity, if Operator (a) breaches in any material respect any of its obligations under this Agreement and such breach has not been cured within thirty (30) days after written notice of such breach to Operator; (b) is or becomes insolvent or bankrupt or ceases to pay its debts as they become due or consents to or acquiesces in the appointment of a receiver, trustee or liquidator for a substantial part of its property; (c) institutes a voluntary bankruptcy, winding up, reorganization, insolvency or similar proceeding; (d) has an involuntary bankruptcy, winding up, reorganization, insolvency or similar proceeding instituted against it that is not stayed, dismissed or terminated within ninety (90) days after commencement; or (e) ceases to carry on its business. Section 4.3. Cooperation in Connection with Expiration or Termination. During the final three (3) months prior to the expiration of the Service Term, and during the period of three (3) months following the termination of this Agreement under Section 5.2 hereof, Operator shall cooperate with Owner and its representatives in (i) the appointment and training of a successor operator ("Successor Operator") to take over the Gas Control Services. During such period, Operator shall provide Owner and Successor Operator and their respective representatives full access to all information, data and records relating to the Gas Control Services, and Operator shall comply with all reasonable requests by Owner or Successor Operator in connection with taking over the Operator's duties, including the execution and delivery of documents and taking of other actions, in each case as shall be necessary to facilitate the orderly transition of duties from Operator to Successor Operator. At the request of Owner, upon the expiration or termination of this Agreement under this Article IV, Operator shall not assert its rights, if any, to retain its personnel who spend 75% or more of their time on matters relating to the Gas Control Services and shall otherwise permit such personnel to transfer to the employ of Successor Operator. 5 ARTICLE V Compensation Section 5.1. Compensation for Gas Control. As compensation for all Gas Control Services to be performed for the full Service Term, Owner shall pay Operator a single payment of $450,000, the receipt of which is hereby acknowledged by Operator. ARTICLE VI Dispute Resolution Section 6.1. General. Any dispute arising under this Agreement or otherwise in connection with this Agreement shall be resolved pursuant to this Section 6.1. (a) Any Party has the right to request the other to meet to discuss a dispute. The Party requesting the meeting will give at least ten (10) Business Days notice in writing of the subject it wishes to discuss, provide a written statement of the dispute, and designate an officer of the Party with complete power to resolve the dispute to attend the meeting. Within five (5) Business Days after receipt to such request, the Party receiving the request will provide a responsive written statement and will designate an officer of the Party who will attend the meeting with complete power to resolve the dispute. (b) If the meeting fails to resolve the dispute by a signed agreement among the officers, either Party may submit the dispute for binding arbitration administered by the American Arbitration Association ("AAA") under its Commercial Arbitration Rules before a single arbitrator, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (c) The Parties agree to make discovery and disclosure of all matters relevant to the dispute to the extent and in the manner provided by the Federal Rules of Civil Procedure. The arbitrator will rule on all requests for discovery and disclosure and discovery shall be completed within 60 days after the date of appointment of the arbitrator. The arbitrator may consider any matter relevant to the subject to the dispute and shall follow the statutes and decisions of the substantive law of Alaska relevant to the subject. The arbitrator shall not have the authority or power to alter, amend or modify any of the terms and conditions of the agreement of the Parties. The arbitrator shall issue a final ruling within 150 days after the date of appointment of the arbitrators. 6 (d) The ruling of the arbitrator shall be in writing and signed and shall be final and binding upon the Parties. The fees and expenses of counsel, witnesses and employees of the Parties and all other costs and expenses incurred exclusively for the benefit of the Party incurring the same shall be borne by the Party incurring such fees and expenses. All other fees and expenses including, without limitation, compensation for the arbitrator, shall be divided equally between the Parties. All meetings and arbitrations held pursuant to this Section 6.1 shall take place in Anchorage, Alaska. ARTICLE VII Confidentiality of Information Section 7.1. General. As used in this Article VII, "Confidential Information" shall mean any information not in the public domain or generally known in the industry, in any form relating to the business and operations of Owner or Operator (each such entity, for purposes of this Article VII, a "Company"), including but not limited to information regarding customers, vendors, suppliers, trade secrets, training programs, manuals or materials, technical information, contracts, systems, procedures, mailing lists, know-how, trade names, improvements, price lists, financial or other data (including the revenues, costs or profits associated with any of such Company's services), business plans, code books, invoices and other financial statements, computer programs, software systems, databases, disks and printouts, plans (business, technical or otherwise), customer and industry lists, correspondence, internal reports, personnel files, sales and advertising material, telephone numbers, names, addresses or any other compilation of information, written or unwritten, which is or was used by such Company, regardless of whether such information was or is owned during the term of this Agreement by such Company. Section 7.2. Operator's Obligations. Operator shall maintain the confidentiality of any Confidential Information of Owner acquired by Operator during the term of this Agreement, and except as otherwise provided in this Agreement, shall not use such Confidential Information for any purpose other than the performance of this Agreement and the performance of services under the O&M Agreement; provided, however, Operator may use any Confidential Information in the resolution of any disputes under this Agreement. Upon termination of this Agreement, except as otherwise provided in this Agreement, Operator agrees to turn over such Confidential Information to Owner or to destroy such Confidential Information, but only in accordance with the instructions of Owner; provided, however, that Operator may maintain one archive copy of all of such Confidential Information in a secure data storage facility. Section 7.3. Owner's Obligations. Owner shall maintain the confidentiality of any Confidential Information of Operator acquired by Owner during the term of this Agreement, and except as otherwise provided in this Agreement, shall not use such Confidential Information for any purpose other than the performance of this Agreement; provided, however, Owner may disclose invoices and other similar financial information concerning the cost of Gas Control Services to any prospective purchaser of Operator or the Transmission Business, and may use any Confidential Information in the resolution of any disputes under this Agreement. Upon termination of this Agreement, except as otherwise provided in this Agreement, Owner agrees to turn over such Confidential Information to Operator or to destroy such Confidential Information in accordance with the instructions of Operator; provided, however, that Owner may maintain one archive copy of all of such Confidential Information in a secure data storage facility. 7 Section 7.4. Compulsory Disclosure. If any Company is requested or required to disclose Confidential Information of another unaffiliated Company pursuant to any judicial or administrative process, law, regulation or statute, then such receiving Company shall promptly notify the other unaffiliated Company to this Agreement in writing of such request or requirement. The Company whose Confidential Information is requested or required to be disclosed shall either (i) promptly seek protective relief from such disclosure obligation or (ii) direct the receiving Company to comply with such request or requirement. If, after a reasonable opportunity to seek protective relief, such relief is not obtained by the Company whose Confidential Information is subject to discovery or disclosure, or if such Company fails to obtain such relief, the receiving Company may disclose such portion of such Confidential Information that such Company reasonably believes it is legally obligated to disclose. Section 7.5. Injunction. Each Company agrees that the breach by another unaffiliated Company of its obligations under this Article VII would cause significant and irreparable harm to the aggrieved Company, which may be difficult to measure with certainty or to compensate through money damages. Each Company acknowledges that the aggrieved Company shall be entitled, without proof of irreparable harm and without waiving any other right or remedy available to it, to such injunctive and equitable relief as may be deemed proper by a court of competent jurisdiction. ARTICLE VIII Relationship BETWEEN the Parties Section 8.1. No Joint Venture. It is the intent of the Parties that with respect to the provision of the Services pursuant to this Agreement, Owner and Operator are independent contractors. Except to the extent Operator executes contracts or documents as the agent of Owner pursuant to the terms of Section 16.1, nothing in this Agreement shall cause the relationship between Operator and Owner to be deemed to constitute an agency, partnership or joint venture. The terms of this Agreement are not intended to constitute a joint employer for any purpose between any of the Parties and their affiliates. Each of the Parties agrees that the provisions of this Agreement as a whole are not intended to, and do not, constitute control of the other Party (or any affiliates thereof) or provide it with the ability to control such other Party (or any affiliates thereof), and each Party hereto expressly disclaims any right or power under this Agreement to exercise any power whatsoever over the management or policies of the other (or any affiliates thereof). Nothing in this Agreement shall oblige either Party hereto to act in breach of the requirements of applicable Laws or Governmental Approvals. 8 ARTICLE IX Indemnification; Release; Limit on Liability Section 9.1. Indemnification by Operator. Operator shall indemnify, defend and hold harmless Owner, and each of its officers, directors, employees, agents, and affiliates (and the officers, directors, employees and agents of such affiliates) ("Owner Indemnified Party") if any such Owner Indemnified Party shall at any time or from time to time suffer any damage, judgment, fine, penalty, demand, settlement, liability, loss, cost, expense (including reasonable attorneys', consultants' and experts' fees), claim or cause of action (each, a "Loss") arising out of, relating to or resulting from the Operator's performance of this Agreement, to the extent such Loss results from any breach of this Agreement or the fault, tortuous act, negligence, strict liability, gross negligence or willful misconduct of Operator. Further, Operator shall indemnify and hold Owner harmless and defend Owner from any and all claims, costs, damages, injuries, demands and causes of action commenced by an employee of Operator (or his or her estate or legal representative) which arises directly or indirectly from the performance of Services except to the extent that such Loss directly results from the gross negligence or willful misconduct of Owner. Section 9.2. Indemnification by Owner. Owner shall indemnify, defend and hold harmless Operator, and each of its officers, directors, employees, agents, and affiliates (and the officers, directors, employees and agents of such affiliates) ("Operator Indemnified Party") if any such Operator Indemnified Party shall at any time or from time to time suffer any Loss arising out of, relating to or resulting from Owner's performance of this Agreement, to the extent such Loss results from any breach of this Agreement or the fault, tortuous act, negligence, strict liability, gross negligence or willful misconduct of Owner. Further, Owner shall indemnify and hold Operator harmless and defend Operator from any and all claims, costs, damages, injuries, demands and causes of action commenced by an employee of Owner (or his or her estate or legal representative), except to the extent that (i) such Loss directly results from the gross negligence or willful misconduct of Operator, or (ii) Owner is entitled to