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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ______
Commission file number: 0-4408
RESOURCE AMERICA, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 72-0654145
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1845 Walnut Street, Suite 1000, Philadelphia, PA 19103
(Address of principal executive offices)
(Zip code)
(215) 546-5005
(Registrant's telephone number, including area code)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of outstanding shares of each of the issuer's classes of
common stock, as of the latest practicable date:
17,373,137 Shares August 9, 2002
RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
-------------
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2002 (Unaudited)
and September 30, 2001..................................................... 3
Consolidated Statements of Operations (Unaudited)
Three Months and Nine Months Ended June 30, 2002 and 2001.................. 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
Nine Months Ended June 30, 2002............................................ 5
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended June 30, 2002 and 2001................................... 6
Notes to Consolidated Financial Statements - June 30, 2002 (Unaudited)......... 7 - 17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 18 - 33
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 34 - 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 37
Item 4. Submission of Matters to a Vote of Security Holders............................ 37
Item 6. Exhibits and Reports on Form 8-K............................................... 38
SIGNATURES..................................................................................... 39
2
PART I
ITEM 1. FINANCIAL STATEMENTS
RESOURCE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, September 30,
2002 2001
---------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 26,850 $ 48,648
Accounts and notes receivable........................................................ 12,158 18,197
Prepaid expenses..................................................................... 3,300 762
----------- -----------
Total current assets............................................................. 42,308 67,607
Investments in real estate loans (less allowance for possible losses of $2,979
and $2,529).......................................................................... 184,198 189,734
Investments in real estate ventures..................................................... 17,676 16,666
Investment in RAIT Investment Trust..................................................... 34,075 20,909
Property and equipment:
Oil and gas properties and equipment (successful efforts)............................ 122,698 106,795
Gas gathering and transmission facilities............................................ 27,036 23,608
Other................................................................................ 8,137 7,310
----------- -----------
157,871 137,713
Less - accumulated depreciation, depletion and amortization............................. (41,581) (34,739)
----------- -----------
Net property and equipment........................................................... 116,290 102,974
Goodwill ............................................................................... 37,802 31,420
Other assets ........................................................................... 31,863 37,154
----------- -----------
Total assets..................................................................... $ 464,212 $ 466,464
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................................... $ 3,096 $ 8,560
Accounts payable..................................................................... 11,028 18,264
Accrued interest..................................................................... 3,795 1,721
Accrued liabilities.................................................................. 6,282 6,255
Estimated income taxes............................................................... - 288
Deferred revenue on drilling contracts............................................... 6,509 13,770
----------- -----------
Total current liabilities........................................................ 30,710 48,858
Long-term debt:
Senior............................................................................... 65,636 66,826
Non-recourse......................................................................... 61,250 62,159
Other................................................................................ 18,078 12,586
----------- -----------
144,964 141,571
Deferred revenue and other liabilities.................................................. 1,171 1,578
Deferred income taxes................................................................... 21,460 18,682
Minority interest in Atlas Pipeline Partners, L.P. ..................................... 19,629 20,316
Commitments and contingencies........................................................... - -
Stockholders' equity:
Preferred stock, $1.00 par value: 1,000,000 authorized shares ...................... - -
Common stock, $.01 par value: 49,000,000 authorized shares........................... 250 249
Additional paid-in capital........................................................... 223,858 223,712
Less treasury stock, at cost......................................................... (74,372) (74,080)
Less loan receivable from Employee Stock Ownership Plan ("ESOP")..................... (1,241) (1,297)
Accumulated other comprehensive income............................................... 8,976 1,657
Retained earnings ................................................................... 88,807 85,218
----------- -----------
Total stockholders' equity....................................................... 246,278 235,459
----------- -----------
Total liabilities and stockholders' equity....................................... $ 464,212 $ 466,464
=========== ===========
See accompanying notes to consolidated financial statements
3
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ------------------------
2002 2001 2002 2001
---------- ----------- ----------- ----------
(in thousands, except per share data)
REVENUES
Energy................................................................. $ 19,024 $ 22,618 $ 74,451 $ 73,055
Real estate finance.................................................... 4,252 3,971 13,556 12,262
Interest and other..................................................... 1,359 1,037 4,612 4,518
--------- --------- --------- --------
24,635 27,626 92,619 89,835
COSTS AND EXPENSES
Energy................................................................. 13,378 14,398 54,239 44,291
Real estate finance.................................................... 693 408 1,680 1,169
General and administrative............................................. 2,177 1,620 5,017 4,162
Depreciation, depletion and amortization............................... 2,823 2,884 8,203 8,099
Interest............................................................... 3,098 3,601 9,490 11,292
Provision for possible losses.......................................... 93 150 893 806
Minority interest in Atlas Pipeline Partners, L.P. .................... 568 895 1,963 3,505
--------- --------- --------- --------
22,830 23,956 81,485 73,324
--------- --------- --------- --------
Income from continuing operations before income taxes ................. 1,805 3,670 11,134 16,511
Provision for income taxes............................................. 484 1,284 3,563 5,780
--------- --------- --------- --------
Income from continuing operations ..................................... 1,321 2,386 7,571 10,731
Discontinued operations:
Loss from discontinued Optiron Corporation
(including $1,800 loss on classification as held for sale)........ (1,926) (238) (2,328) (1,198)
Income tax benefit.................................................. 611 83 745 419
--------- --------- --------- --------
Loss on discontinued operations..................................... (1,315) (155) (1,583) (779)
Cumulative effect of change in accounting principle, net of taxes
of $308 ............................................................ - - (655) -
--------- --------- --------- --------
Net income............................................................. $ 6 $ 2,231 $ 5,333 $ 9,952
========= ========= ========= ========
Net income (loss) per common share - basic:
Continuing operations............................................... $ .08 $ .14 $ .44 $ .59
Discontinued operations............................................. (.08) (.01) (.09) (.04)
Cumulative effect of change in accounting principle................. - - (.04) -
--------- --------- --------- --------
Net income per common share - basic................................. $ .00 $ .13 $ .31 $ .55
========= ========= ========= ========
Weighted average common shares outstanding............................. 17,455 17,483 17,444 18,126
========= ========= ========= ========
Net income (loss) per common share - diluted:
Continuing operations............................................... $ .07 $ .13 $ .43 $ .58
Discontinued operations............................................. (.07) (.01) (.09) (.05)
Cumulative effect of change in accounting principle................. - - (.04) -
--------- --------- --------- --------
Net income per common share - diluted............................... $ .00 $ .12 $ .30 $ .53
========= ========= ========= ========
Weighted average common shares......................................... 17,903 18,076 17,813 18,610
========= ========= ========= ========
See accompanying notes to consolidated financial statements
4
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 2002
(Unaudited)
(in thousands, except share data)
Common Stock Additional Treasury Stock ESOP
-------------------------- Paid-In ------------------------- Stockholders'
Shares Amount Capital Shares Amount Receivable
------------------------------------------------------------------------------------
Balance, October 1, 2001............. 24,940,037 $ 249 $ 223,712 (7,498,613) $ (74,080) $ (1,297)
Treasury shares issued............... (387) 29,640 697
Issuance of common stock............. 103,360 1 289
Purchase of shares for treasury...... (97,927) (989)
Other comprehensive income...........
Cash dividends ($.099 per share).....
Tax benefit from employee stock
option exercise.................. 244
Repayment of ESOP loan............... 56
Net income...........................
