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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-4408
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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 Number)
1521 Locust Street
Philadelphia, Pennsylvania 19102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 546-5005
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
--------------------------------------
Name of each exchange on which registered:
The Company's Common Stock trades on the NASDAQ National Market System
----------------------------------------------------------------------
under the symbol "REXI"
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing price of such stock on December 20, 1996 was
approximately $51,881,974.
The number of outstanding shares of the registrant's Common Stock on December
20, 1996 was 3,550,928.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for registrant's 1997 Annual Meeting of
Shareholders to be held on March 17, 1997 are incorporated by reference in Part
III of this Form 10-K.
RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
ON FORM 10-K
Page
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PART I
Item 1: Business. . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2: Properties. . . . . . . . . . . . . . . . . . . . . . . 21
Item 3: Legal Proceedings . . . . . . . . . . . . . . . . . . . 21
Item 4: Submission of Matters to a Vote of Security Holders . . 22
PART II
Item 5: Market for the Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . 22
Item 6: Selected Financial Data . . . . . . . . . . . . . . . . 23
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 24
Item 8: Financial Statements and Supplementary Data . . . . . . 31
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . 60
PART III
Item 10: Directors, Executive Officers, Promoters, and
Control Persons of the Registrant . . . . . . . . . . . 61
Item 11: Executive Compensation. . . . . . . . . . . . . . . . . 61
Item 12: Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . 61
Item 13: Certain Relationships and Related Transactions. . . . . 61
PART IV
Item 14: Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . 62
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
PART I
ITEM 1. BUSINESS
GENERAL
Resource America, Inc. and its subsidiaries (the "Company" or the
"Registrant") are Delaware corporations. Registrant maintains its principal
executive office and headquarters for its asset acquisition and resolution
operations at 1521 Locust Street, Philadelphia, Pennsylvania, 19102, its energy
and accounting operations are centered at 2876 South Arlington Road, Akron,
Ohio, 44312, and its equipment leasing operations are located at 7 East Skippack
Pike, Ambler, Pennsylvania, 19002. The Company's telephone number is (215)
546-5005.
The Company is a specialty finance company engaged in three lines of
business: the acquisition and resolution of commercial real estate loans, "small
ticket" commercial equipment leasing, and energy operations, including natural
gas and oil production.
DESCRIPTION OF BUSINESS
The Company's asset acquisition and resolution business involves the
purchase at a discount of relatively small (generally $1 million to $5 million
in purchase price), troubled commercial real estate loans from private market
sellers (primarily financial institutions), and the restructuring and
refinancing of those loans. These loans typically involve legal and other
disputes among the lender, the borrower and/or other parties in interest, and
generally are secured by properties which are unable to produce sufficient cash
flow to fully service the loans in accordance with the original lender's loan
terms. Since entering this business in 1991, the Company's loan portfolio has
grown to $100.5 million (before discounts) at September 30, 1996. During the
fiscal years ended September 30, 1994, 1995 and 1996, the Company's yield on its
net investment in loans acquired (including gains on refinancings and sales of
participations) equalled 30.8%, 34.6% and 36.2%, respectively, while its gross
profits from its loan activities for fiscal 1994, 1995 and 1996 were $2.3
million, $5.3 million and $6.7 million, respectively.
The Company seeks to reduce the amount of its own capital invested in
loans after their acquisition, and to enhance its returns, through prompt
refinancing of the properties underlying its loans, or through sale at a profit
of senior participations in its loans (typically on a recourse basis). At
September 30, 1996, senior lenders held outstanding obligations of $38.7
million, secured by properties with an aggregate appraised value of $68.2
million, resulting in a ratio of senior lien obligations-to-appraised value of
property of 56.7%. Currently, the operating cash flow coverage on the required
debt service on refinancings and participations (exclusive of proceeds from such
refinancings and participations) is 160.8%. The balance of operating cash flow
is, pursuant to agreements with the borrowers, retained by the Company as debt
service on the outstanding balance of the Company's loans.
In September 1995, the Company entered the commercial leasing business
through its acquisition of the leasing subsidiary of a regional insurance
company. This acquisition provided the Company with a servicing portfolio of
approximately 520 individual leases held by six leasing partnerships which
provided the Company with a servicing revenue stream of $1.1
1
million during fiscal 1996. More importantly, through this acquisition the
Company acquired an infrastructure of operating systems, computer hardware and
proprietary software (generally referred to as a "platform"), as well as
personnel, which the Company is utilizing to develop its commercial leasing
business for its own account.
In order to develop this business, in early 1996 the Company hired a team
of four experienced leasing executives, including the former chief executive
officer of the U.S. leasing subsidiary of Tokai Bank, a major Japanese banking
institution. The Company's strategy in developing its leasing business is to
focus on leases with equipment costs of between $5,000 to $100,000 (with a
targeted average transaction of approximately $15,000 per lease) ("small ticket"
leasing) and to market its equipment leasing product through vendor programs
with equipment manufacturers likely to generate $10 million or less annually in
equipment leases, regional distributors and other vendors. The Company has
currently entered into vendor program relationships with five vendors: Minolta
Corporation (copiers), Celsis Incorporated (microbial testing systems), American
Marabacom Communications (Teleco) (telephone systems), CSi (test equipemnt) and
ATI Communications (telephone systems). In addition, Lucent Technologies
(telecommunications equipment) has designated the Company as an authorized
lessor for its dealer distribution channel. The Company believes that this
market is under-served by equipment lessors, banks and other financial
institutions, affording the Company a niche market with significant growth
potential. From the inception of leasing activity for its own account in June
1996 through September 30, 1996, the Company has received 271 lease proposals
involving equipment with an aggregate cost of $6.5 million, approved 118 such
proposals involving equipment with an aggregate cost of $2.5 million, entered
into 39 transactions involving equipment with an aggregate cost of $711,000 and,
had 21 such proposals pending involving equipment with an aggregate cost of $1.3
million.
According to the Equipment Leasing Association of America ("ELA"), a
leading industry trade association, approximately 80% of all United States
businesses lease some portion of their equipment. Leasing enables a company to
obtain the equipment it needs, while preserving cash flos and often receiving
favorable accounting and tax treatment. The Company believes that small
businesses are becoming more aware of the economic benefits offered by equipment
leasing, and that small business leasing will therefore become an increasingly
important segment of the leasing market.
The Company produces natural gas and, to a lesser extent, oil from
locations principally in Ohio, Pennsylvania and New York. At September 30,
1996, the Company had a net investment of $11.3 million in its energy
operations, including interests in 769 individual wells owned directly by the
Company or through 52 partnerships and joint ventures managed by the Company.
While the Company has focused its business development efforts on its specialty
finance operations over the past several years, its energy operations
historically have provided a steady source of revenues and tax benefits.
2
ASSET ACQUISITION AND RESOLUTION
STRATEGY
Identification and Acquisition of Troubled Commercial Real Estate Loans.
The Company believes that the success to date of its asset acquisition and
resolution business has been due in large part to its ability to identify and
acquire troubled commercial real estate loans which, due to legal or factual
disputes, operational difficulties or other problems, can be acquired at a
discount from the unpaid principal and interest amounts of the loan and the
estimated value of the underlying property. A principal part of this strategy
is the Company's focus on relatively small commercial loans (generally $1
million to $5 million in purchase price) held by large private sector financial
institutions. Due to the small size of these loans relative to a large
institution's total portfolio, the lender is often not able, or willing, to
devote the managerial and other resources necessary to resolve the problems to
which the loans are subject, and thus is sometimes willing to dispose of these
loans at prices favorable to the Company. The Company, which offers to acquire
a loan quickly and for immediate cash, provides a convenient way for an
institution to dispose of these loans and to eliminate future work-out costs.
The Company believes that the trend of consolidation in the banking industry may
cause an increase in the amount of smaller loans available for sale and provide
the Company significant opportunities for growth.
Efficient Resolution of Loans. The Company believes that a further
aspect of its success to date has been its ability to resolve problems
surrounding loans it has identified for acquisition. The principal element of
this strategy is the cost-effective use of management and third-party resources
to negotiate and resolve disputes concerning a troubled loan or the property
securing it, and to identify and resolve any existing operational or other
problems at the property. To implement this strategy, the Company has taken
advantage of the background and expertise of its management and has identified
third-party subcontractors (such as property managers and legal counsel)
familiar with the type of problems to which smaller commercial properties may
be subject and who have, in the past, provided effective services to the
Company.
Refinancing or Sale of Participations in Portfolio Loans. The Company
seeks to reduce its invested capital and enhance its returns through prompt
refinancing of the properties underlying its loans or through sales, at a
profit, of senior participations in its loans. In so doing, the Company has in
the past obtained a return of a substantial portion (and in some cases all) of
its invested capital, which it will typically seek to reinvest in further loans,
while maintaining a significant continuing position in the original loan. The
Company's strategic plan contemplates a continued growth in its loan portfolio,
in part through the liquidity provided by such sales or refinancings.
DISPOSITION OF LOANS. In the event a borrower does not repay a loan when
due (whether upon expiration of the Forbearance Agreement or otherwise), the
Company will seek to sell the property underlying the loan or otherwise
liquidate the loan. In appropriate cases and for appropriate consideration, the
Company may agree to further forbearance.
3
MARKET FOR ASSET ACQUISITION AND RESOLUTION SERVICES
The discounted loans acquired by the Company to date are secured by
commercial properties (multi-family housing, small office buildings or single-
user retail properties) which, while income producing, are unable to fully meet
debt service requirements set forth in their initial underwriting. All of the
loans have been acquired from private sector entities (banks and other financial
institutions or institutional sellers) except for one loan purchased from the
United States Department of Housing and Urban Development. Typically, the loans
identified by the Company for acquisition (and the properties securing them)
have been the subjects of complex and/or contentious factual and legal disputes,
operational difficulties or other problems demanding commitments of managerial
and other resources that are perceived by the selling institutions to be
inordinate relative to the comparatively small asset value of these loans.