indemnity from Operator under Section 13.1. Section 9.3. Procedures. Any Party asserting a claim for indemnification hereunder (such Party seeking indemnification, the "Indemnified Party") shall notify the other Party (the "Indemnifying Party") (with reasonable specificity) promptly after it becomes aware of facts supporting a claim or action for indemnification under this Article IX, and shall provide to the Indemnifying Party as soon as practicable thereafter all information and documentation reasonably necessary to support and verify any Losses associated with such claim or action. The failure to so notify or provide information to the Indemnifying Party shall not relieve the Indemnifying Party of any liability that it may have to any Indemnified Party, except to the extent that the Indemnifying Party demonstrates that it has been materially prejudiced by the Indemnified Party's failure to give such notice, in which case the Indemnifying Party shall be relieved from its obligations hereunder to the extent of such material prejudice. The Indemnifying Party may, and, at the request of the Indemnified Party, shall participate in and defend, contest or otherwise protect the Indemnified Party against any such claim or action by counsel of the Indemnifying Party's choice at its sole cost and expense; provided, however, that the Indemnifying Party shall not make any settlement or compromise without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld, conditioned or delayed) unless the sole relief provided is monetary damages that are paid in full by the Indemnifying Party. The Indemnified Party shall have the right, but not the obligation, to participate at its own expense in the defense thereof by counsel of the Indemnified Party's choice and shall in any event use its reasonable best efforts to cooperate with and assist the Indemnifying Party. If the Indemnifying Party fails timely to defend, contest or otherwise protect against such suit, action, investigation, claim or proceeding, the Indemnified Party shall have the right to do so, including, without limitation, the right to make any compromise or settlement thereof, and the Indemnified Party shall be entitled to recover the entire cost thereof from the Indemnifying Party, including, without limitation, reasonable attorneys' fees, disbursements and amounts paid as the result of such suit, action, investigation, claim or proceeding. 9 Section 9.4. Indemnification Payments. Any payment hereunder shall be made by wire transfer of immediately available funds to such account or accounts as the Indemnified Party shall designate to the Indemnifying Party in writing. Section 9.5. Survival. The provisions of this Article IX shall survive the termination of this Agreement for claims made within a period of three (3) years after the expiration date of the Service Term. Section 9.6. Release and Limit on Liability. Operator shall not be liable to Owner for, and Owner hereby releases Operator and its affiliates, and each officer, director, employee and agent of Operator and/or any of its affiliates (the "Operator Parties") from, any Loss arising from any act or omission of Operator in connection with the Gas Control Services, except to the extent any such Loss results from an event for which Owner is entitled to indemnification under Section 9.1. Owner shall not be liable to Operator for, and Operator hereby releases Owner and its affiliates, and each officer, director, employee and agent of Owner and/or any of its affiliates (the "Owner Parties") from, any Loss arising from any act or omission of Owner in connection with the Services, except to the extent any such Loss results from an event for which Operator is entitled to indemnification under Section 9.2. Notwithstanding anything in this Agreement to the contrary, the aggregate liability of the Operator Parties under this Agreement shall not exceed the sum of (i) the aggregate amount of payments received by Operator pursuant to Section 5.1 hereof, and (ii) any payments actually received by Operator or paid to any third party on behalf of Operator in respect to such liabilities under policies of insurance. IN NO EVENT SHALL ANY OF THE OPERATOR PARTIES BE LIABLE TO ANY OF THE OWNER PARTIES, NOR SHALL ANY OF THE OWNER PARTIES BE LIABLE TO ANY OF THE OPERATOR PARTIES, FOR SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE LOSS, DAMAGES OR EXPENSES (INCLUDING LOST PROFITS OR SAVINGS) ARISING FROM THIS AGREEMENT. 10 ARTICLE X Required Insurance Section 10.1. Required Insurance. Until the expiration of the Service Term, each Party shall maintain on behalf of itself and all of its employees, the following minimum insurance coverage, with the cost of Owner's policies being paid by Operator: (a) Workers Compensation insurance complying with all applicable Laws, and Employer's Liability insurance with limits of not less than the Alaskan statutory limit. Each Party and their parent, subsidiary and affiliated companies and their respective employees shall be provided a waiver of all rights of subrogation under this insurance. Either Party under this Agreement shall have the right at their sole option to be a qualified self-insurer for worker's compensation insurance. (b) Commercial or comprehensive general liability insurance with a combined single limit of not less than $1,000,000 per occurrence for bodily injury and property damage, including coverage for premises-operations, blanket contractual liability, broad form property damage liability, personal injury liability, advertising injury liability, independent contractor coverage, products/completed operations, sudden and accidental pollution liability and the explosion, collapse and underground hazards. (c) Automobile liability insurance with a combined single limit of not less than $1,000,000 per occurrence for bodily injury and property damage including coverage for all owned, non-owned and hired vehicles. (d) Umbrella and/or excess liability insurance with a combined single limit of not less than $25,000,000 per occurrence for bodily injury and property damage covering excess of the employer's liability, general liability and automobile liability insurance required above. (e) Any of the above-required liability insurance that is maintained on a claims made basis shall have a retroactive date the same as the date of this Agreement or earlier, and shall remain in effect for at least three years following, or shall provide for a three year discovery and reporting period following, the termination of the Service Term. (f) Operator shall be named as an additional insured and shall be provided with a waiver of all rights of subrogation under the Owner's insurance required in (b), (c) and (d) above to the extent of Owner's indemnification obligations and liabilities assumed under this Agreement. Owner and its lenders shall be named as additional insureds and shall be provided with a waiver of all rights of subrogation under Operator's insurance required in (b), (c) and (d) above to the extent of Operator's indemnification obligations and liabilities assumed under this Agreement. (g) Upon request of one Party under this Agreement, certificates of insurance evidencing the above-required insurance shall be provided to the other Party under this Agreement. 11 ARTICLE XI Miscellaneous Provisions Section 11.1. Agency of Operator. Owner hereby appoints Operator to act as its agent for the performance of Gas Control Services in accordance with, and as limited by, the applicable terms and provisions of this Agreement; provided, however, that Operator shall not, without the prior written approval of an Owner, have any authority under this Agreement to: (i) jointly employ any person who is employed by Owner; (ii) borrow money from or on behalf of, or lend money to, Owner; (iii) create any lien or encumbrance on the Pipeline System or Owner's facilities other than inchoate liens in favor of providers of goods or services securing amounts not yet due and payable or which are being contested by Operator in good faith; (iv) make any filing with any Governmental Authority or execute, terminate or amend any Governmental Approval relating to the Pipeline System or Owner's facilities; (v) file or settle any litigation relating to the Pipeline System; or (vi) retain outside legal counsel or public accountants to provide services to Owner; or (vii) enter into any agreement binding upon Owner. Section 11.2. Force Majeure. If by reason of a Force Majeure Event either Party is rendered unable, in whole or in part, to perform its obligations under this Agreement, other than the obligation to make payments of money then due, such Party shall be excused from such performance to the extent it is prevented by, and during the continuance of, such Force Majeure Event. The Party whose performance is affected by an Force Majeure Event shall (i) give the other Party notice of the occurrence of such Force Majeure Event as soon as practicable and (ii) use all commercially reasonable efforts to remedy the cause(s) and effect(s) of such Force Majeure Event with all reasonable dispatch; provided, however, that the affected Party shall not be obligated to undertake unreasonable or uneconomic costs or burdens, in order to overcome the effects of the Force Majeure Event and reinstate full performance of its obligations under this Agreement. Section 11.3. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be deemed given if delivered personally, by facsimile (which is confirmed) or sent by overnight courier (providing proof of delivery), to the Parties at the following address: 12 If to Operator: [_________________________ __________________________ __________________________ _________________________] If to Owner: [_________________________ __________________________ __________________________ _________________________] Any Party may, by notice given in accordance with this Section 11.3 to the other Parties, designate another address or person for receipt of notices hereunder provided that notice of such a change shall be effective upon receipt. Section 11.4. Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the Parties and their respective successors, assigns and legal representatives (whether by acquisition, merger, operation of law, other transaction constituting a change of control or otherwise). No Party may assign this Agreement or any right or obligation hereunder without the prior written consent of the other Party, and any assignment without such consent shall be void; provided, however, that nothing in this Agreement shall prohibit a transfer of a Party's rights and obligations hereunder by acquisition of substantially all of the assets of such Party, merger or operation of law, but if any such transfer is made by Operator without Owner's prior written consent, Owner shall have the right to terminate this Agreement and neither Party shall have any future obligation hereunder. Section 11.5. Survival. Any provision of this Agreement that expressly or by implication comes into or remains in force following the termination or expiration of this Agreement shall survive for a period of three (3) years after the expiration of the Service Term. Section 11.6. Signatures, Counterparts. Facsimile transmission of any signed original document and/or retransmission of any signed facsimile transmission shall be the same as delivery of an original. On request, a Party will confirm its facsimile transmission by signing a duplicate original document. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. Section 11.7. Amendments. This Agreement may be amended, modified or supplemented only by a written instrument executed by the Parties. Section 11.8. Governing Law. THIS AGREEMENT WILL BE GOVERNED AS TO FORMATION, PERFORMANCE, INTERPRETATION AND ENFORCEMENT BY THE LAWS OF THE STATE OF ALASKA WITHOUT GIVING EFFECT TO ITS CONFLICT OF LAWS PRINCIPLES. Section 11.9. Entire Agreement. This Agreement constitutes the entire agreement between the Parties hereto relating to the subject matter hereof and supersede all prior and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, of the Parties, and there are no general or specific warranties, representations or other agreements by or among the Parties in connection with the entering into of this Agreement or the subject matter hereof except as specifically set forth or contemplated herein or therein. 13 Section 11.10. Negotiated Agreement. This Agreement has been negotiated by the Parties and the fact that the initial and final draft will have been prepared by either Party will not give rise to any presumption for or against any party to this Agreement or be used in any respect or forum in the construction or interpretation of this Agreement or any of its provisions. Section 11.11. Waiver. No consent or waiver, express or implied, by any Party to or of any breach or default by any other Party in the performance by such other Party of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance of obligations hereunder by such other Party hereunder. Failure on the part of any Party to complain of any act or failure to act of any other Party or to declare any other Party in default, irrespective of how long such failure continues, shall not constitute a waiver by such first Party of any of its rights hereunder. Section 11.12. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, each Party directs that such court interpret and apply the remainder of this Agreement in the manner that it determines most closely effectuates the Parties' intent in entering into this Agreement, and in doing so particularly take into account the relative importance of the term, provision, covenant or restriction being held invalid, void or unenforceable. Section 11.13. No Third Party Beneficiaries. Except as set forth in Article IX, nothing in this Agreement is intended or shall be construed to give any person, other than the Parties hereto, their successors and permitted assigns, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 14 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. OWNER ALASKA PIPELINE COMPANY, LLC By:______________________________ Name: Title: OPERATOR ENSTAR NATURAL GAS COMPANY, A DIVISION OF SEMCO ENERGY, INC. By:_______________________________ Name: Title: 15 EXHIBIT A Description of Transportation System The APC's System consists of the following: Kenai Pipeline System: The Kenai Pipeline System consists of combined 142 miles of looped12-inch and 16-inch diameter pipeline, including a nine mile twin crossing of the Turnagain Arm of the Cook Inlet, plus 25 miles of 8-inch diameter pipeline known as the Royalty Lateral and six miles of 12-inch, 6-inch, and 4-inch diameter lateral pipelines connecting to the Royalty Lateral. All lines have a maximum allowable operating pressure (MAOP) of 300 pounds per square inch gage (psig) or greater. The Kenai Pipeline has two compressor stations totaling 8,400 horsepower. Beluga Pipeline System: The Beluga Pipeline System consists of 102 miles of 20-inch pipeline and 23 miles of 6-inch and 4-inch diameter lateral pipelines connecting to the 20-inch pipeline. All lines have a MAOP of 300 psig or greater. It does not have any compression capacity. The Anchorage Pipeline System: The Anchorage Pipeline system consists of 55 miles of 12-inch, 10-inch, 8-inch, 6-inch and 4-inch diameter pipelines and lateral pipelines in the greater Anchorage area interconnecting with the Kenai Pipeline System at Potter Station and with the Beluga Pipeline System at East Anchorage City Gas Station. All lines have a MAOP of 300 psig or greater. The locations of the Kenai Pipeline System, the Beluga Pipeline System and the Anchorage Pipeline System are shown on the attached map. APC PIPELINE SUMMARY
Milepost Designation - ---------------------------------------------------------------------------------------------------------------------------------- Sys. Pipeline Name Year ER # Pipe Size From To Length Length Miles Installed (miles) (feet) - ---------------------------------------------------------------------------------------------------------------------------------- Kenai Pipeline - ---------------------------------------------------------------------------------------------------------------------------------- K "A" Kalifonski to Burnt Island 1960 12" 2.3 64.5 62.12 327,977 - ---------------------------------------------------------------------------------------------------------------------------------- K "A" Turnagain Crossing 1960 12" 64.5 73.2 8.68 45,841 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Turnagain Crossing 1960 12" 64.5 73.2 8.58 45,289 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp Kalifonski to Kenai River 1975 74-513.2 12" & 16" 2.3 6.7 4.40 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp Gutenrath to MP50.5 1975 74-513.2 12" & 16" 21.4 50.5 29.10 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp Kenai River to MP 21.4 1978 78-1831.03 12" & 16" 6.7 21.4 14.70 - ---------------------------------------------------------------------------------------------------------------------------------- K "B" Lp MP 50.5 to MP 64.5 1978 78-1831.03 12" & 16" 50.5 64.5 14.00 - ---------------------------------------------------------------------------------------------------------------------------------- Kenai Sub Total 141.58 - ---------------------------------------------------------------------------------------------------------------------------------- North Kenai Lateral - ---------------------------------------------------------------------------------------------------------------------------------- K KPL Junction to East Forelands 1966 66-3074 4" & 6" 24.6 28.5 3.90 - ---------------------------------------------------------------------------------------------------------------------------------- K CEA Bernice Power Plant S/L 1972 72-2190 4" 0 0.14 0.14 - ---------------------------------------------------------------------------------------------------------------------------------- K Nikiski (Tesoro) to KPL 1977 77-1728.00 6" 23.8 24.6 0.75 3,979 - ---------------------------------------------------------------------------------------------------------------------------------- K Robinson Lp to Nikiski (Tesoro) 1977 77-1728.04 8" 0 23.8 24.01 126,765 - ---------------------------------------------------------------------------------------------------------------------------------- K KPL to Bernice Lake Loop 1981 81-2180.03 6" 24.6 24.8 0.20 - ---------------------------------------------------------------------------------------------------------------------------------- K Beaver Creek Line 1982 82-2290.02 12" 0 0.15 0.15 - ---------------------------------------------------------------------------------------------------------------------------------- K HEA Lateral 1985 85-8500.04 6" 0 0.8 0.83 4,356 - ---------------------------------------------------------------------------------------------------------------------------------- K Sterling Gas Field Lateral 1993 9320.09 4" 0 0.64 0.64 3,397 - ---------------------------------------------------------------------------------------------------------------------------------- K N. Kenai Lateral Bypass 1995 9520.02 8" 0.92 4,835 - ---------------------------------------------------------------------------------------------------------------------------------- N Kenai Sub Total 31.54 - ---------------------------------------------------------------------------------------------------------------------------------- Anchorage Pipeline System - ---------------------------------------------------------------------------------------------------------------------------------- A City Gate Pipeline 1961 12" 73.2 82.7 9.51 50,203 - ---------------------------------------------------------------------------------------------------------------------------------- A Tudor Lateral 1968 68-417 12" 0 3.1 3.10 - ---------------------------------------------------------------------------------------------------------------------------------- A Muldoon Loop (Muldoon) 1968 68-416 12" 0 3.7 3.70 - ---------------------------------------------------------------------------------------------------------------------------------- A Oilwell Rd. Lateral 1968 68-416 10" & 12" 0 3.08 3.08 - ---------------------------------------------------------------------------------------------------------------------------------- A Fort Richardson Power Plant 1968 68-416 8" 0 1.06 1.06 - ---------------------------------------------------------------------------------------------------------------------------------- A Fort Richardson Army Base 1971 71-470 6" 0 3.3 3.30 - ---------------------------------------------------------------------------------------------------------------------------------- A Muldoon Loop (Hillside) 1971 71-451 12" 0 10.94 10.94 - ---------------------------------------------------------------------------------------------------------------------------------- A International Airport Lateral 1967 67-4021 4" & 6" 0 1.33 1.33 - ---------------------------------------------------------------------------------------------------------------------------------- A West Side Feeder (Potter to Dim) 1976 76-570 8" 0 4.1 4.10 - ---------------------------------------------------------------------------------------------------------------------------------- A West Side Feeder (Dim. to Minn.) 1978 78-827 8" 0 6.4 6.40 - ---------------------------------------------------------------------------------------------------------------------------------- A City Gate Loop (Potter Valley) 1983 83-2340.01 16" 0 2.6 2.60 - ---------------------------------------------------------------------------------------------------------------------------------- A 64th Lateral 1989 89-8940.02 12" 0 3.37 3.37 17,790 - ---------------------------------------------------------------------------------------------------------------------------------- A Raspberry Lateral 1990 90-9080.01 6" 0 0.87 0.87 4,573 - ---------------------------------------------------------------------------------------------------------------------------------- A International Airport Lateral 2001 501167000100 6" & 8" 1.33 3 1.67 8,800 - ---------------------------------------------------------------------------------------------------------------------------------- Anch. Sub Total 55.02 - ---------------------------------------------------------------------------------------------------------------------------------- Beluga Pipeline System - ---------------------------------------------------------------------------------------------------------------------------------- B Beluga Pipeline 1984 84-30111.01 20" 0 101.6 101.60 - ---------------------------------------------------------------------------------------------------------------------------------- B Eagle River Lateral 1987 87-8557 6" 0 0.18 0.17 923 - ---------------------------------------------------------------------------------------------------------------------------------- B Fire Lake Lateral 1976 76-571 4" 0 3.65 3.65 19,260 - ---------------------------------------------------------------------------------------------------------------------------------- B Hiland Dr. Lateral 1985 77-723, 8543 4" & 6" 0 3.1 3.10 16,368 - ---------------------------------------------------------------------------------------------------------------------------------- B Palmer Lateral 1984 84-30211.01 6" 0 6.2 6.25 32,977 - ---------------------------------------------------------------------------------------------------------------------------------- B Wasilla Lateral 1984 84-30211.11 4" 0 1.8 1.78 9,414 - ---------------------------------------------------------------------------------------------------------------------------------- B Lewis River Lateral 1984 84-8460.01 6" 0 2.1 2.10 11,105 - ---------------------------------------------------------------------------------------------------------------------------------- B Vine Road Lateral 1993 93-9320.03 4" 0 3.22 3.30 17,434 - ---------------------------------------------------------------------------------------------------------------------------------- B North Palmer Lateral 1997 97-9720.04 4" 0 1.94 1.94 10,235 - ---------------------------------------------------------------------------------------------------------------------------------- B Seward Meridian Lateral 1999 99-0420002 4" 0 1.34 1.34 7,095 - ---------------------------------------------------------------------------------------------------------------------------------- Beluga Sub Total 125.24 - ---------------------------------------------------------------------------------------------------------------------------------- APC SYSTEM TOTAL 353.37 353.37 ---------------------------