---------- --------- ---------- ------------ ------------ ---------
Balance, June 30, 2002............... 25,043,397 $ 250 $ 223,858 (7,566,900) $ (74,372) $ (1,241)
========== ========= ========== ============ ============ =========
Accumulated
Other Totals
Comprehensive Retained Stockholders'
Income Earnings Equity
-----------------------------------------------
Balance, October 1, 2001............. $ 1,657 $ 85,218 $ 235,459
Treasury shares issued............... 310
Issuance of common stock............. 290
Purchase of shares for treasury...... (989)
Other comprehensive income........... 7,319 7,319
Cash dividends ($.099 per share)..... (1,744) (1,744)
Tax benefit from employee stock
option exercise.................. 244
Repayment of ESOP loan............... 56
Net income........................... 5,333 5,333
----------- -------- -----------
Balance, June 30, 2002............... $ 8,976 $ 88,807 $ 246,278
=========== ======== ===========
See accompanying notes to consolidated financial statements
5
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended June 30,
--------------------------------
2002 2001
----------- -------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................ $ 5,333 $ 9,952
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization............................................... 8,203 8,099
Amortization of discount on senior debt and deferred finance costs..................... 825 770
Provision for possible losses.......................................................... 893 806
Minority interest in Atlas Pipeline Partners, L.P...................................... 1,963 3,505
Loss on discontinued operations........................................................ 1,583 779
Cumulative effect of change in accounting principle.................................... 655 -
Gain on dispositions................................................................... (2,846) (1,002)
Property impairments and abandonments.................................................. 18 201
Deferred income taxes.................................................................. 3,022 (413)
Accretion of discount.................................................................. (2,614) (4,579)
Collection of interest................................................................. 5,244 1,330
Non-cash compensation.................................................................. 312 304
Changes in operating assets and liabilities............................................ (17,218) (5,066)
----------- -----------
Net cash provided by operating activities ................................................ 5,373 14,686
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................................... (16,497) (9,988)
Asset acquisitions........................................................................ - (6,500)
Principal payments on notes receivable and proceeds from sales of assets ................. 24,190 26,396
Increase in other assets.................................................................. (6,279) (7,134)
Investments in real estate loans and ventures............................................. (18,647) (23,408)
Decrease in other liabilities............................................................. (25) (80)
----------- -----------
Net cash used in investing activities .................................................... (17,258) (20,714)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on revolving lines of credit.................................. (2,289) 6,559
Dividends paid............................................................................ (1,744) (1,774)
Dividends paid to minority interests of Atlas Pipeline Partners, L.P...................... (2,936) (2,696)
Treasury stock purchased.................................................................. (989) (57,254)
Repayment of ESOP loan.................................................................... 56 32
Increase in other assets.................................................................. (411) (343)
Proceeds from issuance of stock........................................................... 17 390
----------- -----------
Net cash used in financing activities..................................................... (8,296) (55,086)
----------- -----------
Net cash used in discontinued operations.................................................. (1,617) (2,225)
----------- -----------
Decrease in cash and cash equivalents..................................................... (21,798) (63,339)
Cash and cash equivalents at beginning of period.......................................... 48,648 117,107
----------- -----------
Cash and cash equivalents at end of period................................................ $ 26,850 $ 53,768
=========== ===========
See accompanying notes to consolidated financial statements
6
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE 1 - MANAGEMENT'S OPINION REGARDING INTERIM FINANCIAL STATEMENTS
These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP") for interim financial information and the instructions to
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by US GAAP for complete financial statements.
The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect (i) the
reported amounts of assets and liabilities, (ii) disclosure of contingent assets
and liabilities as of the dates of the financial statements and (iii) the
reported amounts of revenues and costs and expenses during the reporting
periods. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair presentation have
been reflected in these consolidated financial statements.
Operating results for the three and nine months ended June 30, 2002 are
not necessarily indicative of the results that may be expected for the year
ending September 30, 2002. Certain reclassifications have been made in the
fiscal 2001 consolidated financial statements to conform to the fiscal 2002
presentation. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 2001.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating the fair value of each class of financial instruments for which it is
practicable to estimate fair value.
For cash and cash equivalents, receivables and payables, the carrying
amounts approximate fair value because of the short maturity of these
instruments.
For investments in real estate loans, because each loan is a unique
transaction involving a discrete property, it is impractical to determine their
fair values. However, the Company believes the carrying amounts of the loans are
reasonable estimates of their fair value considering the nature of the loans and
the estimated yield relative to the risks involved.
The following table provides information for financial instruments as
of June 30, 2002:
Carrying Estimated
Amount Fair Value
----------- ----------
(in thousands)
Energy debt................................ $ 46,578 $ 46,578
Real estate finance debt................... 29,428 29,428
Senior debt................................ 65,636 68,261
Other debt................................. 6,418 6,418
----------- -----------
$ 148,060 $ 150,685
=========== ===========
7
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
(Unaudited)
Earnings Per Share
The following table presents a reconciliation of the components used in
the comparison of net income per common share-basic and net income per common
share-diluted for the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ------------------------
2002 2001 2002 2001
---------- ----------- ----------- ----------
(in thousands)
Income from continuing operations ..................................... $ 1,321 $ 2,386 $ 7,571 $ 10,731
Loss from discontinued Optiron Corporation,
net of taxes of $611, $83, $745 and $419........................... (1,315) (155) (1,583) (779)
Cumulative effect of change in accounting principle,
net of taxes of $308............................................... - - (655) -
--------- --------- --------- --------
Net income........................................................ $ 6 $ 2,231 $ 5,333 $ 9,952
========= ========= ========= ========
Basic average shares of common stock outstanding....................... 17,455 17,483 17,444 18,126
Dilutive effect of stock option and award plans........................ 448 593 369 484
--------- --------- --------- --------
Dilutive average shares of common stock................................ 17,903 18,076 17,813 18,610
========= ========= ========= ========
For the three months and nine months ended June 30, 2002, the
computation of diluted earnings per share excludes options for 861,000 shares of
common stock that have exercise prices (ranging from $11.03 to $15.50 per share)
greater than the per share average market price ($9.76) for the period. The
effect of including these options in the computation of diluted per share
amounts would be anti-dilutive.
Comprehensive Income (Loss)
The following table presents comprehensive income (loss) for the
periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ------------------------
2002 2001 2002 2001
---------- ----------- ----------- ----------
(in thousands)
Net income............................................................. $ 6 $ 2,231 $ 5,333 $ 9,952
Other comprehensive income (loss):
Unrealized gain on investment, net of taxes of $1,748, $1,068,
$3,742 and $1,480................................................. 3,394 2,078 7,442 2,873
Unrealized loss on natural gas futures contracts, net of
tax benefits of $9 and $46........................................ (12) - (123) -
--------- --------- --------- --------
3,382 2,078 7,319 2,873
--------- --------- --------- --------
Comprehensive income................................................... $ 3,388 $ 4,309 $ 12,652 $ 12,825
========= ========= ========= ========
8
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
(Unaudited)
Recently Issued Financial Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS
143 establishes requirements for accounting for removal costs associated with
asset retirements. SFAS 143 is effective for fiscal years beginning after June
15, 2002. The Company is currently assessing the impact of this standard on our
consolidated financial statements.
In October 2001, SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Live Assets" ("SFAS 144") was issued. SFAS 144 requires that
one accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, and broadens the definition
of what constitutes discontinued operations to include more disposal
transactions. Under SFAS 144, assets held for sale that are a component of an
entity are included in discontinued operation and cash flows will be eliminated
from the ongoing operations if the entity does not have any significant
continuing involvement in the operations prospectively. The adoption of SFAS 144
resulted in the classification of the Company's interest in its partially-owned
energy technology subsidiary, Optiron Corporation ("Optiron"), as a discontinued
operation (See Note 9).
In May 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS
145") was issued. SFAS 145 rescinds the automatic treatment of gains and losses
from extinguishments of debt as extraordinary unless they meet the criteria for
extraordinary items as outlined in Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 145 also requires sale-leaseback accounting for
certain lease modifications that have economic effects similar to a
sale-leaseback transaction and makes various corrections to existing
pronouncements. The adoption of SFAS 145 did not have a material effect on the
Company's consolidated financial position or results of operations.
In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities" ("SFAS 146") was issued. SFAS 146 is effective for exit
or Disposal activities initiated after December 31, 2002. The Company has not
yet adopted SFAS 146 nor determined the effect of the adoption of SFAS 146 on
its consolidated financial position or results of operations.
NOTE 3 - OTHER ASSETS AND GOODWILL-CHANGE IN ACOUNTING PRINCIPLE
Other assets consist of the following:
June 30, September 30,
2002 2001
---------------- ---------------
(Unaudited)
(in thousands)
Contracts acquired (net of accumulated amortization of $4,959 and $4,005)............... $ 9,531 $ 16,851
Deferred financing costs, net of amortization........................................... 1,517 1,921
Investments .......................................................................... 12,316 10,743
Assets held for sale.................................................................... 820 -
Note receivable and amounts in escrow related to the disposal of subsidiary
(net of allowance for possible losses of $10,522 and $10,704)........................ 5,862 7,141
Other................................................................................... 1,817 498
----------- ----------
$ 31,863 $ 37,154
=========== ===========
9
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
(Unaudited)
NOTE 3 - OTHER ASSETS AND GOODWILL - CHANGE IN ACOUNTING PRINCIPLE - (Continued)
On October 1, 2001, the Company adopted SFAS 142 "Goodwill and Other
Intangible Assets", which requires that goodwill no longer be amortized, but
instead tested for impairment at least annually. At that time the Company had
unamortized goodwill of $31.4 million. The Company has completed the
transitional impairment test required upon adoption of SFAS 142. The
transitional test, which involved the use of estimates related to the fair
market value of the business operations associated with the goodwill did not
indicate an impairment loss. The Company will continue to evaluate its goodwill,
at least annually, and will reflect the impairment of goodwill, if any, in
operating income in the income statement in the period in which is indicated.
Changes in the carrying amount of goodwill for the nine months ended
June 30, 2002 are as follows:
Nine Months Ended
June 30, 2002
-----------------
(in thousands)
Goodwill at September 30, 2001
(less accumulated amortization of $4,063)................................. $ 31,420
Additions to goodwill related to prior year asset acquisitions............... 15
Atlas Pipeline Partners goodwill amortization, whose fiscal year
began January 1, 2002, at which time it adopted SFAS 142.................. (22)
Syndication network reclassified from other assets in accordance with
SFAS 142 (net of accumulated amortization of $711)........................ 6,389
------------
Goodwill at June 30, 2002
(net of accumulated amortization of $4,796)............................... $ 37,802
============
For the three months and nine months ended June 30, 2001, the Company's
goodwill amortization expense was approximately $290,000 and $1.0 million,
respectively. Pro forma net income from continuing operations for the three
months and nine months ended June 30, 2001 would have been $2.6 million and
$11.4 million, respectively, excluding goodwill amortization, net of taxes using
the Company's effective tax rate in fiscal 2001 of 35%. Pro forma basic income
per share from continuing operations for the three months and nine months ended
June 30, 2001 would have been $.15 and $.65, respectively. Pro forma diluted
income per share from continuing operations for the three months and nine months
ended June 30, 2001 would have been $.15 and $.63, respectively.