The market for asset acquisition and resolution services of the type
provided by the Company is, the Company believes, relatively new. A major
impetus to this market has been the sales of packages of under-performing and
non-performing loans by government agencies, in particular the Resolution Trust
Corporation ("RTC") and Federal Deposit Insurance Corporation ("FDIC"). While
the need for asset acquisition and resolution services by governmental agencies
has declined in recent years (the RTC terminated its loan pool packaging and
sales operations on December 31, 1995, and any RTC assets remaining to be sold
at that time were transferred to the FDIC for sale), the Company believes (based
upon its operations to date) that a permanent market for these services is
emerging in the private sector as financial institutions realize that outside
specialists may be able to resolve troubled loan assets more cost-efficiently
than the institution's internal staff. Moreover, the sale of loan assets
provides the institutions with a means of disposing of under-performing loans,
thereby obtaining liquidity and improving the institution's balance sheet. The
trend has been reinforced, management believes, by consolidation within the
banking industry and, within the insurance industry, by the implementation of
risk-based capital rules.
ACQUISITION AND ADMINISTRATION
Prior to acquiring any loan, the Company conducts an acquisition review.
This review includes an evaluation of the adequacy of the loan documentation
(for example, the existence and adequacy of notes, mortgages, collateral
assignments of rents and leases, and title policies insuring first or other lien
positions) and other available information (such as credit and collateral
files). The value of the property securing the loan is estimated by the Company
based upon a recent independent appraisal obtained by the borrower, an
independent appraisal obtained by the Company, or upon valuation information
obtained by the Company and thereafter confirmed by independent appraisal. One
or more members of the Company's management makes an on-site inspection of the
property; where appropriate, the Company will require further inspections by
engineers, architects or property management consultants. The Company may also
retain environmental consultants to review potential environmental issues. The
Company obtains and reviews available rental, expense, maintenance and other
operational information regarding the property, prepares cash flow and debt
service analyses and reviews all pertinent information relating to any legal or
factual disputes to which the property is subject. The amount of the Company's
offer to purchase is based upon the foregoing evaluations and analyses. The
Company generally will not acquire a loan unless (i) current net cash flow from
4
the property securing the loan is sufficient to yield an immediate cash return
on the Company's investment of not less than 10% per annum, (ii) the ratio of
the Company's investment to the appraised value of the property underlying the
loan is less than 80%, (iii) there is the possibility of either prompt
refinancing of the loan by the borrower after acquisition, or sale by the
Company of a participation, that will result in an enhanced yield to the Company
on its (reduced) funds still outstanding and (iv) there is the possibility of
substantial increase in the value of the property underlying the loan over its
appraised value, increasing the potential amount of the loan discount
recoverable by the Company at loan termination. On occasion the Company will
acquire a loan that does not meet one or more of the criteria specified above
if in the Company's judgment other factors make the loan an appropriate
investment opportunity. The Company currently has in its portfolio six
in which the initial investment-to-appraised value of underlying property
exceeded 80%. Also, the Company has acquired loans outside of its targeted
range of $1 million to $5 million (5 loans were acquired at a lesser cost, while
one loan was acquired at a greater cost), and as opportunities arise, may do so
in the future. The Company is not limited by regulation or contractual
obligation as to the types of properties securing the loans it may seek to
acquire, the nature or priority of any lien or other encumbrance it may accept
with respect to a property, whether, after sale of a participation or a
refinancing, its interest in a loan must continue to be secured, the amount it
may invest in any one loan or the ratio of initial investment-to-appraised value
of the underlying property.
As part of the acquisition process, the Company typically resolves
disputes relating to the loans or the underlying properties. Through
negotiations with the borrower and, as appropriate or necessary, with other
creditors or parties in interest, the Company seeks to arrive at arrangements
that reflect more closely the current operating conditions of the property and
the present strategic position of the various interested parties. Where
appropriate, the Company will offer concessions to assure the Company's future
control of the property's cash flow free from dispute. These arrangements are
normally reflected in a Forbearance Agreement, pursuant to which the Company
agrees to defer foreclosure or other action so long as the arrangements
reflected in the Forbearance Agreement are met. The Company also seeks to
resolve operational problems of the properties by appointment of a property
manager acceptable to it and may advance funds for purposes of paying property
improvement costs, unpaid taxes and similar items. Prior to loan acquisition
the Company includes in its pre-acquisition analysis of loan costs and yields
an estimate of such advances.
After acquiring a loan, the Company follows specified procedures to
monitor loan performance and compliance. In particular, the Company requires
that all revenues from the property underlying the loan be paid into an
operating account on which the Company is the sole signatory. All expenditures
with respect to a property (including debt service, taxes, operational expenses
and maintenance costs) are paid from that account and are reviewed and approved
by a senior officer of the Company prior to payment. The Company further
requires that its approval be obtained before any material contract or
commercial lease with respect to a property is executed. To assist it in
monitoring the loan, the Company requires that the borrower prepare a budget for
the property not less than sixty days prior to the beginning of a year, which
must be reviewed and approved by the Company, and submit both a monthly cash
flow statement and a monthly occupancy report. The Company analyzes these
reports in comparison with each other and with account activity in the operating
account referred to above.
5
SALE OF PARTICIPATIONS AND REFINANCINGS
In evaluating a potential loan, the Company places significant emphasis
on the likelihood of its being able to sell a participation on favorable terms
after the acquisition and/or the borrower's likely ability, with or without the
Company's assistance, to secure favorable refinancing. When a loan is
refinanced, or a participation sold, the Company will obtain net refinance or
participation proceeds in an amount representing a major portion of (and
sometimes exceeding) the amount of its investment in the loan. After such
refinancing or sale of a participation, the Company will typically retain an
interest in the loan, which is usually subordinated to the interest of the
refinance lender or loan participant.
Where a participation interest is sold, the balance of the Company's loan
outstanding at the time of sale remains outstanding, including as a part of that
balance the amount of the participation. Thus, the Company's remaining interest
effectively "wraps around" the participation interest. Typically, the interest
rate on the participation interest is less than the stated rate on the Company's
loan. From debt service payments received by the Company, the Company remits
to the participant the debt service applicable to its interest, retaining the
balance. Participations sold during 1994 and 1995 to PICO also obligated the
Company, in the event of a default on the related loan, to replace it with a
performing loan.
Where a refinancing is effectuated, the Company reduces the amount
outstanding on its loan by the amount of net refinancing proceeds received by
it and either converts the outstanding balance of the original note (both
principal and accrued interest, as well as accrued penalties) into the stated
principal amount of an amended note on the same terms as the original note or
retains the original loan obligation as paid down by the amount of refinance
proceeds received by the Company. As with participations, the interest rate on
the refinancing is less than the interest rate on the Company's retained
interest. After sale of a participation or a refinancing, the Company's
retained interest may not be formally secured by a mortgage (because of
conditions imposed by the refinance lender), although it may be protected by a
judgment lien, an unrecorded deed-in-lieu of foreclosure, the borrower's
covenant not to further encumber the property without the Company's consent, or
a similar device.
FORBEARANCE AGREEMENTS
On substantially all of its portfolio loans, the Company has entered into
Forbearance Agreements with borrowers pursuant to which (i) the Company agrees,
subject to receipt of minimum monthly payments, to defer the exercise of
existing rights to proceed on the defaulted loan (including the right to
foreclose), (ii) the Company directly receives the rents from the underlying
property and (iii) the borrower agrees to retain a property management firm
acceptable to the Company. As a result of provision (iii), an affiliated
company, Brandywine Construction and Management, Inc. ("BCMI") has assumed
responsibility for supervisory and, in many cases, day to day management of the
underlying properties with respect to substantially all of the loans the Company
currently owns. In five instances, the President of BCMI has also acted
as the general partner of the borrower. The minimum payments required under a
Forbearance Agreement (generally related to anticipated cash flow from the
property after operating expenses) are normally materially less than the debt
service payments called for by the original terms of the loan. The difference
between the minimum required payments under the Forbearance Agreement and the
payments called for by the original loan terms continues to
6
accrue, but (except for amounts recognized as an accretion of discount) are not
recognized as revenue to the Company until actually paid.
At the end of the term of a Forbearance Agreement, the borrower is
required to pay the loan in full. The borrower's ability to do so, however,
will be dependent upon a number of factors, including prevailing conditions at
the underlying property, the state of real estate and financial markets
(generally and as regards the particular property), and general economic
conditions. In the event the borrower does not or cannot do so, the Company
anticipates that it will seek to sell the property underlying the loan or
otherwise liquidate the loan. Alternately, the Company anticipates that it
might, in appropriate cases, and for appropriate additional consideration,
agree to further forbearance.
An existing Forbearance Agreement remains in effect with no modifications
when the Company sells a participation in a loan. In such instance, the
participant's interest is in the loan as modified by the terms of the
Forbearance Agreement. However, when a borrower refinances a loan, the
Forbearance Agreement is thereby amended to (i) reflect the pay down of the loan
balance, (ii) acknowledge the existence of the refinancings and (iii) provide
for the continued effectiveness of all provisions of the Forbearance Agreement
for the term specified therein, except that where specific provisions of the
Forbearance Agreements are inconsistent with the terms of the refinancing, the
terms of the refinancing have priority. In some refinancings, the refinance
lender may require that the borrower issue an amended note (a "retained interest
note") to reflect the reduction of the borrower's indebtedness to the Company
and, where applicable, any other revised terms (such as extension of the
forbearance period).