[GRAPHIC OMITTED] EXHIBIT G TOWER LICENSE This Tower License (hereinafter referred to as this "License") is entered into this day of _____, 2004 between ENSTAR Natural Gas Company, a Division of SEMCO Energy, Inc. (hereinafter "Licensor" or the "Company"), and Alaska Pipeline Company LLC (hereinafter referred to as "Licensee"). This License sets forth the terms and conditions whereby Licensor agrees to irrevocably license to Licensee the right to utilize certain radio tower facilities that Licensor owns solely for specified purposes. WHEREAS, Licensor desires to irrevocably license unto Licensee the right to utilize certain radio tower facilities (the "Facilities") owned by Licensor solely for the purpose of operating the natural gas pipeline system owned by Licensee (the "System"); and WHEREAS, Licensee desires to irrevocably license from Licensor the right to use such radio tower facilities exclusively for such purpose; NOW THEREFORE, for and in consideration of the terms and mutual promises herein contained and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Licensor and Licensee agree as follows: 1. USE OF TOWER FACILITIES - Licensor hereby grants to Licensee, and Licensee hereby accepts, a perpetual, irrevocable and non-exclusive license to use the Facilities described on Exhibit A hereto to: (a) receive and transmit wireless communications pursuant to a commercial mobile radio service license granted to Licensee by the Federal Communications Commission ("FCC"), in connection with the operation of the System, and (b) operate a microwave system for Licensee's own internal purposes relating to the operations of the System, including, without limitation, use of antenna equipment, cable wiring, back-up power sources (including generators and fuel storage tanks), and necessary related fixtures. Licensor also hereby grants Licensee reasonable ingress and egress to the Facilities for purposes of maintenance, repair, modification, replacement, and removal of equipment on the Facilities twenty-four (24) hours per day, seven (7) days per week. 2. TERM - This License shall commence on the date of the completion of the sale of the System by Licensor to Licensee and may be terminated only in accordance with the provisions of Sections 13 and 15 hereof. 3. CONSIDERATION - License Fee - Upon the execution of this License, Licensee shall pay to Licensor a one time non-refundable payment of Two Hundred Fifty Thousand Dollars ($250,000) (the "License Fee"). 4. WARRANTY OF TITLE AND QUIET ENJOYMENT; SUBORDINATION - Licensor warrants that (a) Licensor owns and operates the Facilities, (b) the use of this License by Licensee in accordance with the terms hereof will not breach, violate or infringe on the rights of any third parties, and (c) Licensor has full right to make and perform this License. Upon Licensee's payment of the License Fee and otherwise complying with the terms hereof, Licensor shall ensure that Licensee may have quiet use and enjoyment of the Facilities. Subject to the foregoing, this License shall be subordinate and inferior to any mortgage or lien which currently encumbers the Facilities. Licensee further agrees to subordinate this License to any future mortgage or deed of trust that Licensor, its successors and assigns, obtains against the Facilities, provided that Licensor obtains a non-disturbance agreement reasonably acceptable to Licensee from the holder of any such mortgage or deed of trust. 5. COVENANTS AND AGREEMENTS- (a) Licensor, at Licensor's sole cost and expense, shall maintain the Facilities in good order and repair sufficient for the operation of the System consistent with past practices, reasonable wear and tear, damage by fire, the elements or other casualty excepted. Licensor shall be under no obligation to improve or expand the Facilities to accommodate Licensee's System. Damage to the Facilities or the equipment or improvements of Licensor, which results from the acts or omissions of Licensee, shall be repaired by Licensee at Licensee's cost and expense, or at the option of Licensor, Licensee shall reimburse Licensor for the actual costs incurred by Licensor in repairing such damage or replacing such equipment or improvements, as evidenced by adequate documentation. Damage to the equipment or improvements of Licensee, which results from the acts or omissions of Licensor, shall be repaired by Licensor at Licensor's cost and expense, or at the option of Licensee, Licensor shall reimburse Licensee for the actual costs incurred by Licensee in repairing such damage or replacing such equipment or improvements, as evidenced by adequate documentation. (b) Licensor shall not enter into any agreement to sell or otherwise transfer ownership of all or any part of the Facilities unless the purchaser agrees to be bound by and be subject to the terms of this License. (c) Licensee will use the Facilities solely in connection with its operation of the System and in a manner that will not unreasonably disturb the occupancy of Licensor or any other licensees of the Facilities or the sites where the Facilities are located. Licensee agrees that it will not install any equipment of types and radio frequencies which would cause interference to communications operations being conducted from the Facilities by Licensor. Licensee also covenants that any equipment installed by Licensee shall comply with all applicable laws, ordinances and regulations, including but not limited to those regulations promulgated by the FCC. In the event the equipment installed by Licensee causes such interference, Licensee will promptly after notice from Licensor take the steps necessary to correct and eliminate the interference. If such interference cannot be eliminated within forty-eight (48) hours after receipt by Licensee of notice from Licensor describing the existence of the interference, Licensee shall temporarily disconnect the electric power and shut down the equipment (except for intermittent operation for the purpose of testing, after performing maintenance, repair, modification, replacement, or other action taken for the purpose of correcting such interference) until such interference is corrected. If such interference is not corrected within thirty (30) days after receipt by Licensee of such prior written notice from Licensor of the existence of interference, Licensee agrees to then remove the equipment causing such interference from the Facilities. Licensor shall impose upon future licensees a duty to refrain from interfering with Licensee which is similar to that set forth herein and Licensee covenants that it shall not subsequently modify its equipment at the Facilities in a way which causes interference with other then existing equipment at the Facilities. 6. UTILITIES - Except as provided herein, Licensor shall pay utility services relating to the Facilities. Any utility services installed on the Facilities for the use or benefit of Licensee shall be made at the sole cost and expense of Licensee and shall be separately metered from Licensor's utilities. Notwithstanding the foregoing, to the extent utility facilities can be shared by multiple licensees of the Facilities, Licensor agrees to use its best efforts to allocate the construction and installation costs of common utility facilities equally between the licensees that have executed license agreements as of the time construction and installation of the utility facilities commences. The Parties acknowledge and agree that the provisions of this Section 6 do not apply with respect to services, including the use of the Facilities, provided by Licensor pursuant to the terms of the Operations and Maintenance and Administration Services Agreement of even date herewith between Licensor and Licensee, as such agreement may be amended, supplemented or replaced from time to time. 7. TAXES - Except as provided herein, Licensor shall pay all real property taxes relating to the Facilities. Licensee shall pay any and all property, use or other taxes associated with any expansion of the Facilities made exclusively for Licensee's use. 8. TOWER MARKING AND LIGHTING REQUIREMENTS - Licensor shall be responsible for compliance with any applicable marking and lighting requirements of the FAA and the FCC, provided that if the requirement for compliance results from the presence of equipment of the Licensee, then Licensee shall pay costs and expenses therefor (including any lighting automated alarm system so required). 9. MECHANICS' LIENS - Licensee shall not permit any mechanics,' materialmen's, contractors' or subcontractors' liens arising from any construction work, repair, restoration or removal or any other claims or demands to be enforced against the Facilities or any part thereof. Licensor shall have the right at any time to post and maintain upon the Facilities such notices as may be necessary to protect Licensor against liability for all such liens and encumbrances. Licensee shall give Licensor written notice prior to the commencement of any work or the delivery of any materials connected with such work or construction, repair, restoration, or removal of materials on the Facilities. Licensor shall assume no liability for the payment of materials or labor which accrue in the installation of Licensee's improvements upon the Facilities and no mechanics' or materialmen's lien for Licensee's improvements shall attach to the interest of Licensor in the Facilities. 10. FINANCING AGREEMENT - Licensee may, upon written notice to Licensor, mortgage or grant a security interest in any equipment it installs on the Facilities to any such mortgagees or holders of security interests including their successors and assigns (hereinafter collectively referred to as "Secured Parties"). No such security interest shall extend in any way to the interests or property of Licensor or any other licensee of the Facilities. 11. DISCLAIMER OF WARRANTIES - LICENSEE ACKNOWLEDGES THAT, EXCEPT AS SET FORTH IN SECTION 4, LICENSOR HAS NOT MADE ANY REPRESENTATION OR WARRANTY, EXPRESS, IMPLIED OR AT COMMON LAW, BY STATUTE, OR OTHERWISE RELATING TO ANY FACILITIES INCLUDING, WITHOUT LIMITATION, THE CONDITION OF THE TOWER FACILITIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED OR EXPRESSED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, ENVIRONMENTAL CONDITION, OR GEOLOGIC CONDITION). IN FURTHERANCE OF THE FOREGOING, LICENSOR HEREBY EXPRESSLY DISCLAIMS AND NEGATES, AND LICENSEE HEREBY WAIVES (I) ANY IMPLIED OR EXPRESSED WARRANTY OF MERCHANTABILITY; (II) ANY IMPLIED OR EXPRESSED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, (III) ANY IMPLIED OR EXPRESSED WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS; (IV) ANY CLAIM FOR DAMAGES BECAUSE OF ANY LATENT OR PATENT DEFECTS OR OTHER DEFECTS, WHETHER KNOWN OR UNKNOWN AND (V) ANY AND ALL IMPLIED WARRANTIES EXISTING UNDER APPLICABLE LAW. IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT ALL TOWER FACILITIES BE LICENSED ON AN AS IS, WHERE IS BASIS. THE PARTIES HERETO AGREE THAT, TO THE EXTENT REQUIRED BY APPLICABLE LAW TO BE EFFECTIVE, THE DISCLAIMERS OF CERTAIN WARRANTIES CONTAINED IN THIS SECTION ARE CONSPICUOUS DISCLAIMERS. 12. INDEMNIFICATION - (a) Defined Terms - As used in this Section 12, these terms are defined as follows: (i) "Affiliate" means, with respect to any person, (i) any other person directly or indirectly controlled by, controlling or under common control with such first person and (ii) any director or officer of such first person or of any person referred to in clause (i) above. For the purposes of this definition control of any person means ownership, directly or indirectly, of 50% or more of the voting stock of such person, if a corporation, and ownership of 50% or more of the equity or beneficial interest in any other person. The general partner of any person which is a partnership will be deemed to control such person. (ii) "Claim" means, demands, claims, suits, actions, proceedings or investigations brought against a Person by an unrelated or unaffiliated Person. (iii) "Damages" means, debts, liabilities, obligations, losses, damages, cost and expenses, whether actual, consequential or punitive, interest (including, without limitation, prejudgment interest), penalties, reasonable legal fees, disbursements and costs of investigations, deficiencies, levies, duties and imposts (iv) "Environmental Law" means any and all federal, state, local, statutes, laws (including common law), regulations, ordinances, rules, judgments, orders, decrees, codes and any binding administrative or judicial interpretation thereof relating to the protection of the environment (including indoor or outdoor ambient air, surface water, groundwater, drinking water, soils and subsurface strata, biota and natural resources) and health and safety, including without limitation those pertaining to the use, distribution, generation, emission, discharge, handling, storage, processing, transportation, treatment, disposal, investigation, remediation and monitoring of pollutants, contaminants, petroleum products or petroleum byproducts, asbestos in friable form, polychlorinated biphenyls or flammable, corrosive, radioactive, reactive, hazardous or toxic substances, materials, products, compounds, chemicals or wastes or any other substances or materials that are defined or characterized under Environmental Law as "hazardous," "toxic," or "dangerous" (collectively, "Hazardous Materials"). (v) "Indemnified Parties" means any Person entitled to indemnification pursuant to this Section 12. (vi) "Person" means an individual, corporation, limited liability company, partnership, joint venture, bank, trust, unincorporated organization and/or a government or any department or agency thereof or other entity of any kind. (b) By Licensee - Licensee, its heirs, grantees, successors, and assigns shall indemnify, defend and hold harmless Licensor, its Affiliates and their respective directors, officers, shareholders, successors and assigns from all Damages arising from any Claim to the extent such Claim is attributable to the joint, concurrent or sole negligence, gross negligence, or willful misconduct or strict liability of Licensee, or its agents, employees, representatives, contractors or other persons acting or engaged by, through or under Licensee. For purposes of clarification of the foregoing, Licensee shall not be responsible or liable to any of the foregoing