Optiron, accounted for by the equity method, adopted SFAS 142 on
January 1, 2002, the first day of its fiscal year. Optiron performed the
evaluation of its goodwill required by SFAS 142 and determined that it was
impaired due to uncertainty associated with the on-going viability of the
product line with which the goodwill was associated. This impairment resulted in
a cumulative effect adjustment on Optiron's books of $1.9 million before tax.
The Company has recorded, in its second quarter which correlates to Optiron's
first quarter, its 50% share of this cumulative effect adjustment in the same
manner.
10
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
(Unaudited)
NOTE 4 - CASH FLOW STATEMENTS
Supplemental disclosure of cash flow information:
Nine Months Ended
June 30,
-----------------------------
2002 2001
----------- -----------
(in thousands)
Cash paid during the period for:
Interest........................................................................... $ 6,591 $ 8,219
Income taxes....................................................................... $ 3,499 $ 11,724
Nine Months Ended
June 30,
-----------------------------
2002 2001
----------- -----------
(in thousands)
Non-cash activities include the following:
Cancellation of shares issued in contingency settlement............................ $ - $ 1,305
Shares issued in contingency settlement............................................ $ - $ (2,089)
Atlas Pipeline Partners units issued in exchange for gas gathering and
transmission facility............................................................ $ - $ (2,250)
Buyer's assumption of liabilities upon sale of loan................................ $ - $ 460
Tax benefit from employee stock option exercise.................................... $ 244 $ -
Detail of asset acquisitions:
Fair value of assets acquired...................................................... $ - $ 9,180
Atlas Pipeline Partners units issued in exchange for gas gathering and
transmission facility............................................................ - (2,250)
Liabilities assumed................................................................ - (430)
----------- -----------
Net cash paid.................................................................... $ - $ 6,500
=========== ===========
NOTE 5 - INVESTMENTS IN REAL ESTATE LOANS
The Company has primarily focused its real estate activities on
managing and enhancing the value of its existing real estate loan portfolio.
These real estate loans generally were acquired at discounts from both their
face value and the appraised value of their underlying properties. The Company
records as income the accretion of a portion of the difference between its cost
basis in a real estate loan and the sum of projected cash flows therefrom. Cash
received by the Company for payment on each real estate loan is allocated
between principal and interest. This accretion of discount amounted to $428,000
and $1.4 million during the three months ended June 30, 2002 and 2001,
respectively, and $2.6 million and $4.6 million during the nine months ended
June 30, 2002 and 2001, respectively. As the Company sells senior lien interests
in or receives funds from refinancings of its loans, a portion of the cash
received is applied to reduce the cumulative accretion of discount included in
the carrying value of the Company's investments in real estate loans.
11
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
(Unaudited)
NOTE 5 - INVESTMENTS IN REAL ESTATE LOANS - (Continued)
At June 30, 2002, the Company held real estate loans having an
aggregate face value of $600.3 million, which were being carried at an aggregate
cost of $184.2 million, including cumulative accretion and net of an allowance
for possible losses. The following is a summary of the changes in the carrying
value of the Company's investments in real estate loans for the periods
indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -------------
(in thousands)
Balance, beginning of period...................................... $ 176,124 $ 189,335 $ 189,734 $ 183,927
Additions to existing loans....................................... 9,799 10 17,147 23,408
Provision for possible losses..................................... (210) (150) (1,010) (450)
Accretion of discount (net of collection of interest)............. 428 1,427 2,614 4,579
Collection of principal........................................... - (75) - (1,063)
Cost of loans resolved............................................ (1,943) (2,187) (24,287) (22,041)
----------- ----------- ----------- -------------
Balance, end of period............................................ $ 184,198 $ 188,360 $ 184,198 $ 188,360
=========== =========== =========== =============
The following is a summary of activity in the Company's allowance for
possible losses related to real estate loans for the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -------------
(in thousands)
Balance, beginning of period...................................... $ 2,829 $ 2,229 $ 2,529 $ 2,013
Provision for possible losses..................................... 210 150 1,010 450
Charges against allowance......................................... (60) - (560) (84)
----------- ----------- ----------- -------------
Balance, end of period............................................ $ 2,979 $ 2,379 $ 2,979 $ 2,379
=========== =========== =========== =============
12
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
(Unaudited)
NOTE 6 - DEBT
Total debt consists of the following:
June 30, September 30,
2002 2001
-------------- ----------------
(in thousands)
Senior debt..................................................................... $ 65,636 $ 66,826
Non-recourse debt:
Energy:
Revolving and term bank loans.............................................. 46,578 43,284
Real estate finance:
Revolving credit facilities................................................ 13,797 18,000
Other...................................................................... 875 875
------------ -------------
Total non-recourse debt.................................................... 61,250 62,159
Other debt...................................................................... 21,174 21,146
------------ -------------
148,060 150,131
Less current maturities......................................................... 3,096 8,560
------------ -------------
$ 144,964 $ 141,571
============ =============
NOTE 7 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company, through its energy subsidiaries, enters into natural gas
futures and option contracts to hedge its exposure to changes in natural gas
prices. At any point in time, such contracts may include regulated New York
Mercantile Exchange ("NYMEX") futures and options contracts and non-regulated
over-the-counter futures contracts with qualified counterparties. NYMEX
contracts are generally settled with offsetting positions, but may be settled by
delivery of natural gas.
As these contracts qualify and have been designated as cash flow
hedges, any gains or losses resulting from market price changes are deferred and
recognized as a component of production revenues in the month the gas is sold.
Gains or losses on futures contracts are determined as the difference between
the contract price and a reference price, generally prices on NYMEX. The Company
entered into 90 and 272 natural gas futures contracts, during the three and nine
months ended June 30, 2002, respectively, in addition to the 17 contracts that
were open at the beginning of the fiscal year.
For the three months and nine months ended June 30, 2002, the Company
settled 42 and 59 contracts at a loss of $37,000 and $62,000, respectively (net
to the Company). A portion of these settled contracts cover natural gas
production for the upcoming fiscal quarter and $7,000 of the $62,000 loss will
appear as a component of production revenues at that time. At June 30, 2002, the
Company had 230 open contracts covering 644,000 dekatherms ("Dth") (net to the
Company) which mature through September 2003 at a combined average settlement
price of $3.47 per Dth. For the current fiscal year ending September 30, 2002,
20 of the 230 open contracts will mature covering 56,000 Dth (net to the
Company) at a combined average settlement price of $3.18 per Dth.
13
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
(Unaudited)
NOTE 7 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - (Continued)
The Company's net unrealized loss related to all open NYMEX contracts
was approximately $169,000 at June 30, 2002. The unrealized loss at June 30,
2002 has been recorded as a liability in the Company's June 30, 2002
Consolidated Financial Statements and in Stockholders' Equity as a component of
accumulated other comprehensive income, net of taxes of $46,000. As of June 30,
2002, $4,600 of the net unrealized losses on derivative instruments included in
accumulated other comprehensive income are expected to be recognized in revenues
during the remainder of the current fiscal year. The Company assesses the
effectiveness of its hedges based on changes in the derivatives' intrinsic
value. The Company recognized no gains or losses during the three months or nine
months ended June 30, 2002 for hedge ineffectiveness or as a result of the
discontinuance of cash flow hedges.
Although hedging provides the Company some protection against falling
prices, these activities could also reduce the potential benefits of price
increases, depending upon the instrument. The Company does not hold derivative
instruments for trading purposes.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
As a part of the consideration for the sale of our wholly-owned small
ticket equipment leasing subsidiary, Fidelity Leasing, Inc. ("Fidelity
Leasing"), in fiscal 2000, the Company received a non-interest bearing
promissory note that is payable to the extent that payments are made on a pool
of Fidelity Leasing lease receivables and refunds are received with respect to
certain tax receivables. Through June 30, 2002, the Company received $6.8
million of payments on the note. In addition, $10.0 million of the sales
proceeds were placed in an escrow account until July 31, 2004 as security for
certain indemnification obligations to the purchaser. Through June 30, 2002,
$510,000 had been paid out of the escrow to satisfy indemnification claims. The
note and escrow account are included in the Company's consolidated financial
statements as components of other assets.
Through July 31, 2002, the purchaser of Fidelity Leasing and its
assignees have made indemnification claims in the aggregate amount of $18.4
million, which the Company has disputed. The Company and the assignee have
entered into discussions concerning the validity of these claims. At June 30,
2002, the Company has a $10.5 million allowance recorded against the promissory
note and escrow account. The Company has reviewed the allowance and adjusted the
allowance, as required, to a level that is estimated by management to provide
for possible losses against the promissory note and indemnification obligations.