Loan Status
Of the twenty-four loans in the Company's portfolio, eighteen were acquired
as first mortgage loans and six were acquired as junior lien obligations. In
accordance with the Company's emphasis on acquiring loans in anticipation of
refinancing, borrowers on six of the Company's loans have obtained refinancing,
and the Company has sold participations in twelve loans. After such
refinancings and sales of participation interests, the Company holds
subordinated interests in twenty-three loans, of which six interests are not
collateralized by recorded mortgages. The following table sets forth the
Company's acquisition and refinancing activity from 1991 (the year the Company
commenced its asset acquisition and resolution operations) through
September 30, 1996:
7
Outstanding Appraised Value
Property Type of Loan Loan of Property Cost of
Number Property Location Seller Acquired Receivable(1) Securing Loan(2) Investment(3)
- -------- ----------- ------------ --------------------- -------- ------------- ---------------- -------------
001 Multifamily Pennsylvania Alpha Petroleum 1991 $8,276,838 $5,300,000 $4,597,849
Pension Fund
002 Multifamily Pennsylvania CoreStates Bank(9) 1992 1,465,714 800,000 548,995
003 Multifamily New Jersey RAM Enterprises/ 1993 2,512,965 1,350,000 1,307,962
Glenn Industries
Pension Plan
004 Multifamily Pennsylvania St. Paul Federal Bank
for Savings(12) 1993 1,431,763 1,125,000 842,445
005 Office Pennsylvania Shawmut Bank(9) 1993 5,665,620 1,600,000 1,207,197
006 Office/Retail Virginia Nationsbank(9) 1993 5,426,783 2,425,000 2,294,988
007 Single User Minnesota Prudential Insurance, 1993 4,294,167 2,515,000 1,362,421
Alpha Petroleum
(Retail) Pension Fund
008 Multifamily Pennsylvania Nomura/Cargill/ 1994 5,261,804 1,950,000 1,612,674
Eastdil Realty(13)
009 Multifamily Pennsylvania Mellon Bank(9) 1995 1,558,308 1,730,000 1,358,884
010 Multifamily Pennsylvania RIVA Financial 1994 1,491,446 800,000 454,856
011 Office Washington, D.C. First Union Bank(9) 1995 1,060,532 2,000,000 927,986
012 Multifamily Pennsylvania CoreStates Bank(9)(12) 1995 2,999,874 1,825,000 1,272,809
013 Single User California California Federal 1995 2,997,375 2,400,000 1,671,695
(Commercial) Bank, FSB
014 Office Washington, D.C. Nomura/Cargill/
Eastdil Realty(13) 1995 14,702,547 11,000,000 8,546,218
015 Condo/ North Carolina First Bank, South 1995 3,794,708 3,501,000 2,721,661
Multifamily Trust Bank (14)
016 Single User California Mass Mutual, Alpha 1995 6,695,368 3,000,000 2,073,470
(Retail) Petroleum
Pension Fund
017 Single User West Virginia Triester 1996 1,655,757 1,900,000 929,280
(Retail) Investments (9)
018 Single User California Emigrant Savings Bank, 1996 2,887,362 4,555,000 2,148,205
(Retail) Walter R. Samuels
and Jay Furman(16)
019 Multifamily Pennsylvania Summit Bancorp(9) 1996 4,851,557 4,600,000 3,756,201
020 Office New Jersey Cargill/Eastdil 1996 5,977,762 4,100,000 2,799,392
Realty(13)
021 Multifamily Pennsylvania Bruin Holdings/ 1996 8,158,461 2,700,000 1,518,193
Berkeley Federal
Savings Bank
022 Multifamily Pennsylvania FirsTrust FSB 1996 3,269,049 3,250,000 2,284,775
023 Multifamily Pennsylvania Jefferson Bank 1996 606,225 510,000 412,206
024 Multifamily Pennsylvania U.S. Dept. of Housing
& Urban Development 1996 3,477,631 3,300,000 2,528,976
Totals $100,519,616 $68,236,000 $49,179,338
8
Proceeds from Company's Net Maturity of Loan/
Refinancing or Interest In Expiration of
Property Participations Net Carried Cost Outstanding Loan Forbearance
Number Sold Investment(4) of Investment(5) Receivables(6) Agreement(7)
- -------- -------------- ------------- ---------------- ---------------- -----------------
001 $2,570,000 (8) $2,027,849 $2,410,664 $ 5,711,836 12/31/02
002 575,000 (10) 26,005 179,980 865,714 10/31/98
003 627,000 482,963 694,850 1,882,965 1/1/03
004 871,000 (10) 28,555 226,968 535,763 10/31/98
005 940,000 (10) 267,197 1,086,709 4,825,620 02/07/01
006 840,000 1,454,988 1,537,546 4,537,883 7/31/98
007 2,099,000 (736,579) 527,846 2,095,167 12/31/14
008 934,300 678,374 721,212 4,148,809 07/31/98
009 654,600 704,284 510,608 664,761 11/1/99
010 575,000 (10) (120,144) 112,467 891,446 9/2/99
011 660,000 (10) 267,986 414,360 375,532 09/30/99
012 954,000 153,460 747,640 1,731,874 12/2/99
013 1,975,000 (10) (303,305) 302,354 997,375 5/1/01
014 6,487,000 2,059,218 3,170,843 7,825,020 11/30/98
015 2,475,000 (8) 246,660 356,147 1,365,705 08/25/00
016 2,375,000 (10) (301,550) 428,703 4,295,368 12/31/19
017 524,000 (8) 394,280 961,756 1,122,557 12/31/18 (15)
018 1,969,000 (10) 179,783 782,973 918,362 11/1/98
019 3,020,000 736,177 900,017 1,644,145 12/29/00
020 2,562,000 (11) 237,392 1,536,729 3,377,762 2/7/01
021 2,010,000 (10) (491,807) 516,036 6,148,461 (17) 7/1/16 (17)
022 1,250,000 (8) 1,034,775 1,060,176 2,019,049 10/31/98 (18)
023 303,000 (8) 109,206 110,559 303,225 03/28/01 (19)
024 - 2,528,976 2,500,624 3,477,631 11/01/22 (20)
Totals $37,249,900 $11,664,743 $21,797,768 $61,762,030
9
(1) Consists of the stated, or face value of the obligations plus accrued
interest and penalties and the amount of senior secured interests at
September 30, 1996.
(2) The Company obtains appraisals on each of its properties at least once
every three years. Accordingly (with the exception of one appraisal for
property 5, which was completed in July 1993), appraisal dates range from
1994 to 1996.
(3) Consists of the original cost of the investment to the Company (including
acquisition costs and the amount of any senior lien obligation to which the
property remained subject) plus subsequent advances, but excludes the
proceeds to the Company of the sale of participations or borrower
refinancings.
(4) Represents the unrecovered costs of the Company's investment (calculated
as the cash investment made in acquiring the loan plus subsequent advances
less cash received from sale of a participation in or borrower refinancing
of the loan). Negative amounts represent the receipt by the Company of
proceeds from the sale of participations or borrower refinancings in excess
of the Company's investment.
(5) Represents the cost of the investment carried on the books of the Company
after accretion of discount and allocation of gains from the sale of a
participation in or borrower refinancing of the loan.
(6) Consists of the amount set forth in the column "Outstanding Loan
Receivable" less senior secured interests.
(7) With respect to properties 6, 7, 8, 9, 14 and 19, the date given is for the
maturity of the subordinated note for the residual loan balance received
by the Company in connection with the refinancing. For the remaining
properties, the date given is the expiration date of the related
Forbearance Agreement.
(8) Represents the amount of the senior lien in place on date of acquisition.
(9) Successor by merger to the Seller.
(10) Participation sold to PICO.
(11) Participation sold to Commerce Bank, N.A. The Company has the obligation
to repurchase this participation on or after September 27, 2011 if the
participation is not repaid in accordance with its terms.
(12) Seller was a wholly-owned subsidiary of this institution.
(13) Seller was a partnership of these entities.
(14) The positions of these institutions are currently held by Gene M. and Anne
S. Holbrooks, the guarantors thereof, who acquired these positions as part
of the transaction in which the Company made its loan.
(15) The loan acquired consists of a series of notes becoming due yearly through
October 31, 2018. The notes are being paid in accordance with their terms
and, accordingly, a Forbearance Agreement was not required.
(16) Amounts advanced by the Company were used in part to directly repay the
loan of Emigrant Savings Bank; the balance was applied to purchase a note
held by Messrs. Samuels and Furman.
(17) The loan acquired consists of twenty-eight separate mortgage loans on
thirty-two individual condominium units in a single building. Nine of such
loans are due on July 1, 2016, eighteen are due January 1, 2015 and one is
due March 1, 2001.
(18) The senior lienor has the right to sell its interest to the Company on or
after June 30, 2001 for an amount equal to the outstanding balance of such
interest.
(19) Includes a note for $14,948 which is payable to the Company on demand.
(20) Loan maturity date pursuant to a Provisional Workout Arrangement entered
into betwee between borrower and the U.S. Department of Housing and Urban
Development. Borrower is currect under these arrangements as of the date of
this Prospectus.
10
The following table sets forth the current monthly cash flow from each
of the properties underlying the Company's portfolio loans, the monthly debt
service payable to participants and refinance lenders and the current monthly
payment with respect to the Company's retained interest:
Monthly Debt Monthly
Monthly Cash Service on Payment to
Property Flow from Refinancing the Company's
Number Property (1)(2) or Participations(3) Interest (2)
-------- --------------- -------------------- -------------
001 $ 30,533 $ 17,626 $ 12,907
002 5,964 4,875 1,089
003 7,000 6,058 942
004 8,107 7,280 827
005 12,158 6,825 5,333
006 21,176 8,021 13,155
007 20,400 20,400 -
008 23,971 10,670 13,301
009 19,829 7,359 12,470
010 6,750 4,875 1,875
011 8,000 5,566 2,434
012 15,833 10,317 5,516
013 19,000 15,833 3,167
014 107,218 58,551 48,667
015 29,278 27,330 1,948
016 20,557 19,500 1,057
017 9,068 5,415 3,653
018 24,827 (4) 15,998 8,829
019 36,000 25,300 10,700
020 22,667 20,884 1,783
021 16,577 16,331 246
022 25,408 8,075 17,333
023 6,206 2,273 3,933
024 26,777 - 26,777
-------- -------- --------
$496,527 $303,586 $192,941
======== ======== ========
(1) "Cash Flow" as used herein is that amount equal to the operating revenues
from property operations less operating expenses, including real estate and
other taxes pertaining to the property and its operations, and before
depreciation, amortization and capital expenditures.
(2) Except as set forth in note (4), monthly cash flow from each of the
properties has been calculated as the average monthly amount during the
three months ended September 30, 1996.
(3) Monthly debt service consists of required payments of principal, interest
and other regularly recurring charges payable to the holder of the
refinancing loan or participation.
(4) Includes one-fourth of an annual payment of $110,000 received in December
of each year.
All of the Company's portfolio loans are currently performing in
accordance with the terms set forth in their respective Forbearance Agreements
or remainder interest notes.
11
ACCOUNTING FOR DISCOUNTED LOANS
The difference between the Company's cost basis in a loan and the sum
of projected cash flows from, and the appraised value of, the underlying
property is accreted into interest income over the estimated life of the loan
using a method which approximates the level interest method. The projected cash
flows from the property are reviewed on a regular basis and changes to the
projected amounts reduce or increase the amounts accreted into interest income
over the remaining life of the loan on a method approximating the level interest
method.
The Company records the investments in its loan portfolio at cost,
which is significantly discounted from the face value of, and accrued interest
and penalties on, the notes. This discount totaled $9.8 million, $16.1 and
$40.0 at September 30, 1994, 1995 and 1996, respectively. The cost basis in the
various loans is periodically reviewed to determine that it is not greater than
the sum of the projected cash flows and the appraised value of the underlying
properties. If the cost basis were found to be greater, the Company would
provide, through a charge to operations, an appropriate allowance. For the
years ended September 30, 1994, 1995 and 1996, no such provision was required.