Indemnified Parties for any Damages resulting from any Claim to the extent attributable to any acts or omissions of other licensees or tower users occupying the Facilities or for any structural or power failures or destruction or damage to the Facilities except to the extent caused by the joint, concurrent or sole negligence, gross negligence, or willful misconduct of Licensee. (c) By Licensor - Licensor, its heirs, grantees, successors, and assigns shall indemnify, defend and hold harmless Licensee, its Affiliates and their respective directors, officers, shareholders, successors and assigns from all Damages arising from any Claim to the extent such Claim is attributable to the joint, concurrent or sole negligence, gross negligence, or willful misconduct or strict liability of Licensor, or its agents, employees, representatives, contractors or other persons acting or engaged by, through or under Licensor. For purposes of clarification of the foregoing, Licensor shall not be responsible or liable to any of the foregoing Indemnified Parties for any Damages resulting from any Claim to the extent attributable to any acts or omissions of other licensees or tower users occupying the Facilities or for any structural or power failures or destruction or damage to the Facilities except to the extent caused by the joint, concurrent or sole negligence, gross negligence, or willful misconduct of Licensor. (d) Environmental By Licensee - Licensee, its heirs, grantees, successors, and assigns shall indemnify, defend and hold harmless Licensor, its Affiliates and their respective directors, officers, shareholders, successors and assigns from and against any and all environmental Damages, caused by activities conducted at the Facilities by Licensee, and (i) arising from the presence of any Hazardous Materials upon, about or beneath the Facilities or migrating to or from the Facilities, or (ii) arising in any manner whatsoever out of the violation by Licensee of any Environmental Law pertaining to the Facilities and any activities thereon, either of which conditions came into existence after the execution of this License and are solely attributable to activities conducted by Licensee at the sites where the Facilities are located. Licensee covenants that it shall not nor shall Licensee allow its employees, agents or independent contractors to use, treat, store or dispose of any Hazardous Materials at the sites where the Facilities are located. (e) Environmental By Licensor - Licensor, its heirs, grantees, successors, and assigns shall indemnify, defend and hold harmless Licensee, its Affiliates and their respective directors, officers, shareholders, successors and assigns from and against any and all environmental Damages arising (i) from the presence of any Hazardous Materials upon, about or beneath the Facilities or migrating to or from the Facilities; or (ii) in any manner whatsoever out of the violation of any Environmental Law pertaining to the Facilities and any activities thereon, either of which conditions are solely attributable to activities conducted by Licensor at the sites where the Facilities are located. (f) Survival - The provisions of this Section 12 shall survive the termination of this License with respect to any events occurring on or before termination of this License whether or not Claims relating thereto are asserted before or after termination of this License. 13. DESTRUCTION OR CONDEMNATION - If the whole or any substantial part of the Facilities shall be taken by any public authority under the power of eminent domain, or if the whole or any substantial part of the Facilities shall be destroyed by fire or other casualty, so as to materially interfere with Licensee's use and occupancy thereof, then this License shall cease on the part so taken on the date of possession by such authority of that part or the destruction of that part, and Licensee shall have the right to terminate this License upon written notice to Licensor, which notice shall be delivered by Licensee within thirty (30) days following the date written notice is received by Licensee of such taking or possession. 14. DEFAULT BY LICENSEE - Any failure of Licensee to perform or observe any term, covenant, provision or condition of this License which failure is not corrected or cured by Licensee within thirty (30) days of receipt by Licensee of written notice from Licensor of the existence of such a default (except such thirty (30) day cure period shall be extended as reasonably necessary to permit Licensee to complete a cure so long as Licensee commences the cure within such thirty (30) day cure period and thereafter continuously and diligently pursues and completes such cure) shall be considered to be a default of this License by Licensee. 15. REMEDIES - In the event of a default by Licensee under the terms of Section 14 of this License and after the Licensee's failure to cure such default within the time allowed the Licensee to cure such default, then this License shall automatically terminate, and Licensor may remove any of Licensee's equipment at the Facilities without being deemed liable for trespass or conversion and store the same at Licensee's sole cost and expense. 16. NOTICES - All notices or demands by or from Licensor to Licensee, or Licensee to Licensor, shall be in writing. Notices shall be effective on the day they are sent. Such notices or demands shall be mailed (U.S. mail, certified with return receipt requested or by overnight courier service) to the other party at the following address: Licensor: Licensee: 17. RELOCATION OF FACILITIES - Licensor may, at its election, relocate the Facilities to, or replace the Facilities in, alternative locations or properties owned or leased by Licensor. Such relocations will (i) be at Licensor's sole cost; and (ii) not result in an interruption of Licensee's communications services. Upon such relocation, the Facilities covered herein shall be the relocated or replaced Facilities. At the request of either party, Licensor and Licensee shall enter into an amendment of this License to clarify the rights of Licensee to the relocated or replaced Facilities. 18. ENTIRE AGREEMENT - This License contains the entire agreement between the parties hereto with respect to the use of the Facilities and supersedes all previous negotiations leading thereto. This License may be modified only by an agreement in writing executed by Licensor and Licensee. 19. SUCCESSORS AND ASSIGNS - This License shall be binding upon and inure to the benefit of the legal representatives, heirs, successors, and assigns of Licensor and Licensee. Licensee may not sublicense all or any part of the Facilities without Licensor's prior written consent. Licensee may assign all of its rights hereunder to any party acquiring Licensee's interest in the System provided such party agrees to bound and subject to the terms of this License. Licensor may assign its rights hereunder to any party who owns the Facilities and agrees to be bound and subject to the terms of this License. 20. LIMITATION OF PARTIES' LIABILITY - Neither Licensor nor Licensee shall be responsible for any incidental or consequential damages incurred resulting from (i) Licensor's or Licensee's use or inability to use the Facilities, or (ii) damage to the other's equipment. 21. MISCELLANEOUS - (a) This License is governed by the laws of the State of Alaska; (b) If any provision of this License is invalid or unenforceable with respect to any party, the remainder of this License will not be affected and each provision of this License will be valid and enforceable to the fullest extent permitted by law; (c) The prevailing party in any court action or mutually agreed upon arbitration proceeding to enforce the terms of this License is entitled to receive its reasonable attorneys' fees and other reasonable expenses from the non-prevailing party; (d) Failure or delay on the part of either party to exercise any right, power or privilege hereunder will not operate as a waiver thereof and waiver or breach of any provision hereof under any circumstances will not constitute a waiver of any subsequent breach; (e) Each party executing this License acknowledges that it has full power and authority to do so and that the person executing on its behalf has the authority to bind the party; (f) Neither party shall be deemed the drafter of this License for purposes of any applicable judicial principles or rules of contract construction. IN WITNESS WHEREOF, the Licensor and Licensee have executed this Tower License as of the date and year first above written. LICENSOR: ENSTAR NATURAL GAS COMPANY, A DIVISION OF SEMCO ENERGY, INC. By:__________________________________________ Name: Title: LICENSEE: ALASKA PIPELINE COMPANY, LLC By:__________________________________________ Name: Title: Date: EXHIBIT A Tower Locations - ---------------- Beluga Purchase Station Wasilla Office Site Summit (Anchorage, leased from DoD) Spenard Office (Anchorage) Anchorage Operations Center Glen Alps (Anchorage) Soldotna Office Kalifonsky Purchase and Compressor Stations Gudenrath Compressor Station Potter Gate Station (Anchorage) Anchorage City Gate East Anchorage City Gate Pt. Mackenzie Pretty Creek Purchase Station Stump Lake/van River Purchase Station Lewis River CIGGS/KNPL Purchase Station Beaver Creek Purchase Station Mile 39 (Beluga-Anchorage Pipeline) Sterling Purchase Station EXHIBIT H RECIPROCAL EASEMENT AND JOINT USE AGREEMENT BY AND BETWEEN ALASKA PIPELINE COMPANY, LLC AND ENSTAR NATURAL GAS COMPANY, A DIVISION OF SEMCO ENERGY, INC. TABLE OF CONTENTS
ARTICLE I DEFINITIONS.................................................................................1 Section 1.1. Definitions............................................................................1 ARTICLE II RECIPROCAL EASEMENTS........................................................................2 Section 2.1. Grant by APC...........................................................................2 Section 2.2. Grant by ENSTAR........................................................................3 Section 2.3. Limitations............................................................................3 Section 2.4. Recordable Documents...................................................................4 Section 2.5. Modifications to Schedules.............................................................4 ARTICLE III JOINT USE RIGHTS AND OBLIGATIONS............................................................4 Section 3.1. Maintenance and Repair Obligations.....................................................4 Section 3.2. Additions/Alterations..................................................................4 Section 3.3. Avoiding Endangerment..................................................................5 Section 3.4. Conflicting Uses.......................................................................5 Section 3.5. Abandonment............................................................................5 ARTICLE IV INDEMNIFICATION; RELEASE; LIMIT ON LIABILITY................................................6 Section 4.1. Indemnification by APC.................................................................6 Section 4.2. Indemnification by ENSTAR..............................................................6 Section 4.3. Procedures.............................................................................6 Section 4.4. Indemnification Payments...............................................................7 Section 4.5. Limit on Liability.....................................................................7 ARTICLE V DISPUTE RESOLUTION..........................................................................7 Section 5.1. General................................................................................7 ARTICLE VI MISCELLANEOUS PROVISIONS....................................................................8 Section 6.1. Notices................................................................................8 Section 6.2. Successors and Assigns.................................................................8 Section 6.3. Signatures, Counterparts...............................................................8 Section 6.4. Amendments.............................................................................8 Section 6.5. Governing Law..........................................................................8 Section 6.6. Entire Agreement.......................................................................8 Section 6.7. Negotiated Agreement...................................................................9 Section 6.8. Waiver.................................................................................9 Section 6.9. Severability...........................................................................9 Section 6.10. No Third Party Beneficiaries...........................................................9 SCHEDULES Schedule 2.1 APC Affected Rights of Way Schedule 2.4 ENSTAR Affected Rights of Way