In connection with the Supplemental Employee Retirement Plan
established pursuant to the employment agreement with Edward E. Cohen, its
chairman and chief executive officer, the Company entered into a "split-dollar"
insurance arrangement under which the Company pays a portion of the premiums
under a life insurance policy with respect to Mr. Cohen, with reimbursement of
such premiums due upon the occurrence of specified events, including Mr. Cohen's
death. Under the recently enacted Sarbanes-Oxley Act of 2002, the future payment
of premiums by the Company under this arrangement may be deemed to be a
prohibited loan by the Company to Mr. Cohen. Since the next premium payment
under this arrangement is not due until April 2003, the Company has deferred any
decision relating to this arrangement until the application of the
Sarbanes-Oxley Act has been clarified. The Company cannot predict what effect,
if any, the cancellation of the arrangement might entail.
14
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
(Unaudited)
NOTE 9 - DISCONTINUED OPERATIONS
In June 2002, the Company adopted a plan to dispose of Optiron. The
Company has a verbal agreement in principle to reduce its 50% interest in
Optiron to 10% through a sale to current management and anticipates that the
sale will be completed by September 30, 2002. Accordingly, Optiron is reported
as a discontinued operation for the three months and nine months ended June 30,
2002 and 2001. In connection with the sale, the Company anticipates that it will
forgive $4.5 million out of the $5.9 million of indebtedness owed by Optiron.
The remaining $1.4 million of indebtedness will be retained by the Company in
the form of a promissory note which will be secured by all of Optiron's assets
and by the common stock of Optiron's 90% shareholder. The Company anticipates
that the note will bear interest at the prime rate plus 1% payable monthly; an
additional 1% will accrue until the maturity date of the note in 2022. Closing
of this transaction is subject to the signing of a definitive agreement.
NOTE 10 - TERMINATION OF AGREEMENT TO SELL SUBSIDIARIES
On January 18, 2002, subsidiaries of the Company entered into an
agreement to sell their 100% membership interest in Atlas Pipeline Partners GP,
LLC to New Vulcan Coal Holdings, L.L.C. for $29.0 million in cash. Atlas
Pipeline Partners GP, LLC is the general partner of Atlas Pipeline Partners. On
July 31, 2002, the Company announced that Atlas Pipeline Partners had exercised
its right under the contribution agreement, dated January 18, 2002, to terminate
the agreement with New Vulcan Coal Holdings, L.L.C. and Vulcan Intermediary,
L.L.C. (collectively, "Vulcan") to acquire Triton Coal Company, L.L.C.
("Triton"). Since consummation of the contribution agreement was a condition for
the consummation of the agreement to sell Atlas Pipeline Partners GP, LLC to
Vulcan, that agreement was likewise terminated on July 31, 2002.
Through June 30, 2002, Atlas Pipeline Partners had incurred
approximately $1.4 million in costs in connection with the Triton transaction,
subject to reimbursement by the Company and its affiliates for their allocable
portion of these costs. The Company has advanced approximately $900,000 to Atlas
Pipeline Partners through June 30, 2002 to pay for these costs. The Company
anticipates that it will advance to Atlas Pipeline Partners the balance of these
costs. Atlas Pipeline Partners and its affiliates have the right to
reimbursement from Vulcan of up to $1.2 million of the transaction costs. Atlas
Pipeline Partners has expensed transaction costs of $187,500, the difference
between costs incurred and those reimbursable by Vulcan. The costs that are
reimbursable by Vulcan are included on the Company's consolidated balance sheet
as prepaid expenses.
15
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
(Unaudited)
NOTE 11 - OPERATING SEGMENT INFORMATION
The Company operates in two principal industry segments - energy and
real estate finance. Segment data for the periods indicated are as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -------------
(in thousands)
Revenues:
Energy......................................................... $ 19,145 $ 22,654 $ 74,625 $ 73,141
Real estate finance............................................ 4,252 3,971 13,556 12,262
Corporate...................................................... 1,359 1,037 4,612 4,518
----------- ----------- ----------- -------------
$ 23,756 $ 27,662 $ 92,793 $ 89,921
=========== =========== =========== =============
Operating profit (loss):
Energy......................................................... $ 2,153 $ 3,696 $ 10,087 $ 16,213
Real estate finance............................................ 1,626 1,465 5,329 5,376
Corporate...................................................... (1,974) (1,491) (4,282) (5,078)
----------- ----------- ----------- -------------
$ 1,805 $ 3,670 $ 11,134 $ 16,511
=========== =========== =========== =============
June 30, September 30,
2002 2001
----------- -------------
(Unaudited)
(in thousands)
Identifiable assets:
Energy............................................................................. $ 178,429 $ 172,189
Real estate finance................................................................ 203,178 207,682
Corporate.......................................................................... 82,605 86,593
----------- -----------
$ 464,212 $ 466,464
=========== ===========
Operating profit (loss) represents total revenues less costs
attributable thereto, including interest expense, provision for possible losses,
and, with respect to energy and real estate finance, general and administrative
expenses, and less depreciation, depletion and amortization. The information
presented does not eliminate intercompany transactions of $121,000 and $174,000
in the three months and nine months ended June 30, 2002, respectively, and
$36,000 and $86,000 in the three months and nine months ended June 30, 2001,
respectively.
16
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
(Unaudited)
NOTE 12 - SUBSEQUENT EVENT
In July 2002, Atlas America, the Company's energy subsidiary, entered
into a $75.0 million credit facility led by Wachovia Bank. The revolving credit
facility has an initial borrowing base of $45.0 million which may be increased
subject to growth in the Company's oil and gas reserves. The facility permits
draws based on the remaining proved developed non-producing and proved
undeveloped natural gas and oil reserves attributable to the Atlas America's
wells and the projected fees and revenues from operation of the wells and the
administration of partnerships. Up to $10.0 million of the facility may be in
the form of standby letters of credit. The facility is secured by Atlas
America's assets. The revolving credit facility has a term ending in July 2005
and bears interest at one of two rates (elected at the borrower's option) which
increase as the amount outstanding under the facility increases: (i) Wachovia
prime rate plus between 25 to 75 basis points, or (ii) LIBOR plus between 175
and 225 basis points. The credit facility contains financial covenants,
including covenants requiring the Company and Atlas America to maintain
specified financial ratios, and imposes the following limits: (a) the amount of
debt that can be incurred cannot exceed specified levels without the banks'
consent; and (b) the energy affiliates may not sell, lease or transfer property
without the banks' consent. This credit facility was used to pay off the
existing energy revolving credit facility.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited)
When used in this Form 10-Q, The words "believes" "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties more
particularly described in Item 1, under the caption "Risk Factors", in our
annual report on Form 10-K for fiscal 2001. These risks and uncertainties could
cause actual results to differ materially. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. We undertake no obligation to publicly release the results of any
revisions to forward-looking statements which we may make to reflect events or
circumstances after the date of this Form 10-Q or to reflect the occurrence of
unanticipated events.
Factors that might cause such a difference include:
In Energy:
o fluctuations in world-wide prices and demand for natural gas and
oil;
o fluctuations in the level of natural gas and oil exploration and
development activities;
o fluctuations in the demand for contract drilling and well
services;
o the existence of competitors, technological changes and other
developments in the industry;
o the existence of operating risks inherent in contract drilling
and well services;
o uncertainties inherent in estimating quantities of gas and oil
reserves, projecting futures rates of production and the timing
of development expenditures;
o the availability of capital; and
o general economic conditions and the existence of regulatory
uncertainties.
In Real Estate Finance:
o fluctuations in real property values;
o fluctuations in interest rates;
o changes in current environmental laws or the discovery of
contamination on any properties underlying our loans; and
o changes in national economic conditions or in conditions in the
areas in which properties underlying our real estate loans are
located.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited) - (Continued)
Overview of Third Quarter of Fiscal 2002
Our operating results and financial condition for the third quarter of
fiscal 2002 reflect the importance to us of our energy operations as shown in
the following tables:
Revenues as a Percent of Total Revenues(1)
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -------------
Energy ........................................................... 77% 82% 80% 81%
Real estate finance............................................... 17% 14% 15% 14%
Assets as a Percent of Total Assets(2)
June 30, September 30,
2002 2001
---------------- ---------------
Energy ............................................................................... 38% 37%
Real estate finance................................................................... 44% 45%
- ---------------
(1) The balance (6% and 5%, and 4% and 5%, for the three and nine months ended
June 30, 2002 and 2001, respectively) is attributable to revenues derived
from corporate assets not allocated to a specific industry segment,
including cash and the common shares held in RAIT Investment Trust.
(2) The balance (18% at June 30, 2002 and September 30, 2001) is attributable to
corporate assets not attributable to a specific industry segment, as
referred to in (1).