Gains on the sale of a participation in or refinancings of a portfolio
loan are allocated between the portion of the loan sold or refinanced and the
portion retained based upon the fair value of those respective portions on the
date of sale or refinance. The fair value of the loan is the current appraised
values of the property underlying the loan. Any gain recognized on a sale of a
participation or a refinancing is brought into income on the date of such sale
or refinancing.
COMPETITION
Although the asset acquisition and resolution business is intensely
competitive in virtually all of its aspects, the Company's focus on the
acquisition of relatively small troubled commercial real estate loans subject
to complex and/or contentious situations is a niche in which the Company's
believes there are relatively few, specialized investors. In the overall market
for the acquisition of real estate obligations, however, there are a substantial
number of competitors (including investment partnerships, financial
institutions, investment companies, public and private mortgage funds and other
entities), many of which possess far greater financial resources than the
Company. The Company's ability to add to its loan portfolio will depend on its
success in obtaining funding for the acquisition of additional mortgages. In
raising such funds in the financial capital markets, the Company will have to
compete for capital based largely on the Company's overall financial performance
and, more specifically, the performance of the Company's loan portfolio.
EQUIPMENT LEASING
GENERAL
The Company conducts its leasing operations through three separate
corporate divisions: Fidelity Leasing, Inc. ("FLI"), which conducts the
Company's small ticket leasing operations; F.L. Partnership Management, Inc.
("FLPM"), which manages six public leasing partnerships formerly managed by
Fidelity; and FL Financial Services, Inc. ("FLFS"), which provides lease finance
placement and advisory services. The Company's primary focus is on the
development of FLI and its small ticket leasing operation, which has only
recently commenced operations.
12
FLPM's operations will be reduced over the next several years as partnership
assets are sold and cash is distributed back to the investors. FLPM does not
anticipate forming new limited partnerships in the future. FLFS will continue
to operate its lease finance placement and advisory business which, while
profitable, is not expected to constitute a material source of revenues for the
Company.
STRATEGY
FOCUS ON SMALL TICKET LEASING. The Company focuses on leasing
equipment costing between $5,000 and $100,000. By so doing, the Company takes
advantage not only of the background and expertise of its leasing management
team (which previously had managed the United States small ticket leasing
operations of Tokai Bank), but also of the servicing platform the Company has
acquired and developed, which has the capacity to monitor the large amounts of
equipment and related assets involved in a small-ticket leasing operation. In
addition, small ticket items represent a substantial portion of the equipment
sought by small business, a segment of the end-user market the Company believes
is under-served by equipment lessors, banks and other financial institutions,
which affords the Company a niche market with significant growth potential.
Moreover, the small size of a typical transaction relative to the Company's
total lease portfolio reduces the Company's credit risk exposure from any
particular transaction.
FOCUS ON VENDOR PROGRAMS, PARTICULARLY WITH SMALLER MANUFACTURERS. The
significant majority of equipment leased to end-user customers by the Company
will be purchased from manufacturers or regional distributors with whom the
Company is establishing vendor programs. In so doing, the Company utilizes the
manufacturer's or distributor's sales organization to gain access to the
manufacturer's end-user base without incurring the costs of establishing
independent customer relationships. The vendor relationship will typically
provide for the upgrade, refurbishment and remarketing of equipment purchased
and leased by the Company. Through these relationships, and particularly with
respect to the vendor's involvement in remarketing the equipment, the Company's
profit opportunity from residual sales or re-leasing of equipment is enhanced.
The Company is actively pursuing the establishment of multiple vendor programs
in an effort to reduce its reliance on any one vendor and, thus, to reduce the
risk of tying the success of the Company's leasing operations to the
continuation of a relationship with one (or a small group) of vendors. The
Company has currently established programs with five manufacturers or
distributors. The Company emphasizes the establishment of vendor programs with
smaller manufacturers (those likely to generate $10 million or less annually in
equipment leases) and regional distributors. Historically, the Company's
primary competitors, most of whom are far larger than the Company, target
vendors with substantially larger leasing volumes. As a result, the Company's
targeted group of vendors often do not have a relationship with an equipment
finance provider, again offering the Company a market niche with significant
growth potential.
FOCUS ON LEASING TO SMALL BUSINESSES. The Company focuses its
marketing programs and resources on lease programs for small business end-users
(generally those with 500 or fewer employees). Because small business end-users
frequently are unable to provide standardized financial information for credit
analysis (for example, audited financial statements), the Company believes that
these end-users may be perceived by the Company's larger competitors as less
desirable credit risks thereby reducing competition for their business and
creating a niche market the Company believes it can profitably serve. The
Company has acquired and developed credit evaluation and scoring systems (based
upon credit evaluation services provided by Dun & Bradstreet) which it believes
significantly reduce the perceived credit risk. The Company also believes that
small business end-users, while sensitive to the size of a monthly lease
payment,
13
are less sensitive than large end-users to the interest rate structure of a
lease, allowing the Company to increase its yield by lengthening lease terms to
lower monthly rent. The Company currently offers lease terms of from two to
five years to meet the needs of its end-users.
FOCUS ON FULL-PAYOUT LEASES. The Company seeks to reduce the financial
risk associated with the lease transactions it originates through the use of
full payout leases. The principal benefit from this lease format is the
repayment to the Company during the lease term of its invested capital plus an
amount sufficient to cover its transaction costs and, typically, a return on its
invested capital. The Company seeks to substantially increase this return
through amounts received upon remarketing the equipment or through continued
leasing of the equipment after expiration of the initial lease term.
FOCUS ON PROVIDING SERVICE. The Company provides service and support
to its small business customers and vendors by seeking to minimize the time
required to respond to customer applications for lease financing and by
providing sales training programs to its vendors and their sales staff (which
it customizes to their particular needs) regarding the use of lease financing
for marketing purposes to increase a vendor's equipment sales and market share.
The Company has acquired and developed proprietary management systems to assist
it in providing lease quotes and application decisions to its customers,
generally within 24 hours after receipt of a request.
INDUSTRY OVERVIEW
Equipment leasing is a significant factor in the financing of
productive assets by United States businesses. According to the ELA, a leading
industry trade association, of the estimated $571.1 billion of such capital
expenditures in 1995 (up from $296.2 billion in 1986), $160.7 billion (up from
$85.0 billion in 1986) represented lease financing. The ELA further estimates
that total capital expenditures will increase to $582.1 billion in 1996, of
which $169.1 billion (or 29%) will be acquired through leasing, a leasing growth
rate of 5.6%, slightly less than the average annual rate of 6.5%.
The Company's targeted market is businesses with less than 500
employees and leases involving equipment with a cost of under $100,000.
According to studies conducted by the U.S. Small Business Administration, in
1991 there were 5.7 million such businesses and an additional 8.9 million sole
proprietorships. A 1995 survey conducted by the Federal Reserve Board found
that, in 1993, 9.2% of all small businesses used equipment
leasing services (not including vehicle leases), 14.0% used credit lines or
loans to acquire equipment and 7.5% obtained one or more leases from a leasing
company. Moreover, in a 1995 survey of its membership, the ELA found that 30%
of all new leasing volume (by dollar amount) was for equipment costing under
$100,000, while 47.8 % of all new leasing volume (by number of transactions) was
for equipment costing under $100,000.
According to the ELA, approximately 80% of all United States businesses
lease some portion of their equipment. Leasing enables a company to obtain
equipment it needs, while preserving cash flow and often receiving favorable
accounting and tax treatment. Leasing, particularly with shorter term leases,
also provides a lessee with greater flexibility than ownership in the event it
outgrows its equipment or requires equipment upgrades. The Company believes
that small businesses are becoming more aware of the economic benefits offered
by equipment leasing, and that small business leasing will therefore become an
increasingly important segment of the leasing market.
14
SMALL TICKET LEASING
The Company offers full pay-out leases with options, exercisable by the
lessee at the end of the lease term, either to purchase the equipment at fair
market value, to purchase the equipment for a fixed price negotiated at the time
the lease is signed, or to continue as a lessee on a month-to-month basis. A
"full pay-out lease" is a lease under which the non-cancelable rental payments
due during the initial lease term are at least sufficient to recover the
purchase price of the equipment under the lease and related acquisition fees.
The Company's leases have a provision which requires the lessee to make all
lease payments under all circumstances. The leases are also net leases,
requiring the lessee to pay (in addition to rent) any other expenses associated
with the use of equipment, such as maintenance, casualty and liability
insurance, sales or use taxes and personal property taxes. The Company also
offers lease terms of between two to five years and will consider other lease
terms in appropriate circumstances.
Equipment types initially being financed include telecommunication
systems, medical diagnostic and treatment equipment, document processing and
storage equipment, small manufacturing machines and office furniture. The
Company will vary the equipment categories in which it is willing to lease based
upon the demands of its small business customers.
The Company has developed credit evaluation and lease administration
systems based upon systems the Company acquired from Fidelity. The credit
evaluation system, known as the "Small Business Credit Scoring System," is
intended to respond to the inability of small businesses to supply standardized
financial information for credit analysis (for example, audited financial
statements). The system operates by assigning point amounts, or "scores," to
various factors (such as business longevity, type of business, payment history,
bank account balances and credit ratings) deemed relevant by the Company in
determining whether an end-user is a creditworthy lessee. The scoring system
declines approval of end-users with low scores, approves end-users with high
scores and refers mid-range scores to credit analysts for further consideration
and decision. Information is obtained from the end-user, from reports by
standard credit reporting firms and from reports provided by consumer credit
bureaus. The credit scoring system is also based upon industry data and the
past experience of the Company and will be reviewed and modified as required in
response to actual portfolio performance. Financial statements may be required
for larger transactions (in the $30,000 to $100,000 range) as a complement to
the scoring system.
The Company oversees its leasing program through a lease administration
and management system, known as the "Fidelity Asset Tracking System." The
system currently administers 520 leases with respect to more than 12,500 pieces
of equipment for six public leasing partnerships managed by FLPM and has the
capacity to administer leases with respect to more than 200,000 pieces of
equipment. The system controls invoicing, collection, sales and property taxes
and financial and other reporting to management (including reports regarding
regular payments, payment shortages, advance payments, security deposits,
insurance payments and late or finance charges). The Company will supplement
the system with an internal audit department (which will evaluate the
safeguarding of assets, reliability of financial information and compliance with
the Company's credit policies) and a collection department.