RECIPRoCAL EASEMENT AND JOINT USE AGREEMENT This Reciprocal Easement and Joint Use Agreement (this "Agreement") is made this ___ day of [________], 2004 by and between ALASKA PIPELINE COMPANY, LLC, a Delaware limited liability company ("APC") and ENSTAR Natural Gas Company, a Division of SEMCO Energy, Inc., a Michigan corporation ("ENSTAR"). Recitals APC and ENSTAR each hold title to rights of way, easements and licenses for the installation and maintenance of natural gas pipelines and related equipment (collectively, the "Rights of Way"). Prior to the date of this Agreement, APC was a wholly owned subsidiary of ENSTAR and, from time to time, (i) APC located pipelines and related facilities used in its gas transmission business ("APC Facilities") in Rights of Way held by ENSTAR and (ii) ENSTAR located pipelines and related facilities used in its gas distribution business ("ENSTAR Facilities") in Rights of Way held by APC. As a result of the sale by ENSTAR of APC, APC and ENSTAR are no longer commonly owned, and as a result, the Parties desire to provide for the continued use by APC of Rights of Way held by ENSTAR for APC Facilities and for the continued use by ENSTAR of Rights of Way held by APC for ENSTAR Facilities on the terms and subject to the conditions set forth in this Agreement. NOW THEREFORE, in consideration of the premises and the mutual promises herein contained, the Parties agree as follows: ARTICLE I DEFINITIONS Section 1.1. Definitions. The following capitalized terms when used in this Agreement shall have the following meanings: "AAA" is defined in Section 5.1(b). "Affected Right of Way" shall mean either of an APC Affected Right of Way or an ENSTAR Affected Right of Way. "Agreement" is defined in the Introductory Paragraph of this Agreement. "APC" is defined in the Introductory Paragraph of this Agreement. "APC Affected Rights of Way" is defined in Section 2.1. "APC Easement" is defined in Section 2.2. 1 "APC Facilities" is defined in the Recitals to this Agreement. "APC Indemnified Party" is defined in Section 4.1. "APC Permitted Uses" is defined in Section 2.2. "Easement" shall mean either the APC Easement or the ENSTAR Easement. "ENSTAR" is defined in the Introductory Paragraph of this Agreement. "ENSTAR Affected Rights of Way" is defined in Section 2.2. "ENSTAR Easement" is defined in Section 2.1. "ENSTAR Facilities" is defined in the Recitals to this Agreement. "ENSTAR Indemnified Party" is defined in Section 4.2. "ENSTAR Permitted Uses" is defined in Section 2.1. "Facilities" means either the APC Facilities or the ENSTAR Facilities. "Indemnified Party" is defined in Section 4.3. "Laws" shall mean any applicable statute, common law, rule, regulation, judgment, order, ordinance, writ, injunction or decree issued by any governmental authority having jurisdiction with respect to the applicable subject matter. "Limited Party" is defined in Section 3.4. "Limiting Party" is defined in Section 3.4. "Loss" is defined in Section 4.1. "Party" means either APC or ENSTAR. "Rights of Way" is defined in the Recitals to this Agreement. ARTICLE II RECIPROCAL EASEMENTS Section 2.1. Grant by APC. APC hereby grants ENSTAR, for the term of the underlying Right of Way and any extension thereof or replacement therefor, an easement and license (the "ENSTAR Easement") to use those Rights of Way now held by APC and on which ENSTAR Facilities are currently located, including, without limitation, those Rights of Way described on Schedule 2.1 (the "APC Affected Rights of Way") for the purpose of inspecting, maintaining, repairing, removing, replacing, locating or relocating pipeline and related equipment used in connection with ENSTAR's natural gas distribution business (the "ENSTAR Permitted Uses"). 2 Section 2.2. Grant by ENSTAR. ENSTAR hereby grants to APC, for the term of the underlying Right of Way and any extension thereof or any replacement therefor, an easement and license (the "APC Easement") to use those Rights of Way now held by ENSTAR and on which APC Facilities are currently locating, including, without limitation, those Right of Way described on Schedule 2.2 (the "ENSTAR Affected Rights of Way") for the purpose of inspecting, maintaining, repairing, removing, replacing, locating or relocating pipeline and related equipment used in connection with APC's natural gas transmission business (the "APC Permitted Uses"). Section 2.3. Limitations. The Easements granted pursuant to Sections 2.1 and 2.3 are expressly subject to the following limitations: (a) Each Easement is expressly subject to the scope of the underlying Right of Way, and to the extent the scope of any Easement exceeds the scope of any underlying Right of Way, such Easement shall be deemed to be limited to the maximum scope now or hereafter permitted by such underlying Right of Way. (b) APC shall be entitled to use the APC Easement only for APC Permitted Purposes and ENSTAR shall be entitled to use the ENSTAR Easement only for ENSTAR Permitted Purposes. (c) ENSTAR ACCEPTS THE ENSTAR EASEMENT AND THE LANDS OVER WHICH THE ENSTAR EASEMENT IS LOCATED "AS-IS," AND IN THE CONDITION EXISTING ON THE DATE OF THIS AGREEMENT. ENSTAR ACKNOWLEDGES AND AGREES THAT APC MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND OR NATURE WITH RESPECT TO THE ENSTAR EASEMENT, INCLUDING WITHOUT LIMITATION ANY REPRESENTATIONS OR WARRANTIES REGARDING (i) APC'S RIGHT, TITLE OR INTEREST IN OR TO ANY PART OF ANY APC AFFECTED RIGHT OF WAY (AND THE ENSTAR EASEMENT IS ACCORDINGLY GRANTED HEREUNDER WITHOUT ANY WARRANTIES OR COVENANTS OF TITLE); (ii) ENCROACHMENT OR TRESPASS OF ENSTAR FACILITIES ONTO, OVER OR UNDER THE PROPERTY OF OTHERS, OR ENCROACHMENTS OR TRESPASS OF FACILITIES, STRUCTURES OR USES OF THIRD PARTIES ONTO, OVER OR UNDER ANY APC AFFECTED RIGHT OF WAY; (iii) THE SPECIFIC LOCATION OF THE ENSTAR FACILITIES ON, OVER, UNDER, ACROSS OR ALONG THE APC AFFECTED RIGHTS OF WAY OR ANY PART THEREOF; OR (iv) THE SUITABILITY OF ANY APC AFFECTED RIGHT OF WAY FOR THE ENSTAR FACILITIES OR ANY PART THEREOF, THE FREEDOM OF ANY APC AFFECTED RIGHT OF WAY FROM HAZARDS, OR OTHERWISE IN ANY MANNER REGARDING THE PHYSICAL CONDITION OR CHARACTERISTICS OF ANY APC AFFECTED RIGHT OF WAY OR ANY PART THEREOF. (d) APC ACCEPTS THE APC EASEMENT AND THE LANDS OVER WHICH THE APC EASEMENT IS LOCATED "AS-IS," AND IN THE CONDITION EXISTING ON THE DATE OF THIS AGREEMENT. APC ACKNOWLEDGES AND AGREES THAT ENSTAR MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND OR NATURE WITH RESPECT TO THE APC EASEMENT, INCLUDING WITHOUT LIMITATION ANY REPRESENTATIONS OR WARRANTIES REGARDING (i) ENSTAR'S RIGHT, TITLE OR INTEREST IN OR TO ANY PART OF ANY ENSTAR AFFECTED RIGHT OF WAY (AND THE APC EASEMENT IS ACCORDINGLY GRANTED HEREUNDER WITHOUT ANY WARRANTIES OR COVENANTS OF TITLE); (ii) ENCROACHMENT OR TRESPASS OF APC FACILITIES ONTO, OVER OR UNDER THE PROPERTY OF OTHERS, OR ENCROACHMENTS OR TRESPASS OF FACILITIES, STRUCTURES OR USES OF THIRD PARTIES ONTO, OVER OR UNDER ANY ENSTAR AFFECTED RIGHT OF WAY; (iii) THE SPECIFIC LOCATION OF THE APC FACILITIES ON, OVER, UNDER, ACROSS OR ALONG THE ENSTAR AFFECTED RIGHTS OF WAY OR ANY PART THEREOF; OR (iv) THE SUITABILITY OF ANY ENSTAR AFFECTED RIGHT OF WAY FOR THE APC FACILITIES OR ANY PART THEREOF, THE FREEDOM OF ANY ENSTAR AFFECTED RIGHT OF WAY FROM HAZARDS, OR OTHERWISE IN ANY MANNER REGARDING THE PHYSICAL CONDITION OR CHARACTERISTICS OF ANY ENSTAR AFFECTED RIGHT OF WAY OR ANY PART THEREOF. 3 Section 2.4. Recordable Documents. At the request of either Party, a counterpart of this Agreement in recordable form shall be placed of record in the real estate records in any jurisdiction in which any Affected Right of Way is located. Section 2.5. Modifications to Schedules. The Parties agree to update Schedules 2.1 and 2.2 from time to time to correct any errors contained therein and to add any Affected Rights of Way not listed on such Schedules. ARTICLE III JOINT USE RIGHTS AND OBLIGATIONS Section 3.1. Maintenance and Repair Obligations. Each Party shall at its own expense (i) conduct its operations in any Affected Right of Way, including operation of its Facilities located in any Affected Right of Way, in compliance with applicable Law, (ii) maintain and repair, in structurally and operationally safe condition, its Facilities located on the Affected Rights of Way, (iii) maintain such portions, if any, of the Affected Rights of Way as are exclusively used, occupied and controlled by such Party, and (iv) with reasonable promptness cause all damage to the lands underlying the Affected Rights of Way or the other Party's Facilities resulting from activities associated with the Permitted Uses undertaken by such Party to be repaired to a condition at least substantially equivalent to that existing prior thereto including, as appropriate, leveling of the surface thereof and seeding with grasses or other ground cover as appropriate following excavation (it being understood that the reasonable time for performance of certain restoration work, such as reseeding, may depend on weather or seasonal considerations). Section 3.2. Additions/Alterations. This Agreement gives each Party the right, in its discretion, to alter, improve, relocate or construct additional Facilities on its Easement (an "Improvement"). A Party desiring to make an Improvement shall notify the other party at least ten (10) days before commencing work on the Improvement, and shall include in such notice plans, specifications, surveys and/or other information pertaining to the proposed Improvement so as to fully inform the other Party as to the nature and extent thereof. Improvements shall be subject to all terms and conditions of this Agreement. All Improvements shall be constructed in compliance in all material respects with applicable Laws and the underlying Rights of Way, and otherwise in a good and workmanlike manner. The Party constructing any Improvement shall be responsible for ensuring that the Improvement does not violate any of the terms and conditions of this Agreement or exceed the scope of the Easement on which such Improvement is constructed. 4 Section 3.3. Avoiding Endangerment. The Party on whose Affected Right of Way an Improvement is to be constructed may notify the other Party in writing within ten (10) days after receipt of notice of the Improvement of reasonable work and design restrictions and precautions that are needed to avoid endangering such Party's Facilities located on the Affected Right of Way, and the Party undertaking the Improvement shall comply with all such restrictions and precautions. Such restrictions and precautions may include, by way of example and not limitation, restrictions and precautions that must be following in the event that any pipeline or buried cable is to be uncovered, or for installation of facilities that will cross pipelines or buried cables or will be in close proximity to pipelines or buried cables. Neither the content of any such work or design restrictions or precautions, nor the failure to specify such restrictions or precautions, nor any failure to enforce to any extent any such work or design restrictions or precautions shall limit or affect in any way the obligations and liabilities of the Party undertaking the Improvements under this Agreement. Section 3.4. Conflicting Uses. The Parties recognize that the use of an Affected Right of Way by one Party may preclude or limit the right of the other Party to use the Affected Right of Way. The Parties agree to cooperate with each other and to use commercially reasonable efforts to minimize the likelihood of conflicting uses. In the event that a Party's Facilities in an Affected Right of Way limits or precludes a Permitted Use of the Affect Right of Way by the other Party, the Party whose Permitted Use is limited or precluded (the "Limited Party") shall have the right to cause the other Party (the "Limiting Party") to relocate its Facilities located on the Affected Right of Way, subject to the following: (a) In no event shall any Facilities of the Limiting Party be relocated if such relocation (i) unreasonably interferes with the Limiting Party's normal business operations, or (ii) is to a location that increases the Limiting Party's costs of operation or in which the Limiting Party has rights that are less extensive or secure as such Party's property rights in the Affected Right of Way. (b) The Limited Party shall pay all of the costs and expenses of the Limiting Party in relocating its Facilities, including, without limitation, costs of alternative rights of way, design, engineering, permitting and surveying costs and costs of construction of the replacement Facilities. Section 3.5. Abandonment. Before abandoning any Affected Right of Way, the Party holding such Affected Right of Way shall offer to transfer the Affected Right of Way to the other Party, without cost other than reimbursement of reasonable out-of-pocket transaction costs. 