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited) - (Continued)
Results of Operations: Energy
The following tables set forth information relating to revenues
recognized and costs and expenses incurred, daily production volumes, average
sales prices and production costs per equivalent unit in our energy operations
during the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -------------
(in thousands, except
sales price and production volumes data)
Revenues:
Production.................................................... $ 7,304 $ 10,078 $ 21,200 $ 29,456
Well drilling................................................. 8,472 8,905 43,211 32,389
Well services................................................. 1,910 2,115 6,028 6,928
Transportation................................................ 1,338 1,520 4,012 4,282
----------- ----------- ----------- -----------
$ 19,024 $ 22,618 $ 74,451 $ 73,055
=========== =========== =========== ===========
Costs and expenses:
Production.................................................... $ 1,631 $ 1,743 $ 4,931 $ 4,957
Exploration................................................... 580 644 1,236 1,203
Well drilling................................................. 7,597 7,718 38,405 26,646
Well services................................................. 1,085 989 2,993 2,963
Transportation................................................ 516 396 1,574 1,224
Non-direct.................................................... 1,969 2,908 5,100 7,298
----------- ----------- ----------- -----------
$ 13,378 $ 14,398 $ 54,239 $ 44,291
=========== =========== =========== ===========
Production revenues(1):
Gas........................................................... $ 6,392 $ 8,784 $ 18,752 $ 25,669
Oil........................................................... $ 930 $ 1,187 $ 2,443 $ 3,586
Production volumes:
Gas (thousands of cubic feet ("mcf")/day) (1)................. 19,239 19,521 19,535 17,944
Oil (barrels ("bbls")/day).................................... 466 574 463 507
Average sales prices:
Gas (per mcf)................................................. $ 3.65 $ 4.94 $ 3.52 $ 5.24
Oil (per bbl)................................................. $ 21.96 $ 22.71 $ 19.34 $ 25.92
Average production costs:
(per mcf equivalent unit)..................................... $ .81 $ .83 $ .81 $ .86
- ----------------
(1) Excludes sales of residual gas and sales to landowners.
Our natural gas revenues were $6.4 million and $18.8 million in the
three months and nine months ended June 30, 2002, a decrease of $2.4 million
(27%) and $6.9 million (27%) from $8.8 million and $25.7 million in the three
months and nine months ended June 30, 2001. The decreases were due to decreases
in the average sales price of natural gas of 26% and 33% for the three months
and nine months ended June 30, 2002, respectively. Additionally, volumes
decreased 1% and increased 9% in the three months and nine months ended June 30,
2002, respectively. The $2.4 million decrease in gas revenues in the three
months ended June 30, 2002 as compared to the prior period consisted of $2.3
million attributable to price decreases and $94,000 attributable to volume
decreases. The $6.9 million decrease in gas revenues in the nine months ended
June 30, 2002 as compared to the prior period consisted of an $8.4 million
decrease attributable to price decreases, partially offset by a $1.5 million
increase attributable to volume increases.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited) - (Continued)
Results of Operations: Energy - (Continued)
Our oil revenues were $930,000 and $2.4 million in the three months and
nine month periods ended June 30, 2002, a decrease of $257,000 (22%) and $1.1
million (32%) from $1.2 million and $3.6 million in the three months and nine
months ended June 30, 2001, due to decreases in production volumes of 19% and 9%
in the three months and nine months ended June 30, 2002. In addition, the
average sales prices received for oil decreased 3% and 25% in the three months
and nine months ended June 30, 2002, as compared to the prior fiscal periods.
The $257,000 decrease in oil revenues in the three months ended June 30, 2002 as
compared to the prior period consisted of decreases of $218,000 attributable to
price decreases and $39,000 attributable to volume decreases. The $1.1 million
decrease in oil revenues for the nine months ended June 30, 2002 as compared to
the prior period consisted of decreases of $910,000 attributable to price
decreases and $233,000 attributable to volume decreases.
Our well drilling revenues and expenses represent the billings and
costs associated with the drilling of wells for partnerships sponsored by Atlas
America. The gross profit from drilling operations was $875,000 and $4.8 million
in the three months and nine months ended June 30, 2002, a decrease of $312,000
(26%) and $937,000 (16%) from $1.2 million and $5.7 million in the three months
and nine months ended June 30, 2001. The decrease in our gross profit margin
from 13% and 18% in the three months and nine months ended June 30, 2001 to 10%
and 11% in the three months and nine months ended June 30, 2002 arose from an
increase in the average cost per well and a change, during the first quarter of
fiscal 2002, in the structure of our drilling contracts effective December 2000
to a cost-plus basis from a turnkey basis. Cost-plus contracts protect us in an
inflationary environment while limiting our profit margin. Additionally, the
first quarter of the prior fiscal year included the benefit of a downward
adjustment to our previous estimates of certain costs in connection with a
completed drilling program.
Our well services revenues decreased $205,000 and $900,000 in the three
months and nine months ended June 30, 2002, respectively. This decrease was
primarily a result of a decrease in gas marketing activities of $288,000 and
$983,000 in the three months and nine months ended June 30, 2002, respectively.
These decreases were partially offset by increases in well operating revenues
due to an increase in the number of wells we operate as a result of new
partnership wells drilled during fiscal 2002 and 2001.
Our transportation revenues, which are derived from our natural gas
transportation agreements with partnerships we sponsor, decreased 12% in the
three months and 6% in the nine months ended June 30, 2002 as compared to the
prior periods. These decreases are a result of a decrease in prices received for
natural gas transported by our pipelines, as some of our transportation
contracts are based on the price of the gas transported.
Our transportation expenses increased 30% and 29% in the three months
and nine months ended June 30, 2002, respectively, as compared to the prior
periods. These increases resulted from higher compressor expenses and costs
associated with two small pipelines acquired in fiscal 2001 by Atlas Pipeline
Partners.
Non-direct expenses were $2.0 million and $5.1 million in the three
months and nine months ended June 30, 2002, a decrease of $939,000 (32%) and
$2.2 million (30%). These expenses include, among other things, non-direct
salaries and benefits, the costs of running the energy corporate office and
outside services. These decreases were due to the reallocation of costs to our
production, drilling, well services and well operations functions.
Amortization of oil and gas properties as a percentage of oil and gas
revenues was 26% in both the three months and nine months ended June 30, 2002
compared to 17% and 15% for the three months and nine months ended June 30,
2001. The variance from period to period is directly attributable to changes in
our oil and gas reserve quantities, product prices and fluctuations in the
depletable cost basis of oil and gas.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited) - (Continued)
Results of Operations: Real Estate Finance
The following table sets forth certain information relating to
the revenues recognized and costs and expenses incurred in our real estate
finance operations during the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -------------
(in thousands)
Revenues:
Interest..................................................... $ 2,583 $ 2,237 $ 7,588 $ 6,916
Accreted discount............................................ 428 1,427 2,614 4,579
----------- ----------- ----------- -----------
3,011 3,664 10,202 11,495
Gains on resolutions of loans and loan payments in
excess of the carrying value of loans...................... 757 496 2,398 891
Net rental and fee income.................................... 484 (189) 956 (124)
----------- ----------- ----------- -----------
$ 4,252 $ 3,971 $ 13,556 $ 12,262
=========== =========== =========== ===========
Cost and expenses.............................................. $ 693 $ 408 $ 1,680 $ 1,169
=========== =========== =========== ===========
Revenues from our real estate finance operations increased $281,000
(7%) from $4.0 million in the three months ended June 30, 2001 to $4.3 million
in the three months ended June 30, 2002. Revenues increased $1.3 million (11%)
from $12.3 million in the nine months ended June 30, 2001 to $13.6 million in
the nine months ended June 30, 2002. We attribute these changes to the
following:
o An increase of $261,000 (53%) and $1.5 million (169%) in gains
from resolution of loans and loan repayments in excess of carrying
values in the three and nine months ended June 30, 2002 as
compared to the same prior periods. In the three months ended June
30, 2002, we sold one loan having a book value of $1.0 million to
RAIT Investment Trust for $1.8 million, resulting in a gain of
$757,000. We also sold a loan which had been written down by
$500,000 in the previous quarter and by an additional $60,000 in
the current quarter, resulting in no gain or loss on the sale of
this loan. In the nine months ended June 30, 2002, we sold a total
of three loans having book values of $24.2 million for $26.6
million, resulting in gains of $2.4 million. In the three and nine
months ended June 30, 2001, we sold two loans having book values
of $2.2 million and $22.1 million, respectively, which were
resolved for $2.6 million and $23.0 million, respectively,
resulting in gains of $460,000 and $795,000, respectively. There
was also the repayment of one loan in the three months and two
loans in the nine months ended June 30, 2001 in the amounts of
$110,000 and $225,000, respectively, having book values of $74,000
and $130,000, respectively, resulting in gains of $36,000 and
$96,000.
o A decrease in interest and accreted discount of $653,000 (18%) and
$1.3 million (11%) in the three months and nine months ended June
30, 2002, respectively, primarily resulting from the following:
- The sale of seven loans, which decreased interest income by
$746,000 and $2.8 million in the three months and nine months
ended June 30, 2002, respectively, as compared to the three
months and nine months ended June 30, 2001.