The Company is marketing its leasing services primarily through the
establishment of vendor programs. The Company has currently entered into vendor
program relationships with five vendors: Minolta Corporation (copiers), Celsis
Incorporated (microbial testing systems), American Marabacom Communications
(Teleco) (telephone systems), CSi (test equipment) and ATI Communications
(telephone systems). In addition, Lucent Technologies
15
(telecommunications equipment) has designated the Company as an authorized
lessor for its dealer distribution channel. Under a typical vendor program,
the Company will work with the vendor and the lessee to structure the lease,
finance the lease, purchase the related equipment and administer the lease,
including providing all billing and collection services (except for private-
label leasing, referred to below). At the end of the initial lease term, the
Company and the vendor will typically coordinate the re-marketing of the
equipment. The Company seeks to establish vendor relationships by (i) obtaining
manufacturers' endorsements of the Company's finance programs, (ii) offering
inventory financing credit lines to a manufacturer's vendors, (iii) developing
customized sales training programs to offer to vendors and (iv) assisting the
manufacturers and their vendors in establishing a sales package including the
lease financing provided by the Company. The Company anticipates that it will
also compete by establishing private-label leasing programs with its vendors.
Private-label leasing involves the lease by a vendor of its own equipment on a
lease form bearing the vendor's name as lessor (but otherwise identical to the
Company's lease form), the sale of the lease and equipment to the Company, and
the provision of basic administrative services by the vendor (such as billing
and collecting rent). The Company will provide assistance, particularized
rental payment structures and other customized lease terms, remarketing,
customized invoicing and management information reports. The Company also
seeks to develop programs marketing directly to end-user groups, primarily
through small business affinity groups or associations, participation in trade
shows and conventions, and media advertising.
It is anticipated that a significant portion of the Company's revenues
from leasing operations will be derived from residuals. The Company anticipates
that residuals will principally involve the original end-users; however,
equipment not sold or re-leased to end-users will be disposed of in the
secondary market. While residual realization is generally higher with original
end-users than in the secondary market, the secondary market (essentially,
networks of distributors and dealers in various equipment categories) is well
developed in the product categories the Company intends to pursue and
transactions in these product categories have historically resulted in residual
recoveries, on average, equal to the book value of the equipment. Equipment
reacquired by the Company prior to lease termination (through lease default or
otherwise) will be sold in the secondary market.
PARTNERSHIP MANAGEMENT
The Company acts as the general partner and manager of six public
limited partnerships formed between 1985 and 1990 with total assets at September
30, 1996 of $39.9 million, including $24.2 million (book value) of equipment
with an original cost of $71.0 million. A seventh partnership completed its
operations in the first quarter of fiscal 1996. The partnerships lease computer
and related peripheral equipment to investment grade, middle market, capital
intensive companies. The principal stated objective of each of the limited
partnerships is to generate leasing revenues for distribution to the investors
in the partnerships.
For its services as general partner, the Company receives management
fees, an interest in partnership cash distributions and a reimbursement of
specified expenses related to administration of the partnerships (including
costs of non-executive personnel, legal, accounting and third-party contractor
fees and costs, and costs of equipment used in a partnership's behalf).
Management fees range from 3% to 6% of gross rents except that, if leases are
full payout leases, management fees range from 1% to 3% of gross rents. In four
of the partnerships, management fees are subordinated to the receipt by limited
partners of a cumulative annual cash distribution of 11% (two partnerships) or
12% (two partnerships) of the limited partners' aggregate investment. The
Company's interest, as general partner, in cash distributions from the
16
partnerships is 5% (one partnership), 3.5% (one partnership) and 1% (four
partnerships).
FINANCE PLACEMENT AND ADVISORY
The Company also operates a lease finance placement and advisory
business which focuses on two related types of leasing transactions: the
origination of leases by others and the identification of third-party lease
funding sources. Lease transactions generated by the division are generally
full payout leases. The Company generally receives between 1% and 4% of the
equipment cost at the time the transaction is closed for its services in
arranging a transaction. In some of the transactions it generates, the Company
also enters into a remarketing agreement that entitles it to fees upon residual
sale. During fiscal 1996 lease finance and placement generated revenues of
$650,000.
COMPETITION
The Company believes that, although the small ticket leasing business
has experienced substantial consolidation in the past few years, the business
of equipment leasing remains highly competitive. The Company believes, however,
that small ticket leasing, to be viable, requires the financing and monitoring
of large amounts of equipment and related assets. Because of the complexity and
cost of developing and maintaining the platforms and vendor programs to handle
such high volumes, the Company believes that there are substantial barriers to
others entering into this business. Accordingly, the Company believes that its
principal competitors are and will be primarily major financial institutions and
their affiliates. The Company also believes that the scale on which these
competitors generally operate inhibits their attention to the needs of the
Company's targeted market of small manufacturers and regional distributors and
provides the Company with an under-served market niche.
ENERGY OPERATIONS
GENERAL
The Company produces natural gas and, to a lesser extent, oil from
locations principally in Ohio, Pennsylvania and New York. At September 30,
1996, the Company had (either directly or through partnerships and joint
ventures managed by it) interests in 769 wells (of which the Company operates
579 wells), 310 miles of natural gas pipelines and 66,000 acres of mineral
rights. Natural gas produced from wells operated by the Company is collected
in gas gathering pipeline systems owned by partnerships managed by the Company
(and in which the Company also has an interest) and by systems directly owned
by the Company, and is sold to a number of customers, such as gas brokers and
local utilities, under a variety of contractual arrangements. Oil produced from
wells operated by the Company is sold at the well site to regional oil refining
companies at the prevailing spot price for Appalachian crude oil.
17
WELL OPERATIONS
The following table sets forth information as of September 30, 1996
regarding productive oil and gas wells operated by the Company for the
partnerships it manages as well as its own account both in gross and net to the
Company's interest:
Number of Productive Wells
--------------------------
Gross(1) Net(1)
-------- ------
Oil Wells. . . . . . . . . . . . 186 37
Gas Wells. . . . . . . . . . . . 583 397
--- ---
Total . . . . . . . . . . . . 769 435
=== ===
- ---------------------------------
(1) Includes the Company's equity interest in wells owned by 52 partnerships
and joint ventures. Does not include royalty or overriding interests held by
the Company.
The following table sets forth net quantities of oil and natural gas
produced, average sales prices, and average production (lifting) costs per
equivalent unit of production, for the periods indicated, including the
Company's equity interests in the production of 52 partnerships and joint
ventures, for the periods indicated.
Production Average Sales Price Average Lifting Cost
--------------------- ------------------- --------------------
Fiscal Year Oil (bbls) Gas (mcf) per bbl per mcf per Equivalent mcf(1)
- ----------- ---------- --------- ------- ------- ---------------------
1996 33,862 1,165,477 $18.53 $2.34 $1.04
1995 36,420 1,198,245 $16.74 $2.31 $1.06
1994 34,002 1,161,685 $15.74 $2.45 $1.00
1993 30,788 1,178,727 $18.64 $2.39 $1.08
- -----------------------------------
(1) Oil production is converted to mcf equivalents at the rate of six mcf per
barrel.
Neither the Company nor the partnerships and joint ventures it manages
are obligated to provide any fixed quantities of oil or gas in the future under
existing contracts.
EXPLORATION AND DEVELOPMENT
The following table sets forth information with respect to the number
of wells completed in Ohio and New York (the only areas in which Company
drilling activities occurred) at any time during fiscal 1993, 1994, 1995, and
1996, regardless of when drilling was initiated.
Exploratory Wells Development Wells
----------------- -----------------
Productive Dry Productive Dry
---------- ----- ---------- -----
Gross Net Gross Net Gross Net Gross Net
----- --- ----- --- ----- --- ----- ---
1996 3.0 .52 1.0 .29 2.0 1.50 - -
1995 3.0 .36 2.0 .36 1.0 .87 2.0 1.75
1994 2.0 .18 2.0 1.18 - - - -
1993 - - - - - - - -
All drilling has been on acreage held by the Company. The Company does not own
its own
18
drilling equipment; rather, it acts as a general contractor for well operations
and subcontracts drilling and certain other work to third parties.
OIL AND GAS RESERVE INFORMATION
An evaluation of the Company's estimated proved developed oil and gas
reserves as of September 30, 1996, was verified by E.E. Templeton & Associates,
Inc., an independent petroleum engineering firm. Such study showed, subject to
the qualifications and reservations therein set forth, reserves of 12.9 million
mcf of gas and 310,000 barrels of oil at September 30, 1996. See Note 13 to the
Consolidated Financial Statements.
The following table sets forth information with respect to the
Company's developed and undeveloped oil and gas acreage as of September 30,
1996. The information in this table includes the Company's equity interest in
acreage owned by 52 partnerships and joint ventures.
Developed Acreage Undeveloped Acreage
------------------- --------------------
Gross Net Gross Net
------ ------ ------ ------
Arkansas . . . . . . . . 2,560 403 - -
Kansas . . . . . . . . . 160 20 - -
Louisiana. . . . . . . . 1,819 206 - -
Mississippi. . . . . . . 40 3 - -
New York . . . . . . . . 12,861 10,738 14,599 13,558
Ohio . . . . . . . . . . 34,961 28,111 11,335 10,296
Oklahoma . . . . . . . . 4,243 635 - -
Pennsylvania . . . . . . 2,365 1,742 - -
Texas. . . . . . . . . . 4,520 209 - -
------ ------ ------ ------
63,529 42,067 25,934 23,854
====== ====== ====== ======
The terms of the oil and gas leases held by the Company's managed
partnerships and by the Company for its own account vary, depending upon the
location of the leased premises and the minimum remaining terms of undeveloped
leases, from less than one year to five years. Rentals of approximately $7,600
were paid in fiscal 1996 to maintain leases on such acreage in force.
The Company believes that the partnership, joint venture and Company
properties have satisfactory title. The developed oil and gas properties are
subject to customary royalty interests generally contracted for in connection
with the acquisition of the properties, burdens incident to operating
agreements, current taxes and easements and restrictions (collectively,
"Burdens"). Presently, the partnerships and the Company are current with
respect to all such Burdens.
At September 30, 1996, the Company had no individual interests in any
oil and gas property that accounted for more than 10% of the Company's proved
developed oil and gas reserves, including the Company's interest in reserves
owned by 52 partnerships and joint ventures.