5 ARTICLE IV INDEMNIFICATION; RELEASE; LIMIT ON LIABILITY Section 4.1. Indemnification by APC. APC shall indemnify, defend and hold harmless ENSTAR, and each of its officers, directors, employees, agents, and affiliates (and the officers, directors, employees and agents of such affiliates) ("ENSTAR Indemnified Party") if any such ENSTAR Indemnified Party shall at any time or from time to time suffer any damage, judgment, fine, penalty, demand, settlement, liability, loss, cost, expense (including reasonable attorneys', consultants' and experts' fees), claim or cause of action (each, a "Loss") arising out of, relating to or resulting from the APC's performance of this Agreement, to the extent such Loss results from any breach of this Agreement or the fault, tortuous act, negligence, strict liability, gross negligence or willful misconduct of APC. Section 4.2. Indemnification by ENSTAR. ENSTAR shall indemnify, defend and hold harmless APC, and each of its officers, directors, employees, agents, and affiliates (and the officers, directors, employees and agents of such affiliates) ("APC Indemnified Party") if any such APC Indemnified Party shall at any time or from time to time suffer any Loss arising out of, relating to or resulting from ENSTAR's performance of this Agreement, to the extent such Loss results from any breach of this Agreement or the fault, tortuous act, negligence, strict liability, gross negligence or willful misconduct of ENSTAR. Section 4.3. Procedures. Any Party asserting a claim for indemnification hereunder (such Party seeking indemnification, the "Indemnified Party") shall notify the other Party (the "Indemnifying Party") (with reasonable specificity) promptly after it becomes aware of facts supporting a claim or action for indemnification under this Article IV, and shall provide to the Indemnifying Party as soon as practicable thereafter all information and documentation reasonably necessary to support and verify any Losses associated with such claim or action. The failure to so notify or provide information to the Indemnifying Party shall not relieve the Indemnifying Party of any liability that it may have to any Indemnified Party, except to the extent that the Indemnifying Party demonstrates that it has been materially prejudiced by the Indemnified Party's failure to give such notice, in which case the Indemnifying Party shall be relieved from its obligations hereunder to the extent of such material prejudice. The Indemnifying Party may, and, at the request of the Indemnified Party, shall participate in and defend, contest or otherwise protect the Indemnified Party against any such claim or action by counsel of the Indemnifying Party's choice at its sole cost and expense; provided, however, that the Indemnifying Party shall not make any settlement or compromise without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld or delayed) unless the sole relief provided is monetary damages that are paid in full by the Indemnifying Party. The Indemnified Party shall have the right, but not the obligation, to participate at its own expense in the defense thereof by counsel of the Indemnified Party's choice and shall in any event use its reasonable best efforts to cooperate with and assist the Indemnifying Party. If the Indemnifying Party fails timely to defend, contest or otherwise protect against such suit, action, investigation, claim or proceeding, the Indemnified Party shall have the right to do so, including, without limitation, the right to make any compromise or settlement thereof, and the Indemnified Party shall be entitled to recover the entire cost thereof from the Indemnifying Party, including, without limitation, reasonable attorneys' fees, disbursements and amounts paid as the result of such suit, action, investigation, claim or proceeding. 6 Section 4.4. Indemnification Payments. Any payment hereunder shall be made by wire transfer of immediately available funds to such account or accounts as the Indemnified Party shall designate to the Indemnifying Party in writing. Section 4.5. Limit on Liability. IN NO EVENT SHALL ANY PARTY BE LIABLE TO THE OTHER PARTY FOR SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE LOSS, DAMAGES OR EXPENSES (INCLUDING LOST PROFITS OR SAVINGS). ARTICLE V DISPUTE RESOLUTION Section 5.1. General. Any dispute arising under this Agreement or otherwise in connection with this Agreement shall be resolved pursuant to this Section 5.1. (a) Any Party has the right to request the other to meet to discuss a dispute. The Party requesting the meeting will give at least ten (10) Business Days notice in writing of the subject it wishes to discuss, provide a written statement of the dispute, and designate an officer of the Party with complete power to resolve the dispute to attend the meeting. Within five (5) Business Days after receipt to such request, the Party receiving the request will provide a responsive written statement and will designate an officer of the Party who will attend the meeting with complete power to resolve the dispute. (b) If the meeting fails to resolve the dispute by a signed agreement among the officers, either Party may submit the dispute for binding arbitration administered by the American Arbitration Association ("AAA") under its Commercial Arbitration Rules before a single arbitrator, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (c) The Parties agree to make discovery and disclosure of all matters relevant to the dispute to the extent and in the manner provided by the Federal Rules of Civil Procedure. The arbitrator will rule on all requests for discovery and disclosure and discovery shall be completed within 60 days after the date of appointment of the arbitrator. The arbitrator may consider any matter relevant to the subject to the dispute and shall follow the statutes and decisions of the substantive law of Alaska relevant to the subject. The arbitrator shall not have the authority or power to alter, amend or modify any of the terms and conditions of the agreement of the Parties. The arbitrator shall issue a final ruling within 150 days after the date of appointment of the arbitrators. (d) The ruling of the arbitrator shall be in writing and signed and shall be final and binding upon the Parties. The fees and expenses of counsel, witnesses and employees of the Parties and all other costs and expenses incurred exclusively for the benefit of the Party incurring the same shall be borne by the Party incurring such fees and expenses. All other fees and expenses including, without limitation, compensation for the arbitrator, shall be divided equally between the Parties. All meetings and arbitrations held pursuant to this Section 5.1 shall take place in Anchorage, Alaska. 7 ARTICLE VI MISCELLANEOUS PROVISIONS Section 6.1. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be deemed given if delivered personally, by facsimile (which is confirmed) or sent by overnight courier (providing proof of delivery), to the Parties at the following address: If to APC: [_____________________ ______________________ ______________________ _____________________] If to ENSTAR: [______________________ ______________________ ______________________ _____________________] Any Party may, by notice given in accordance with this Section 6.1 to the other Parties, designate another address or person for receipt of notices hereunder provided that notice of such a change shall be effective upon receipt. Section 6.2. Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the Parties and their respective successors, assigns and legal representatives (whether by acquisition, merger, operation of law, other transaction constituting a change of control or otherwise). Section 6.3. Signatures, Counterparts. Facsimile transmission of any signed original document and/or retransmission of any signed facsimile transmission shall be the same as delivery of an original. On request, a Party will confirm its facsimile transmission by signing a duplicate original document. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. Section 6.4. Amendments. This Agreement may be amended, modified or supplemented only by a written instrument executed by the Parties. Section 6.5. Governing Law. THIS AGREEMENT WILL BE GOVERNED AS TO FORMATION, PERFORMANCE, INTERPRETATION AND ENFORCEMENT BY THE LAWS OF THE STATE OF ALASKA WITHOUT GIVING EFFECT TO ITS CONFLICT OF LAWS PRINCIPLES. Section 6.6. Entire Agreement. This Agreement constitutes the entire agreement between the Parties hereto relating to the subject matter hereof and supersede all prior and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, of the Parties, and there are no general or specific warranties, representations or other agreements by or among the Parties in connection with the entering into of this Agreement or the subject matter hereof except as specifically set forth or contemplated herein or therein. 8 Section 6.7. Negotiated Agreement. This Agreement has been negotiated by the Parties and the fact that the initial and final draft will have been prepared by either Party will not give rise to any presumption for or against any party to this Agreement or be used in any respect or forum in the construction or interpretation of this Agreement or any of its provisions. Section 6.8. Waiver. No consent or waiver, express or implied, by any Party to or of any breach or default by any other Party in the performance by such other Party of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance of obligations hereunder by such other Party hereunder. Failure on the part of any Party to complain of any act or failure to act of any other Party or to declare any other Party in default, irrespective of how long such failure continues, shall not constitute a waiver by such first Party of any of its rights hereunder. Section 6.9. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, each Party directs that such court interpret and apply the remainder of this Agreement in the manner that it determines most closely effectuates the Parties' intent in entering into this Agreement, and in doing so particularly take into account the relative importance of the term, provision, covenant or restriction being held invalid, void or unenforceable. Section 6.10. No Third Party Beneficiaries. Except as set forth in Article IV, nothing in this Agreement is intended or shall be construed to give any person, other than the Parties hereto, their successors and permitted assigns, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 9 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. APC ALASKA PIPELINE COMPANY, LLC By:_______________________________ Name: Title: ENSTAR ENSTAR NATURAL GAS COMPANY, A DIVISION OF SEMCO ENERGY, INC. By:________________________________ Name: Title: 10 Schedule 2.1 [To be completed prior to closing] Schedule 2.2 [To be completed prior to closing] EX-12 12 ex12-1.txt EXHIBIT 12.1 Exhibit 12.1
COMPUTATION OF RATIOS (in thousands) - ----------------------------------------------------------------------------- ---------- ---------- --------- Earnings to fixed charges for the fiscal year ending: 2003 2002 2001 - ----------------------------------------------------------------------------- ---------- ---------- --------- Income from continuing operations before income taxes $14,330 $11,772 $20,410 - ----------------------------------------------------------------------------- ---------- ---------- --------- Minority Interest in earnings 4,439 2,605 4,099 - ----------------------------------------------------------------------------- ---------- ---------- --------- Fixed Charges 13,298 12,984 14,888 - ----------------------------------------------------------------------------- ---------- ---------- --------- Total Earnings $33,715 $27,813 $39,726 - ----------------------------------------------------------------------------- ---------- ---------- --------- Earnings to Fixed Charges (1) 2.5:1 2.1:1 2.7:1 - ----------------------------------------------------------------------------- ---------- ---------- --------- (1) Calculated by dividing the sum of income from continuing operations, Minority Interest and fixed charges by fixed charges. Fixed charges represent total interest expense including amortization of debt expense. - ----------------------------------------------------------------------------- ----------- ----------- ---------- Long-term debt to total capital at the fiscal year ended: 2003 2002 2001 - ----------------------------------------------------------------------------- ----------- ----------- ---------- Total debt, including current maturities $140,335 $155,510 $150,131 - ----------------------------------------------------------------------------- ----------- ----------- ---------- Total Equity 227,454 233,539 235,459 - ----------------------------------------------------------------------------- ----------- ----------- ---------- Long-term debt to total capital (2) 62:1 67:1 64:1 - ----------------------------------------------------------------------------- ----------- ----------- ---------- (2) Calculated by dividing the sum total debt, including current maturities by the sum of total debt and equity (Capital).