- The completion of accretion on eight loans, which decreased
interest income by $351,000 and $617,000 in the three months
and nine months ended June 30, 2002, respectively, as
compared to the three months and nine months ended June 30,
2001.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited) - (Continued)
Results of Operations: Real Estate Finance - (Continued)
- These decreases were partially offset by an increase in our
accretion amount due to increases in our estimated cash flows
relating to several properties resulting in an increase in
interest income of $241,000 and $666,000 in the three months
and nine months ended June 30, 2002, respectively, as
compared to the three months and nine months ended June 30,
2001.
- These decreases were partially offset by an increase in
interest income resulting from the purchase of two senior
lien interests in two loans in March 2001 in which we
previously held subordinated interests, increasing interest
income by $203,000 and $1.4 million in the three months and
nine months ended June 30, 2002, respectively, as compared to
the three months and nine months ended June 30, 2001.
o An increase in net rental and fee income of $673,000 and $1.1
million to $484,000 and $956,000 in the three months and nine
months ended June 30, 2002, respectively. This compared to an
expense of $189,000 and $124,000 in the three months and nine
months ended June 30, 2001, respectively. These increases resulted
from an increase in our equity earnings in one real estate joint
venture in which we own a 50% equity interest and a consulting fee
of $300,000 received from another real estate joint venture in
which we own a 25% equity interest.
Gains on resolutions of loans and loan payments in excess of the
carrying value of loans (if any) and the amount of fees received (if any) vary
from transaction to transaction and there may be significant variations in our
gains on resolutions and fee income from period to period.
Costs and expenses of our real estate finance operations were $693,000
and $1.7 million in the three months and nine months ended June 30, 2002,
respectively, an increase of $285,000 (70%) and $511,000 (44%) from $408,000 and
$1.2 million in the same periods of the prior fiscal year. The increase was
primarily a result of an increase in professional fees of $317,000 in the nine
months ended June 30, 2002, associated with ongoing litigation regarding one of
our real estate loans. In addition, wages and benefits increased $139,000 in the
nine months ended June 30, 2002 as a result of the addition of a new president
and other personnel in our real estate subsidiary to manage our existing
portfolio of commercial loans and real estate joint ventures and to direct the
resolution of these mortgages and the disposition of the underlying properties.
Results of Operations: Other Revenues, Costs and Expenses
Our interest and other income was $1.4 million and $4.6 million in the
three months and nine months ended June 30, 2002, respectively, an increase of
$322,000 (31%) and $94,000 (2%) as compared to $1.0 million and $4.5 million
during the three months and nine months ended June 30, 2001, respectively.
Increases for the three months and nine months ended June 30, 2002 as compared
to the three months and nine months ended June 30, 2001 are as follows:
Three Months Ended Nine Months Ended
June 30, 2002 June 30, 2002
as compared to as compared to
Three Months Ended Nine Months Ended
June 30, 2001 June 30, 2001
-------------------- -------------------
(in thousands)
Interest income................................... $ (175) $ (1,539)
Dividend income................................... 220 926
Gains on sale of property and equipment........... 149 316
Other............................................. 128 391
----------- ----------
$ 322 $ 94
=========== ==========
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited) - (Continued)
Results of Operations: Other Revenues, Costs and Expenses - (Continued)
Interest income decreased due to decreases in our cash balances from
the sale of our small ticket leasing subsidiary for the three months and nine
months ended June 30, 2002 from those in the comparable prior fiscal year
periods, as well as to lower rates on those funds invested. Gains on sales of
property and equipment increased primarily due to the sale of certain assets
which were not located within the Appalachian basin. Dividend income increased
primarily from our additional share ownership in RAIT Investment Trust.
Our general and administrative expenses increased $557,000 (34%) to
$2.2 million, and $855,000 (21%) to $5.0 million, in the three months and nine
months ended June 30, 2002, from $1.6 million and $4.2 million in the three and
nine month periods ended June 30, 2001, respectively. These increases primarily
resulted from increases in salaries and benefits including health insurance,
increases in our donations and professional services.
Our interest expense was $3.1 million and $9.5 million in the three
months and nine months ended June 30, 2002, respectively, a decrease of $503,000
(14%) and $1.8 million (16%) from $3.6 million and $11.3 million for the three
months and nine months ended June 30, 2001, respectively. These decreases
primarily resulted from our purchase of $7.7 million of our 12% senior
subordinated notes since June 30, 2001, which reduced interest by $226,000 and
$584,000 for the three months and nine months ended June 30, 2002, respectively.
In addition, a reduction in borrowings and lower rates received by our real
estate finance division decreased interest expense by $379,000 and $846,000 in
the three months and nine months ended June 30, 2002, respectively.
The minority interest in Atlas Pipeline Partners owned by unitholders
other than ourselves represents approximately 48% of the net earnings of Atlas
Pipeline Partners. Because we own more than 50% of Atlas Pipeline Partners, it
is included in our consolidated financial statements and the ownership by the
other unitholders is shown as a minority interest. The minority interest in
Atlas Pipeline Partners earnings was $568,000 and $2.0 million for the three
months and nine months ended June 30, 2002, respectively, as compared to
$895,000 and $3.5 million for the three months and nine months ended June 30,
2001, a decrease of $327,000 (37%) and $1.5 million (44%), respectively. These
decreases were the result of a decrease in net income of these gas gathering
operations principally due to decreases in the transportation fees received by
Atlas Pipeline Partners as a result of reductions in natural gas prices upon
which many of those fees are based.
Our provision for possible losses decreased $57,000 to $93,000 in the
three months ended June 30, 2002 from $150,000 in the three months ended June
30, 2002, as a result of the realization of amounts previously written off due
to the bankruptcy filing of an energy customer, partially offset by an increase
in our provision for possible losses of $60,000 in our real estate segment,
associated with the write-down and subsequent disposal during the current fiscal
quarter, of one real estate loan.
Our provision for possible losses increased $87,000 to $893,000 in the
nine months ended June 30, 2002 from $806,000 in the nine months ended June 30,
2001 as a result of a $560,000 increase in the provision for possible losses
associated with the write-down of one real estate loan which was sold during the
current fiscal quarter, offset by the realization of $117,000 which was
previously written off due to the bankruptcy filing of an energy customer who
filed for bankruptcy in the nine months ended June 30, 2001 which resulted in a
charge to the provision for possible losses of $356,000.
Our effective tax rate decreased to 32% in the nine months ended June
30, 2002 as compared to 35% in the nine months ended June 30, 2001 as a result
of a decrease in the amortization of goodwill in the nine months ended June 30,
2002 as compared to the nine months ended June 30, 2001.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited) - (Continued)
Discontinued Operations and Cumulative Effective of Change in Accounting
Principle
In accordance with SFAS 144 "Accounting for the Impairment or Disposal
of Long Lived Assets", our decision to dispose of Optiron is shown as
discontinued operations for both the three months and nine months ended June 30,
2002 and 2001. Optiron is an energy technology company in which we hold a 50%
equity interest and account for using the equity method.
The cumulative effect of change in accounting principle relates to our
equity method of accounting for Optiron which adopted SFAS 142 on January 1,
2002. This adoption resulted in an impairment and write down of goodwill on
their books associated with the on-going viability of their product with which
the goodwill was associated.
Liquidity and Capital Resources
General. Following the sale of our equipment leasing operations, our
major sources of liquidity have been the proceeds from that sale, funds
generated by operations, funds raised from investor partnerships relating to our
energy operations, resolutions of real estate loans and borrowings under our
existing energy and real estate finance credit facilities. We have employed
these funds principally in the expansion of our energy operations and the
repurchase of our senior notes and common stock. The following table sets forth
our sources and uses of cash for the periods indicated:
Nine Months Ended
--------------------------
June 30,
--------------------------
2002 2001
----------- -----------
(in thousands)
Provided by operations......................... $ 5,373 $ 14,686
Used in investing activities................... (17,258) (20,714)
Used in financing activities................... (8,296) (55,086)
Used by discontinued operations................ (1,617) (2,225)
----------- -----------
$ (21,798) $ (63,339)
=========== ===========
Our working capital at June 30, 2002 was $11.6 million, a decrease of
$7.2 million from $18.7 million at September 30, 2001. Our long-term debt
(including current maturities) to total capital ratio at June 30, 2002 was 38%
as compared to 39% at September 30, 2001. We had $26.9 million in cash and cash
equivalents on hand at June 30, 2002, as compared to $48.6 million at September
30, 2001. Our ratio of earnings to fixed charges was 2.4 to 1.0 in the nine
months ended June 30, 2002 as compared to 2.8 to 1.0 in the nine months ended
June 30, 2001.