19
PIPELINE OPERATION
The Company operates, on behalf of three limited partnerships of which
it is both a general and limited partner (in which it owns 13%, 46% and 22%
interests), and for its own account, various gas gathering pipeline systems
totaling approximately 310 miles in length. Such pipeline systems are located
in Ohio, New York and Pennsylvania.
WELL SERVICES
The Company provides a variety of well services to wells of which it
is the operator and to wells operated by independent third party operators.
These services include well operations, petroleum engineering, well maintenance
and well workover and are provided at rates in conformity with general industry
standards.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company contracts for drilling rigs and purchases tubular goods
necessary for the drilling and completion of wells from a substantial number of
drillers and suppliers, no one of which supplies a significant portion of the
Company's annual needs. During fiscal 1995 and fiscal 1996 to date, the Company
faced no shortage of such goods and services. The duration of the current
supply and demand situation cannot be predicted with any degree of certainty due
to numerous factors affecting the oil and gas industry, including selling
prices, demand for oil and gas, and governmental regulations.
MAJOR CUSTOMERS
The Company's natural gas is sold under contract to various purchasers.
For the year ended September 30, 1996, gas sales to two purchasers accounted for
13% and 29% of the Company's total production revenues. Gas sales to one
purchaser individually accounted for approximately 16% and 15% of total revenues
from energy production for fiscal 1994 and 1995, respectively.
COMPETITION
The oil and gas business is intensely competitive in all of its
aspects. The oil and gas industry also competes with other industries in
supplying the energy and fuel requirements of industrial, commercial and
individual customers. Domestic oil and gas sales are also subject to
competition from foreign sources. Moreover, competition is intense for the
acquisition of leases considered favorable for the development of oil and gas
in commercial quantities. The Company's competitors include other independent
oil and gas companies, individual proprietors and partnerships. Many of these
entities possess greater financial resources than the Company. While it is
impossible for the Company to accurately determine its comparative industry
position with respect to its provision of products and services, the Company
does not consider its oil and gas operations to be a significant factor in the
industry.
20
MARKETS
The availability of a ready market for oil and gas produced by the
Company, and the price obtained therefor, will depend upon numerous factors
beyond the Company's control including the extent of domestic production, import
of foreign natural gas and/or oil, political instability in oil and gas
producing countries and regions, market demands, the effect of federal
regulation on the sale of natural gas and/or oil in interstate commerce, other
governmental regulation of the production and transportation of natural gas
and/or oil and the proximity, availability and capacity of pipelines and other
required facilities. Currently, the supply of both crude oil and natural gas
is more than sufficient to meet projected demand in the United States. These
conditions have had, and may continue to have, a negative impact on the Company
through depressed prices for its oil and gas reserves.
GOVERNMENTAL REGULATION
The exploration, production and sale of oil and natural gas are subject
to numerous state and federal laws and regulations. Compliance with the laws
and regulations affecting the oil and gas industry generally increases the
Company's costs of doing business and consequently affects its profitability.
Inasmuch as such regulations are frequently changing, the Company is unable to
predict the future cost or impact of complying with such regulations. The
Company is not aware of any pending or threatened matter involving a claim that
it has violated environmental regulations which would have a material effect on
its operations or financial position.
EMPLOYEES
As of September 30, 1996, the Company employed 65 persons.
ITEM 2. PROPERTIES
The Company's executive office and headquarters for asset acquisition
and resolution operations is in Philadelphia, and is leased under an agreement
providing for rents of $49,600 per year through May 2000. The Company's
equipment leasing headquarters is located in Ambler, Pennsylvania, and is leased
under agreements providing for rents of $125,000 per year through November 2000.
The Company owns a 9,600 square foot office building and related land in Akron,
Ohio, housing its energy and accounting operations. The Company also maintains
two energy field offices in Ohio and New York and an equipment lease brokerage
office in California. Rents paid for fiscal 1996 for these offices totalled
$188,900.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are party to various routine legal
proceedings arising out of the ordinary course of its business. Management
believes that none of these actions, individually or in the aggregate, will have
a material adverse effect on the financial condition or operations of the
Company.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 9, 1996, the Company held a special shareholders' meeting
seeking approval of a proposed amendment to the Certificate of Incorporation of
the Company to increase the total number of shares of capital stock authorized
to 9 million shares of which 6.5 million shares were to be Class A Common Stock,
1.5 million shares were to be Class B Common Stock and 1 million shares were to
be Preferred Stock. The tabulation of votes was as follows:
In Favor Against Abstain Broker Non-Votes
-------- ------- ------- -----------------
1,531,825 32,741 10,870 0
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted on Nasdaq under the symbol "REXI."
The following table sets forth the high and low sale prices, as reported by
Nasdaq, on a quarterly basis for the Company's last two full fiscal years.
1996 (fiscal) High Low
-------------- ------ ------
Fourth Quarter . . . . . . . . . $17.50 $12.00
Third Quarter. . . . . . . . . . 21.19 12.83
Second Quarter . . . . . . . . . 16.23 7.43
First Quarter. . . . . . . . . . 8.63 6.58
1995 (fiscal) High Low
-------------- ------ ------
Fourth Quarter . . . . . . . . . $8.68 $4.80
Third Quarter. . . . . . . . . . 5.43 4.18
Second Quarter . . . . . . . . . 4.80 4.18
First Quarter. . . . . . . . . . 4.90 4.18
As of December 20, 1996, there were 3,550,928 shares of Common Stock
outstanding held of record by 785 persons.
22
The Company has paid regular quarterly cash dividends since August 31,
1995, as follows:
Dividend Payment Date Per Share Dividends
--------------------- -------------------
August 30, 1996 $.10
May 31, 1996 $.10
February 29, 1996 $.094
November 30, 1995 $.089
August 31, 1995 $.089
The Board of Directors, at a meeting held September 24, 1996, authorized
payment on November 29, 1996 of a dividend of $.10 per share to shareholders of
record on November 15, 1996.
The Company declared and paid 6% stock dividends in January 1996 and
April 1996, and effected a five-for-two stock split in the form of a 150% stock
dividend in May 1996. Under the terms of a senior secured note payable, the
payment of dividends on the Company's common stock is restricted unless certain
financial tests are met.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data as of and for the five years ended September 30,
1996 are as follows (all amounts in thousand except per share data):
Fiscal Year Ended September 30,
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues
Asset acquisition and
resolution $ 7,171 $ 6,114 $ 2,522 $ 606 $ 182
Equipment leasing 4,466 - - - -
Energy production 3,421 3,452 3,442 3,409 3,474
Energy services 1,736 1,880 2,080 2,445 2,676
Interest 197 148 136 106 231
------- ------- ------- ------- -------
Total Revenues 16,991 11,594 8,180 6,566 6,563
Income (loss) from continuing
operations before
income taxes 7,353 3,344 1,209 634 (506)
Provision (benefit) for
income taxes 2,206 630 (100) 44 (100)
Income (loss) from continuing
operations 5,147 2,714 1,309 590 (406)
Net income (loss) per share
(primary) 1.88 1.23 .64 .30 (.21)
Cash dividends per common share .38 .09 - - .13
Balance Sheet Data
Total assets 43,959 37,550 34,796 25,231 24,940
Long-term debt less
current portion 8,966 8,523 8,627 813 972
Stockholders' equity 31,123 26,551 24,140 22,861 22,563
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's operating results and financial condition over the past
several years reflects its shift in focus from its pre-existing energy
businesses to the development of specialty finance businesses. Between the
fiscal years 1994 and 1996, the Company's asset acquisition and resolution
operations grew from 31% of the Company's gross revenues and 30% of its total
assets to 42% of gross revenues and 50% of total assets. Equipment leasing
expanded in the year ended September 30, 1996 from 0% of gross revenues and
2% of its total assets to 26% of gross revenues and 5% of its total assets.
Oil and gas revenues (including energy services) declined from 68% of the
Company's gross revenues in fiscal 1994 to 30% of gross revenues in fiscal
1996, while related assets declined from 37% of total assets to 26% in the
same period, as the Company focused its efforts on expanding its asset
acquisition and resolution operations and on the development of its equipment
leasing operation. While the Company has generated only a small amount of
revenue from its leasing operations (as distinguished from its lease servicing
and partnership management revenues), it anticipates that both revenues from,
and assets used in, its leasing operations will grow significantly during
fiscal 1997 (although there can be no assurance that this will be the case).
RESULTS OF OPERATIONS: ASSET ACQUISITION AND RESOLUTION
The following table sets forth certain information relating to the income
recognized on the Company's commercial real estate loan portfolio during the
periods indicated:
Years Ended September 30,
1996 1995 1994
(Dollars in thousands) ---- ---- ----
Interest. . . . . . . . . . . . . . . . . . $ 1,899 $ 2,246 $ 799
Accreted discount . . . . . . . . . . . . . 954 1,176 602
Fees. . . . . . . . . . . . . . . . . . . . 675 963 25
Gains on refinancings and
sale of participations . . . . . . . . . 3,643 1,729 1,096
--------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . $ 7,171 $ 6,114 $ 2,522
========= ========= =========
Average balance of
investment, net . . . . . . . . . . . $ 19,804 $ 17,683 $ 8,179
Yield on net average balance . . . . . . . 36.2% 34.6% 30.8%
Revenues from asset acquisition and resolution operations increased to
$7.2 million in fiscal 1996 from $6.1 million in fiscal 1995 and $2.5 million in
fiscal 1994. These increases were attributable to increases of 111% (1996) and
58% (1995) in gains recognized on the refinancing of loans and sale of
participations in loans held by the Company. Fees decreased 30% in 1996
24
as compared to 1995 and increased significantly in 1995 as compared to 1994, due
to a reduction in the number of refinancings of, and sales of participations in,
certain of the Company's portfolio loans occurring during 1996 as compared to
1995, and an increase in the number of such refinancings and sales of
participations in 1995 as compared to 1994. The Company sold participation
interests in or refinanced eight and eleven loans during fiscal years 1996 and
1995 (representing an aggregated Company investment of $21.6 and $13.2 million),
respectively, as compared to $1.1 million on the refinancing of one loan
(representing an aggregate Company investment of $943,000) in fiscal 1994.