EX-21 13 ex21-1.txt EXHIBIT 21.1
State of Name Incorp. EIN ---- ------- --- Atlas Energy Holdings, Inc. DE 51-0403866 Atlas America, Inc. DE 51-0404430 Atlas America, Inc. PA 23-2977199 AIC, Inc. DE 51-0367948 Anthem Securities, Inc. PA 25-1803726 Atlas Energy Corporation OH 25-1243697 Atlas Energy Group, Inc. OH 25-1243696 AED Investments, Inc. DE 51-0367949 Atlas Resources, Inc. PA 25-1390937 ARD Investments, Inc. DE 51-0367950 Pennsylvania Industrial Energy, Inc. PA 25-1713313 Atlas Information Management, LLC PA 25-1807156 Resource Energy, Inc. DE 34-1749963 REI-NY, Inc. DE 31-1561431 Resource Well Services, Inc. DE 34-1735319 Viking Resources Corporation PA 23-3011984 RFI Holding Company, Inc. OH 31-1092341 Viking Investments, Inc. DE 31-0807394 Atlas Noble Corp. DE 23-3058777 Atlas Pipeline Partners GP, LLC Atlas Pipeline Partners, L.P. DE 23-3011077 APC Acquisition, LLC DE 55-0844281 Atlas Pipeline Operating Partnership, L.P. DE 23-3015646 Atlas Pipeline New York, LLC PA 25-1850095 Atlas Pipeline Ohio, LLC PA 25-1849435 Atlas Pipeline Pennsylvania, LLC PA 25-1849453
State of Name Incorp. EIN ---- ------- --- Resource Financial Fund Management, Inc. DE 04-3686974 Trapeza Capital Management, LLC DE 11-3662347 Trapeza Manager, Inc. DE 30-0114923 Trapeza Funding, LLC DE 01-0667364 Trapeza Funding II, LLC DE 11-3662350 Trapeza Funding III, LLC DE 45-0499809 Trapeza Funding IV, LLC DE 81-0633650 Trapeza Funding V, LLC DE 20-0402157 RAI Ventures, Inc. DE 23-3052654 Resource Leasing, Inc. DE 51-0367697 FLI Holdings, Inc. DE 51-0397288 LEAF Financial Corp. DE 51-0269559 LEAF Capital Management, Inc. DE 73-1632247 LEAF Asset Management, Inc. DE 75-3019975 LEAF Funding, Inc. DE 57-1159764 LEAF Institutional Direct Management, LLC DE 11-3685100 Resource Real Estate Holdings, Inc. DE 65-1173932 Resource Properties, Inc. DE 23-2720234 Resource Properties II, Inc. DE 23-2691634 Resource Properties IV, Inc. DE 23-2746778 Resource Properties VI, Inc. DE 23-2720144 Resource Properties VIII, Inc. DE 23-2746781 Resource Properties XII, Inc. DE 51-0365087 Resource Properties XV, Inc. DE 51-0365091 Resource Properties XVII, Inc. DE 23-2836316 Resource Properties XVIII, Inc. DE 23-2836317 Resource Properties XX, Inc. DE 23-2836319 Resource Properties XXII, Inc. DE 51-0374874 Resource Properties XXIII, Inc. DE 51-0374875
State of Name Incorp. EIN ---- ------- --- Resource Properties XXIV, Inc. DE 51-0374876 Resource Properties XXV, Inc. DE 51-0374877 Resource Properties XXVI, Inc. DE 52-2005749 Resource Properties XXVII, Inc. DE 52-2005752 Resource Properties XXVIII, Inc. DE 51-0374878 Resource Properties XXIX, Inc. DE 51-0374879 Resource Properties XXX, Inc. DE 51-0374880 Resource Properties XXXI, Inc. DE 51-0365095 Resource Properties XXXII, Inc. DE 52-2048719 Redick Hotel Restaurant Mgmt. Inc. NE Resource Properties XXXIII, Inc. DE 52-2048721 Resource Properties XXXIV, Inc. DE 52-2048722 Resource Properties XXXV, Inc. DE 52-2048723 Resource Properties XXXVI, Inc. DE 52-2048726 Resource Properties XXXVIII, Inc. DE 52-2048730 Resource Properties XL, Inc. DE 52-2048733 Resource Properties XLI, Inc. DE 23-2929392 Resource Properties XLII, Inc. DE 23-2929390 Resource Properties XLIV, Inc. DE 23-2929382 Resource Properties XLVI, Inc. DE 23-2929377 Resource Properties XLVII, Inc. DE 23-2972692 Resource Properties XLIX, Inc. DE 23-2953181 Resource Properties 50, Inc. DE 23-3015612 Resource Properties 51, Inc. DE 23-2966221 Resource Properties 52, Inc. DE 23-2980334 Resource Properties 53, Inc. DE 23-2980335 Resource Properties 54, Inc. DE 23-2980336 ABB Associates I, Inc. DE 23-2980332 ABB Associates I I, Inc. DE 23-2980333 CP/GP, Inc. PA 23-2936954 Chesterfield Mortgage Investors, Inc. DE 23-2990541 ES GP, Inc. DE 23-2953583 RAI Financial, Inc. DE 51-0365093 Resource Commercial Mortgages, Inc. DE 52-2005750 Resource Financial Services, Inc. DE 23-2873436 Resource Housing Investors I, Inc. DE 23-2916186 Resource Housing Investors II, Inc. DE 23-2916188 Resource Housing Investors III, Inc. DE 23-2916190 Resource Housing Investors IV, Inc. DE 23-2916191 Resource Programs, Inc. DE 23-2544941 Resource Rittenhouse, Inc. DE 01-0691140 WS Mortgage Acquisition Corporation DE 23-2929368
State of Name Incorp. EIN ---- ------- --- Resource Capital Partners, Inc. DE 13-4214163
EX-31 14 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION I, Edward E. Cohen, certify that: 1. I have reviewed this annual report on Form 10-K for the fiscal year ended September 30, 2003 of Resource America, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [Omission in accordance with SEC Release Nos. 33-8238, 34-47986 and IC-26068 (June 5, 2003)] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Omitted in accordance with SEC Release Nos. 33-8238, 34-47986 and IC-26068 (June 5, 2003)]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 29, 2003 /s/ Edward E. Cohen --------------------- Name: Edward E. Cohen Title: Chairman of the Board, President and Chief Executive Officer EX-31 15 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION I, Steven J. Kessler, certify that: 1. I have reviewed this annual report on Form 10-K for the fiscal year ended September 30, 2003 of Resource America, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [Omission in accordance with SEC Release Nos. 33-8238, 34-47986 and IC-26068 (June 5, 2003)] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Omitted in accordance with SEC Release Nos. 33-8238, 34-47986 and IC-26068 (June 5, 2003)]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 29, 2003 /s/ Steven J. Kessler ------------------------ Name: Steven J. Kessler Title: Senior Vice President and Chief Financial Officer EX-32 16 ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Resource America, Inc. (the "Company") on Form 10-K for the fiscal year ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward E. Cohen, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Edward E. Cohen ------------------------ Edward E. Cohen Chief Executive Officer December 29, 2003 EX-32 17 ex32-2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Resource America, Inc. (the "Company") on Form 10-K for the fiscal year ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven J. Kessler, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Steven J. Kessler ------------------------ Steven J. Kessler Chief Financial Officer December 29, 2003 -----END PRIVACY-ENHANCED MESSAGE-----