Operating activities. Cash provided by operating activities decreased
$9.3 million to $5.4 million for the nine months ended June 30, 2002 as compared
to $14.7 million for the nine months ended June 30, 2001. The decrease is
primarily related to the following:
o A decrease of $12.1 million in deferred revenue on drilling
contracts primarily attributable to the timing of our receipt of
investor funds from our drilling partnership syndication and
subsequent use of those funds in our drilling activities. This
decrease was substantially the result of the following:
- An increase in deferred revenue on drilling contracts for the
nine months ended June 30, 2001 of $4.5 million, and
- a decrease in deferred revenue on drilling contracts for the
nine months ended June 30, 2002 of $7.3 million.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited) - (Continued)
Liquidity and Capital Resources - (Continued)
o Decreases of $5.5 million in accounts payable primarily due to a
difference in the timing of our receipt of cash for gas and oil
production which was subsequently distributed to well interest
owners in the first quarter of the next fiscal year at September
30, 2001 compared to September 30, 2000.
o Increases of $8.2 million due to greater amounts owed and paid for
income taxes through the nine months ended June 2001 as a result
of our higher income in the period as compared to the nine months
ended June 2002.
Investing activities. Cash used in investing activities decreased $3.4
million for the nine months ended June 30, 2002 to $17.3 million compared to
$20.7 million for the nine months ended June 30, 2001, principally as a result
of the following:
o Investments in real estate loans and ventures decreased $4.8
million. We purchased two loan participations in loans where we
previously held junior interests in the second quarter of fiscal
2001 for $21.6 million as compared to the purchase of five
participations in loans where we previously held junior interests
for $12.9 million in the current fiscal period. We also invested
$4.2 million in existing loans in the nine months ended June 30,
2002, while investing $1.8 million in these loans in fiscal 2001.
In addition, in fiscal 2002, we invested $1.5 million in one real
estate joint venture. There were no such investments in fiscal
2001.
o Payments on notes receivable and proceeds from assets sales
decreased $2.2 million primarily due to an expected decrease in
principal payments of $2.4 million on our note receivable related
to the disposal of our leasing subsidiary
o Investments in other assets deceased $855,000. In the nine months
ended June 30, 2002, we purchased $1.9 million in RAIT shares as
compared to $4.9 million in RAIT shares in the nine months ended
June 30, 2001, resulting in a decrease of $3.0 million. This
decrease was partially offset by increased investments by our
small equipment leasing group in the current year and a final
payment of $2.3 million under the purchase agreement relating to
Viking Resources in the prior year.
Financing activities. Cash used in financing activities decreased $46.8
million to $8.3 million in the nine months ended June 30, 2002. This decrease
was primarily due to our "Dutch Auction" tender offer in the prior fiscal
period, in which we repurchased 6.3 million common shares for $57.0 million
whereas in the nine months ended June 30, 2002, we repurchased 102,400 shares
for $989,000.
We believe that our cash on hand, anticipated funds from operations,
and the amounts available under our revolving credit facilities will be
sufficient to cover our working capital needs, capital expenditures, debt
service requirements and tax obligations for at least the next 12 months. Our
ability to fund operations, make capital expenditures and make scheduled
principal and interest payments or to refinance our indebtedness will depend
upon future financial and operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors, some
of which are beyond our control
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited) - (Continued)
Contractual Obligations and Commercial Commitments
The following tables set forth our obligations and commitments as of
June 30, 2002.
Payments Due By Period (in thousands)
---------------------------------------------------------------------
Contractual cash obligations: Less than 1 - 3 4 - 5 After 5
Total 1 Year Years Years Years
-------------- ------------- ---------------- ------------- ---------------
Long-term debt...................... $ 148,060 $ 3,096 $ 142,319 $ 2,633 $ 12
Capital lease obligations........... - - - - -
Operating leases.................... 5,287 1,757 2,120 1,410 -
Unconditional purchase obligations.. - - - - -
Other long-term obligations......... - - - - -
----------- ----------- ----------- ----------- ---------
Total contractual cash obligations.. $ 153,347 $ 4,853 $ 144,439 $ 4,043 $ 12
=========== =========== =========== =========== =========
Amount of Commitment Expiration Per Period (in thousands)
---------------------------------------------------------------------
Other commercial commitments: Less than 1 - 3 4 - 5 After 5
Total 1 Year Years Years Years
------------- ------------- ---------------- ------------ ----------------
Lines of credit..................... $ - $ - $ - $ - $ -
Standby letter of credit............ 2,165 2,165 - - -
Guarantees.......................... 2,426 132 2,294 - -
Standby replacement commitments..... 10,591 2,742 7,849 -
Other commercial commitments........ 198,039 2,415 64,189 4,162 127,273
----------- ----------- ------------ ---------- -----------
Total commercial commitments........ $ 213,221 $ 7,454 $ 74,332 $ 4,162 $ 127,273
=========== =========== ============ ========== ===========
We have in the past sold participations in real estate loans which were
structured to meet the criteria for sale under generally accepted accounting
principles. As such, these amounts were removed from our balance sheet and
included above.
We also have contingent liabilities in connection with senior lien
financing with respect to five of our loans included in "Other Commercial
Commitments" on the above table. The senior lien loans are with recourse only to
properties securing them subject to certain standard exceptions, which we have
guaranteed. These exceptions relate principally to the following:
o fraud or intentional misrepresentation in connection with the loan
documents;
o misapplication or misappropriation of rents, insurance proceeds or
condemnation awards during continuance of any event of default or,
at any time, of tenant security deposits or advance rents;
o payments of fees or commissions to various persons related to
borrower or us during an event of default, except as permitted by
the loan documents;
o failure to pay taxes, insurance premiums or specific other
expenses, failure to use property revenues to pay property
expenses, and commission of criminal acts or waste with respect to
the property;
o environmental violations; and
o the undismissed or unstayed bankruptcy or insolvency of borrower.
We believe that none of the guarantees must be included in our
consolidated financial statements based on our assessment that the likelihood of
our being required to pay any claims under any of them is remote under the facts
and circumstances pertaining to each of them.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited) - (Continued)
Transactions with Related Parties
We have invested in three limited partnerships which in March 2002
purchased for $18.9 million three properties adjacent to the office building and
garage in which our executive offices are located and in which we own a 50%
interest. Initial financing was provided by RAIT Investment Trust ("RAIT") which
retains a $4.6 million mezzanine loan at 14% per annum, maturing in July 2004.
RAIT's remaining loan, which is in the process of being repaid by additional
borrowings from unaffiliated institutions, is subordinate to a $9.0 million
first mortgage loan provided by an unaffiliated bank. Our investment represents
a 25% interest in the venture, purchased for $1.5 million in cash. In connection
with the financing of this transaction, we received a $300,000 consulting fee.
In June 2002, we sold a mortgage loan having a book value of $1.0
million to RAIT for $1.8 million, recognizing a gain of $757,000.
We, along with an unaffiliated co-venturer, have organized a venture to
acquire approximately $300.0 million of Trust Preferred Securities issued by
financial institutions. The equity portion of this program closed in June 2002
and raised $27.4 million from a group of limited partner investors (including
$2.8 million invested by us). We will receive administrative and collateral
management fees for co-managing the venture, and will earn and receive a return
on our limited partner investment. We will also receive a carried interest in
the venture. The venture was originated and developed in large part by Daniel
Cohen, whose company will continue to provide consulting services to us in
connection with the venture and will receive 10% of the cash received by us. In
addition, Mr. Cohen's company will be reimbursed for expenses, including
salaries and overhead, incurred on behalf of the venture (of which $250,000 has
already been paid, and an additional $150,000 was reimbursed by the venture).
Daniel Cohen is a director of the Company, the son of the Company's chief
executive officer and the brother of the Company's chief operating officer.
In connection with the Supplemental Employee Retirement Plan
established pursuant to our employment agreement with Edward E. Cohen, our
chairman and chief executive officer, we entered into a split-dollar insurance
arrangement under which we pay a portion of the premiums under a life insurance
policy with respect to Mr. Cohen, with reimbursement of such premiums due upon
the occurrence of specified events, including Mr. Cohen's death. Under the
recently enacted Sarbanes-Oxley Act of 2002, the future payment of premiums by
us under this arrangement may be deemed to be a prohibited loan by us to Mr.
Cohen. Since the next premium payment under this arrangement is not due until
April 2003, we have deferred any decision relating to this arrangement until the
application of the Sarbanes-Oxley Act has been clarified. We cannot predict the
effect, if any, that cancellation of the arrangement might entail.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited) - (Continued)
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to bad debts, deferred tax assets and liabilities, goodwill and
identifiable intangible assets, and certain accrued liabilities. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. For a detailed
discussion on the application of these and other accounting policies, see Note 1
of the "Notes to the Consolidated Financial Statements" in Item 8 of our 10-K
Report for the fiscal year ended September 30, 2001.
Accounts Receivable and Investments in Real Estate Loans and Allowance for
Possible Losses
Credit extension, monitoring, and collection are performed by each of
our business segments. In energy, we also perform ongoing credit evaluations of
our customers and adjust credit limits based upon payment history and the
customer's current credit worthiness, as determined by our review of our
customer's credit information. We extend credit on an unsecured basis to many of
our energy customers.