During fiscal 1996, the Company purchased or originated nine real estate
loans, for a total cost of $15.1 million, as compared to seven loans for a total
of $13.6 million in fiscal 1995 and two loans for a total of $2.5 million in
fiscal 1994. In addition, the Company increased its investment in certain
existing loans by $1.7 million in fiscal 1996, $1.3 million in fiscal 1995 and
$717,000 in fiscal 1994 for purposes of paying for property improvement costs,
unpaid taxes and similar items relating to properties underlying portfolio
loans. All such items had been anticipated by the Company at the time of loan
acquisition and included in its analysis of loan costs and yields. In addition,
in fiscal 1996 the Company increased its investment in loans by $535,000 in
connection with its repurchase of PICO loan participations to facilitate
borrower refinancings and received a note for $317,000 (thus increasing its
investment in loans) in connection with granting its consent to the sale
(subject to the Company's existing mortgage loan) of another property by a
borrower. Asset acquisition and resolution expenses decreased 35% in fiscal 1996
and rose significantly in 1995 compared to fiscal 1994. The decrease from fiscal
1995 to fiscal 1996 was a result of lower legal costs, which were in turn due to
a lesser number of refinancings of, and participations sold in, the Company's
portfolio loans. The increase from fiscal 1994 to fiscal 1995 was primarily a
result of higher legal and personnel costs associated with the expansion of
these operations. As a consequence of the foregoing, the Company's gross profit
(asset acquisition and resolution revenues less related expenses including
depreciation and amortization but without allocation of corporate overhead)
from asset acquisition and resolution operations increased from $2.3 million
for fiscal 1994 to $5.3 million for fiscal 1995 (134%) and to $6.7 million for
fiscal 1996 (25%).
RESULTS OF OPERATIONS: EQUIPMENT LEASING
Equipment leasing revenues recognized to date represent fees (including
reimbursement of administrative costs) associated with managing portfolios of
equipment leases owned by limited partnerships in which a subsidiary of the
Company is a general partner, as well as the Company's pro rata share of income
from these partnerships and lease brokerage fees. The Company acquired this
business in September 1995 and accordingly, did not recognize revenues from this
sector until after the completion of fiscal 1995. At September 30, 1996, the
Company acted as general partner for six limited partnerships which held a total
of $24.2 million (book value) in lease assets. For the year ended September 30,
1996, the Company's servicing revenues from these equipment leasing partnerships
were $1.1 million and its reimbursement of administrative costs was $1.4
million. The Company also received revenues in the period of $1.3 million from
its interests in the equipment leasing partnerships and $650,000 from its lease
brokerage operations.
Equipment leasing expenses include costs incurred in the management of
equipment leasing
25
partnerships in which the Company is a general partner. In accordance with the
terms of the related partnership agreements, the Company is reimbursed by the
partnerships for certain general and administrative expenses incurred and
allocable, directly or indirectly, to the partnerships. Such reimbursements are
included in equipment leasing revenue.
Expenses associated with the start-up of the Company's "small ticket"
equipment leasing operation amounted to $411,000 for the year ended September
30, 1996. This new business segment is expected to grow significantly during
fiscal 1997 although there can be no assurance that this will be the case.
RESULTS OF OPERATIONS: ENERGY
Oil and gas revenues from production sales remained essentially constant
for fiscal years 1994, 1995 and 1996.
A comparison of oil and gas sales revenue, daily production volumes, and
average sales prices for the years indicated is as follows:
Year Ended September 30,
1996 1995 1994
Sales (in thousands) ---- ---- ----
Gas(1) . . . . . . . . . . . . . $ 2,722 $ 2,762 $ 2,851
Oil. . . . . . . . . . . . . . . 627 610 535
Production volumes
Gas (mcf/day)(1) . . . . . . . . 3,184 3,283 3,183
Oil (bbls/day) . . . . . . . . . 93 100 93
Average sales prices
Gas (per mcf). . . . . . . . . . $ 2.34 $ 2.31 $ 2.45
Oil (per bbl). . . . . . . . . . 18.53 16.74 15.74
(1) Excludes sales of residue gas and sales to landowners.
Natural gas revenues from production sales decreased 1% in fiscal 1996
from fiscal 1995 due to a 3% decrease in production volumes partially offset by
a 1% increase in the average price per mcf of natural gas. In fiscal 1995,
natural gas revenues decreased 3% as a result of a 6% decrease in the average
price per mcf of natural gas partially offset by a 3% increase in production
volumes. Oil revenues increased by 3% in fiscal 1996 from fiscal 1995 due to an
11% increase in the average price per barrel which was partially offset by a 7%
decrease in production volumes. In fiscal 1995, oil revenues increased by 14%
over fiscal 1994 due to a 6% increase in the average price per barrel and a 7%
increase in production volumes. Primarily as a result of these changes, the
Company's gross profit from energy production (energy production revenues less
energy production and exploration costs) increased from $1.4 million for fiscal
1994 to $1.7 million for fiscal 1995 (20%) and to $1.8 million for fiscal 1996
(7%).
The Company continues to experience normally declining production from
its properties located in New York State. This decline has been almost totally
offset by the acquisition of additional well interests in Ohio. The Company
participated in the drilling of three successful exploratory wells and two
successful developmental wells during fiscal 1996. The impact on
26
revenues from these wells, however, will not be fully realized or reflected on
the Company's financial statements until fiscal 1997. In fiscal 1995, the
Company participated in the drilling of three successful exploratory wells and
recompleted one successful development well whose impact on revenues began to
be realized in fiscal 1996.
Energy services revenues decreased 8% in fiscal 1996 from fiscal 1995 and
10% in fiscal 1995 from fiscal 1994. These decreases resulted from a decrease in
the number of wells operated for limited partnerships managed by the Company.
A comparison of the Company's production costs as a percentage of oil and
gas sales, and the production cost per equivalent unit for oil and gas for
fiscal years 1994, 1995 and 1996, is as follows:
Production Costs 1996 1995 1994
---- ---- ----
As a percent of sales . . . . . . . . 42% 44% 40%
Gas (mcf) . . . . . . . . . . . . . . $ 1.04 $ 1.06 $ 1.00
Oil (bbl) . . . . . . . . . . . . . . $ 6.23 $ 6.36 $ 6.01
Production costs decreased 5% ($81,000) from fiscal 1995 to fiscal 1996
as a result of a decrease in the number of wells requiring cleanout and workover
operations. These operations are conducted on an as-needed basis and,
accordingly, costs incurred by the Company may vary from year to year.
Production costs increased 10% ($133,000) from fiscal 1994 to fiscal 1995, a
result of the acquisition of limited partnership interests in certain oil and
gas partnerships for which the Company serves as general partner and increased
workover costs in the Company's Ohio fields of operation.
Exploration costs decreased 30% ($69,000) in fiscal 1996 from fiscal 1995
and 64% ($405,000) in fiscal 1995 from fiscal 1994. The 1996 decrease resulted
from a decrease in delay rentals and impairment of lease costs which resulted
from a termination of certain leases in New York State in fiscal 1995 and
reduced costs relating to dry holes. The 1995 decrease was due to decreases in
impairment costs, costs relating to abandonment of non-producing properties and
dry hole costs. During fiscal 1996 the Company participated in one exploratory
dry hole and had lease impairments totalling $50,000. During fiscal 1995, the
Company's participation in two exploratory dry holes and lease impairments and
delay rentals totalled $145,000. During fiscal 1994, the Company's participation
in two exploratory dry holes and the determination that an exploratory well
drilled in a previous year was not capable of economic production along with
lease impairments, totalled $547,000.
Energy service expenses decreased $157,000 (15%) in fiscal 1996 from
fiscal 1995 and $105,000 (9%) in fiscal 1995 from fiscal 1994. These decreases
resulted from a decrease in the number of wells operated for third parties as a
result of normal production declines and well repurchases by the Company.
Depreciation, depletion and amortization consist primarily of
amortization of costs relating to oil and gas properties. Amortization of oil
and gas property costs as a percentage of oil and gas revenues was 23% in fiscal
1996, 27% in fiscal 1995 and 28% in fiscal 1994. The variance from year to year
is directly attributable to changes in the Company's oil and gas reserve
27
quantities, product prices and fluctuations in the depletable cost basis of oil
and gas properties. See Note 2 to the Consolidated Financial Statements.
As a result of the foregoing, gross profit from energy services decreased
from $653,000 for fiscal 1994 to $515,000 for fiscal 1995 and increased to
$585,000 for fiscal 1996.
RESULTS OF OPERATIONS: OTHER INCOME (EXPENSE)
General and administrative expense decreased 8% ($178,000) for the year
ended September 30, 1996 as compared to the same period in 1995 primarily as a
result of a decrease in executive compensation due to the death of a senior
officer in July 1995. General and administrative expense increased 19% from
fiscal 1994 to fiscal 1995. The increase in 1995 was a result of the payment of
incentive compensation to executive officers.
Interest expense decreased $219,000 from fiscal 1995 to fiscal 1996, and
increased $781,000 from fiscal 1994 to fiscal 1995, reflecting the changes in
borrowings to fund the growth of the Company's asset acquisition and resolution
operations. In May 1994, the Company privately placed an $8.0 million Senior
Note. In December 1994, the Company borrowed $2.5 million from Jefferson Bank
and $2.0 million from PICO. The $2.5 million was repaid in June 1995 and the
$2.0 million was repaid in September 1995.
The Company's effective tax rate increased from (8%) in fiscal 1994 to
19% in fiscal 1995 and 30% in fiscal 1996. Both the 1996 and 1995 increases were
the result of a continuing decrease in the generation of depletion (for tax
purposes) and tax credits in relation to net income. The increase for fiscal
1995 also resulted, in part, from the one-time effect in 1994 of the reversal of
a previously established valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Sources and (uses) of cash for the three years ended September 30, 1996,
are as follows:
(Dollars in thousands) 1996 1995 1994
---- ---- ----
Provided by operations. . . . . . . . . . $ 2,959 $1,578 $2,258
Used in investing activities. . . . . . . (1,060) (6,113) (2,518)
Provided by (used in) financing activities (202) 4,395 2,096
------- ------ ------
$ 1,697 $ (140) $1,836
======= ====== ======
The Company had $4.2 million in cash and cash equivalents on hand at
September 30, 1996, as compared to $2.5 million at September 30, 1995 and $2.6
million at September 30, 1994. The Company's ratio of current assets to current
liabilities was 3.7:1 at September 30, 1996 and 2.9:1 on each of September 30,
1995 and 1994. Working capital at September 30, 1996 was $4.4 million as
compared to $2.6 million at both September 30, 1995 and September 30, 1994.
Cash provided by operating activities increased $1.4 million, or 88%,
during fiscal 1996, as compared to fiscal 1995, and decreased $681,000, or 30%,
during fiscal 1995, as compared to fiscal 1994. The 1996 increase was primarily
the result of an increase in operating income in the asset acquisition and
resolution and equipment leasing businesses. The decrease in fiscal
28
1995 was primarily the result of decreases in accounts payable and other accrued
liabilities.
The Company's cash used in investing activities decreased $5.1 million or
88% in fiscal 1996 as compared to fiscal 1995, and increased $3.6 million, or
143%, during fiscal 1995, as compared to 1994. The changes resulted primarily
from changes in the amount of cash used to fund asset acquisition and resolution
activities. The Company invested $15.1 million, $13.6 million and $2.5 million
in the acquisition of nine, seven and two loans in fiscal years 1996, 1995 and
1994, respectively. In addition, the Company advanced funds on existing loans
of $1.7 million, $1.3 million and $717,000 in fiscal years 1996, 1995 and 1994,
respectively, and in fiscal 1996 increased its investment in certain existing
loans by $852,000.
Proceeds received upon refinancings or the sale of participations
amounted to $18.5 million, $10.2 million and $2.1 million in fiscal years 1996,
1995 and 1994, respectively. Cash used for capital expenditures increased
$280,000, or 34%, and decreased $219,000 or 21%, during fiscal years 1996 and
1995 over the previous periods. The 1996 increase includes $506,000 in capital
expenditures relating to start-up of small ticket leasing operations. The 1995
decrease was due to a decrease in purchases of additional working interests in
wells operated by the Company. During fiscal 1995 the Company also invested
$877,000 in the acquisition of a leasing company (see Note 10 to the
Consolidated Financial Statements). Cost of equipment acquired for lease
represents the equipment cost and initial direct costs associated with the start
up of small ticket leasing operations. The Company commenced leasing operations
for its own account in June 1996 and began to write leases in August 1996.
The Company's cash flow provided by financing activities decreased $4.6
million during fiscal 1996, as compared to fiscal 1995, and increased $2.3
million in fiscal 1995 as compared to fiscal 1994. During fiscal 1994, the
Company issued the Senior Note in the amount of $8.0 million, of which $5.2
million was pledged, along with seven of the Company's portfolio loans, as
collateral and restricted as to its usage. The Company was, however, free to
use such restricted cash for the purpose of purchasing additional loans provided
such purchased loans were immediately pledged in place of the utilized cash.
During fiscal 1995, the Company (i) sold a $2.0 million loan participation,
(ii) borrowed $2.5 million and (iii) was able to release for corporate
investment purposes $4.9 million of the restricted cash as a result of the
purchase of loans for the Company's portfolio.
In fiscal years 1996 and 1995, $756,000 and $161,000 were paid in
dividends, respectively. The determination of the amount of future cash
dividends, if any, to be declared and paid is in the sole discretion of the
Company's Board of Directors (subject to loan covenants) and will depend on the
various factors affecting the Company's financial condition and other matters
the Board of Directors deems relevant.
INFLATION AND CHANGES IN PRICES
Inflation affects the Company's operating expenses and increases in those
expenses may not be recoverable by increases in finance rates chargeable by the
Company. Inflation also affects interest rates and movements in rates may
adversely affect the Company's profitability.
The Company's revenues and the value of its oil and gas properties have
been and will
29
continue to be affected by changes in oil and gas prices. Oil and gas prices
are subject to fluctuations which the Company is unable to control or
accurately predict.
ENVIRONMENTAL REGULATION
A continued trend to greater environmental and safety awareness and
increasing environmental regulation has resulted in higher operating costs for
the oil and gas industry and the Company. The Company believes environmental
and safety costs will continue to increase in the future. To date, compliance
with environmental laws and regulations has not had a material impact on the
Company's capital expenditures, earnings or competitive position. The Company
monitors environmental laws and believes it is in compliance with applicable
environmental regulations. The Company is unable to predict the impact of future
laws and regulations on the Company's operations.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX
PAGE
NUMBER
------
RESOURCE AMERICA, INC.
Report of Independent Certified Public Accountants. . . . . . . . . . . . 32
Consolidated balance sheets at September 30, 1996 and 1995. . . . . . . . 33
Consolidated statements of income for the years ended
September 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . .34
Consolidated statements of changes in stockholders' equity
for the years ended September 30, 1996, 1995 and 1994. . . . . . . . . 35
Consolidated statements of cash flows for the years ended
September 30, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . 36
Notes to consolidated financial statements. . . . . . . . . . . . . . . . 37
31
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
RESOURCE AMERICA, INC.
We have audited the accompanying consolidated balance sheets of Resource
America, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended September 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Resource America,
Inc., and subsidiaries as of September 30, 1996 and 1995, and the consolidated
results of their operations and cash flows for each of the three years in the
period ended September 30, 1996, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
Cleveland, Ohio
October 25, 1996, except for Note 14, for which the date is November 26, 1996.
32
Resource America, Inc.
Consolidated Balance Sheets
September 30, 1996 and 1995
1996 1995
ASSETS ---- ----
Current Assets
Cash and cash equivalents. . . . . . . . . $ 4,154,516 $ 2,457,432
Accounts and notes receivable. . . . . . . 1,478,702 1,303,556
Prepaid expenses and other current assets. 472,673 163,045
Total current assets . . . . . . . . . . . 6,105,891 3,924,033
------------- -------------
Net Investment in Direct Financing Leases
(less provision for possible losses
of $7,167) . . . . . . . . . . . . . . . . 729,446 -
Property and Equipment
Oil and gas properties and equipment
(successful efforts) . . . . . . . . . . . 24,034,987 24,039,762
Gas gathering and transmission facilities. 1,535,781 1,514,127
Other. . . . . . . . . . . . . . . . . . . 1,666,085 1,072,243
------------- -------------
27,236,853 26,626,132
Less accumulated depreciation, depletion,
and amortization . . . . . . . . . . . . (14,856,874) (14,043,455)
------------- -------------
12,379,979 12,582,677
Investments in Real Estate Loans . . . . . . . 21,797,768 17,991,415
Restricted Cash. . . . . . . . . . . . . . . . 935,346 904,409
Other Assets (less accumulated amortization
of $884,636 and $907,722). . . . . . . . . 2,010,498 2,147,430
------------- -------------
$ 43,958,928 $ 37,549,964
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable . . . . . . . . . . . . . $ 584,985 $ 721,673
Accrued liabilities. . . . . . . . . . . . 596,783 516,066
Accrued income taxes . . . . . . . . . . . 376,946 -
Current portion of long-term debt. . . . . 105,000 91,000
------------ -------------
Total current liabilities. . . . . . . . . 1,663,714 1,328,739
Long-term Debt, net of current portion . . . . 8,966,524 8,522,682
Deferred Income Taxes. . . . . . . . . . . . . 2,206,000 1,147,000
Commitments and Contingencies. . . . . . . . . - -
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 par value,
1,000,000 authorized shares. . . . . . . . - -
Common Stock, $.01 par value,
8,000,000 authorized shares. . . . . . . . 20,472 8,179
Additional paid-in capital . . . . . . . . 21,760,695 19,214,210
Retained earnings. . . . . . . . . . . . . 12,458,344 10,532,719
Less treasury stock, at cost . . . . . . . (2,698,985) (2,721,437)
Less loan receivable from ESOP . . . . . . (417,836) (482,128)
------------- -------------
Total stockholders' equity . . . . . . . . 31,122,690 26,551,543
------------- -------------
$ 43,958,928 $ 37,549,964
============= =============
See accompanying notes to consolidated financial statements.
33
Resource America, Inc.
Consolidated Statements of Income
Years Ended September 30, 1996, 1995 and 1994
1996 1995 1994
REVENUES
Real estate finance. . . . . . . $ 7,171,232 $ 6,114,258 $ 2,522,472
Equipment leasing. . . . . . . . 4,465,918 - -
Energy : production. . . . . . . 3,420,762 3,452,327 3,441,752
: services. . . . . . . . 1,735,791 1,879,001 2,079,800
Interest . . . . . . . . . . . . 197,410 148,331 135,546
------------ ------------ ------------
16,991,113 11,593,917 8,179,570
COSTS AND EXPENSES
Energy : exploration and
production. . . . . . . . . . 1,581,901 1,732,388 2,003,745
: services. . . . . . . . 869,435 1,026,136 1,131,457
Real estate. . . . . . . . . . . 520,714 800,970 248,000
Equipment leasing. . . . . . . . 2,339,141 - -
General and administrative . . . 2,087,265 2,265,036 1,900,917
Depreciation, depletion and
amortization . . . . . . . . 1,368,555 1,334,956 1,346,602
Interest . . . . . . . . . . . 871,674 1,091,027 310,332
Other - net. . . . . . . . . . . 6,842 (2,028) 22,274
------------ ------------ ------------
9,645,527 8,248,485 6,963,327
------------ ------------ ------------
Income from operations . . . . 7,345,586 3,345,432 1,216,243
OTHER INCOME (EXPENSE)
Gain (loss) on sale of
property. . . . . . . . . . . 7,165 (1,305) (7,610)
------------ ------------ ------------
Income before income taxes . . 7,352,751 3,344,127 1,208,633
Provision (benefit) for
income taxes . . . . . . . . . 2,206,000 630,000 (100,000)
------------ ------------ ------------
Net income . . . . . . . . . . $ 5,146,751 $ 2,714,127 $ 1,308,633
============ ============ ============
Net income per common
share - primary. . . . . . . . . . $ 1.88 $ 1.23 $ .64
============ ============ ============
Weighted average common
shares outstanding . . . . . . . . 2,756,900 2,235,400 2,076,100
============ ============ ============
Net income per common share -
fully diluted. . . . . . . . . . . $ 1.87 $ 1.18 $ .62
============ ============ ============
Weighted average common shares
outstanding . . . . . . . . . 2,763,000 2,292,700 2,117,100
============ ============ ============
See accompanying notes to consolidated financial statements.
34
Resource America, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended September 30, 1996, 1995 and 1994
Common Stock Additional Treasury Stock ESOP Total
------------ Paid-in Retained -------------- Share Stockholders'
Shares Amount Capital Earnings Shares Amount Amount Equity
-------------------- ------------- ------------ ---------------------- ------ -------------
Balance,
September 30, 1993 817,912 $ 8,179 $ 19,036,420 $ 6,670,876 (115,545) $(2,243,374) $(610,711) $ 22,861,390
Treasury shares