We continuously monitor collections and payments from our
borrowers/customers and maintain a provision for estimated losses based upon our
historical experience and any specific borrower/customer collection issues that
we have identified. Accounts and loans receivable are reduced by an allowance
for amounts that may become uncollectible in the future. Such allowances can be
either specific to a particular borrower/customer or general to all
borrowers/customers in each of our two business segments. As of June 30, 2002
and September 30, 2001, we had accounts and notes receivable and investments in
real estate loans of $197.3 million and $207.9 million, net of allowance for
possible losses of $ $3.0 million and $2.6 million, respectively. We believe our
allowance for possible losses is adequate at June 30, 2002. However, an adverse
change in the facts and circumstances with regard to one of our larger loans
could cause us to experience a loss in excess of our allowance. At June 30,
2002, our credit evaluations have indicated that we had no need for an allowance
for possible losses for our oil and gas receivables.
We believe the level of our allowance for possible losses is reasonable
based on our experience and our analysis of the net realizable value of our
receivables at June 30, 2002. We cannot guarantee that we will continue to
experience the same loss rates that we have experienced in the past since
adverse changes in the oil and gas and real estate markets, or changes in the
liquidity or financial position of our borrowers/customers, could have a
material adverse effect on the collectibility of our receivables and our future
operating results. If losses exceed established allowances, our results of
operation and financial condition may be adversely affected.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited) - (Continued)
Critical Accounting Policies - (Continued)
Successful Efforts Method Of Accounting
We account for our oil and gas exploration and development activities
utilizing the successful efforts method of accounting. Under this method, costs
of productive exploratory wells, development dry holes and productive wells and
undeveloped leases are capitalized. Oil and gas lease acquisition costs are also
capitalized. Exploration costs, including personnel costs, certain geological
and geophysical expenses and delay rentals for oil and gas leases, are charged
to expense as incurred. Exploratory drilling costs are initially capitalized,
but such costs are charged to expense if and when the well is determined not to
have found reserves in commercial quantities. In most cases, a gain or loss is
recognized for sales of producing properties.
The application of the successful efforts method of accounting requires
management's judgment to determine the proper designation of wells as either
developmental or exploratory, which will ultimately determine the proper
accounting treatment of the costs incurred. The results from a drilling
operation can take considerable time to analyze, and the determination that
commercial reserves have been discovered requires both judgment and industry
experience. Wells may be completed that are assumed to be productive and
actually deliver oil and gas in quantities insufficient to be economic, which
may result in the abandonment of the wells at a later date. The evaluation of
oil and gas leasehold acquisition costs requires management's judgment to
estimate the fair value of exploratory costs related to drilling activity in a
given area. Drilling activities in an area by other companies may also
effectively impair leasehold positions.
Reserve Estimates
Our estimates of our proved natural gas and oil reserves and future net
revenues from them are based upon reserve analyses that rely upon various
assumptions, including those required by the SEC, as to natural gas and oil
prices, drilling and operating expenses, capital expenditures, taxes and
availability of funds. Any significant variance in these assumptions could
materially affect the estimated quantity of our reserves. As a result, our
estimates of our proved natural gas and oil reserves are inherently imprecise.
Actual future production, natural gas and oil prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable
natural gas and oil reserves may vary substantially from our estimates or
estimates contained in the reserve reports and may affect our ability to pay the
notes. Our properties also may be susceptible to hydrocarbon drainage from
production by other operators on adjacent properties. In addition, our proved
reserves may be subject to downward or upward revision based upon production
history, results of future exploration and development, prevailing natural gas
and oil prices, mechanical difficulties, governmental regulation and other
factors, many of which are beyond our control.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited) - (Continued)
Critical Accounting Policies - (Continued)
Impairment of Oil and Gas Properties
We review our producing oil and gas properties for impairment on an
annual basis and whenever events and circumstances indicate a decline in the
recoverability of their carrying value. We estimate the expected future cash
flows from our oil and gas properties and compares such future cash flows to the
carrying amount of the oil and gas properties to determine if the carrying
amount is recoverable. If the carrying amount exceeds the estimated undiscounted
future cash flows, we will adjust the carrying amount of the oil and gas
properties to their fair value in the current period. The factors used to
determine fair value include, but are not limited to, estimates of reserves,
future production estimates, anticipated capital expenditures, and a discount
rate commensurate with the risk associated with realizing the expected cash
flows projected. Given the complexities associated with oil and gas reserve
estimates and the history of price volatility in the oil and gas markets, events
may arise that will require us to record an impairment of our oil and gas
properties and there can be no assurance that such impairments will not be
required in the future.
Business Combinations
Our energy operations have grown substantially through the acquisition
of several companies. These acquisitions were accounted for using the purchase
method of accounting, and recent accounting pronouncements require that all
future acquisitions be accounted for using the purchase method.
Under the purchase method, the acquiring company adds to its balance
sheet the estimated fair values of the acquired company's assets and
liabilities. Any excess of the purchase price over the fair values of the
tangible and intangible net assets acquired is recorded as goodwill. As of
January 1, 2002, the accounting for goodwill has changed. In prior years,
goodwill was amortized. As of January 1, 2002, goodwill and other intangibles
with an indefinite useful life are no longer amortized, but instead are assessed
for impairment at least annually. We have recorded goodwill in connection with
several acquisitions of assets. There can be no assurance that we may not do so
in the future.
There are various assumptions made by us in determining the fair values
of an acquired company's assets and liabilities. The most significant
assumptions, and the ones requiring the most judgment, involve the estimated
fair values of the oil and gas properties acquired. To determine the fair values
of these properties, we prepare estimates of oil and natural gas reserves. These
estimates are based on work performed by our engineers and outside petroleum
reservoir consultants. The judgments associated with the estimation of reserves
are described earlier in this section. The fair value of the estimated reserves
acquired in a business combination is then calculated based on our estimates of
future oil and natural gas prices. Our estimates of future prices are based on
our analysis of pricing trends. Our estimates of future prices are applied to
the estimated reserve quantities acquired to arrive at estimates of future net
revenues. For estimated proved reserves, the future net revenues are then
discounted to derive a fair value for such reserves. We also apply these same
general principles in arriving at the fair value of unproved reserves acquired
in a business combination. These unproved reserves are generally classified as
either probable or possible reserves. Because of their very nature, probable and
possible reserve estimates are less precise than those of proved reserves.
Generally, in our business combinations, the determination of the fair values of
oil and gas properties requires more judgment than the estimates of fair values
for other acquired assets and liabilities.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited) - (Continued)
Critical Accounting Policies - (Continued)
Future Development and Abandonment Costs
Future development costs include costs incurred to obtain access to
proved reserves, including drilling costs and the installation of production
equipment. Future abandonment costs include costs to dismantle and relocate or
dispose of our wells and related structures and restoration costs of land. We
develop estimates of these costs for each of our properties based upon the type
of production structure, depth of water, reservoir characteristics, depth of the
reservoir, market demand for equipment, currently available procedures and
consultations with construction and engineering consultants. Because these costs
typically extend many years into the future, estimating these future costs is
difficult and requires management to make estimates and judgments that are
subject to future revisions based upon numerous factors, including changing
technology and the political and regulatory environment.
Goodwill and Other Long-Lived Assets
We make estimates regarding the fair value of our reporting units in
assessing potential impairment of goodwill. In addition, we make estimates
regarding future undiscounted cash flows from the future use of other long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of a long-lived asset may not be recoverable.
In assessing impairment of goodwill, we use estimates and assumptions
in estimating the fair value of reporting units. If under these estimates and
assumptions we determine that the fair value of a reporting unit has been
reduced, the reduction is realized as an "impairment" of goodwill. However,
future results could differ from the estimates and assumptions we use. Events or
circumstances which might lead to an indication of impairment of goodwill would
include, but might not be limited to, prolonged decreases in expectations of
long-term well servicing and/or drilling activity or rates brought about by
prolonged decreases in natural gas or oil prices, changes in government
regulation of the natural gas and oil industry or other events which could
affect the level of activity of exploration and production companies.
In assessing impairment of long-lived assets other than goodwill, where
there has been a change in circumstances indicating that the carrying amount of
a long-lived asset may not be recoverable, we have estimated future undiscounted
net cash flows from the use of the asset based on actual historical results and
expectations about future economic circumstances, including natural gas and oil
prices and operating costs. Our estimate of future net cash flows from the use
of an asset could change if actual prices and costs differ due to industry
conditions or other factors affecting our performance.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Unaudited) - (Continued)
Recently Issued Financial Accounting Standards
Recently FASB issued SFAS 143 and SFAS 144. SFAS 143 establishes
requirements for the accounting for removal costs associated with asset
retirements and SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 143 is effective for fiscal
years beginning after June 15, 2002, with earlier adoption encouraged, and SFAS
144 is effective for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. We are currently assessing the impact of SFAS
143 on our consolidated financial statements. The adoption of SFAS 144 resulted
in the classification of our investment in Optiron as a discontinued operation.
In May 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" as
issued. SFAS 145 rescinds the automatic treatment of gains and losses from
extinguishments of debt as extraordinary unless they meet the criteria for
extraordinary items as outlined in Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 145 also requires sale-leaseback accounting for
certain lease modifications that have economic effects similar to a
sale-leaseback transaction and makes various corrections to existing
pronouncements. The adoption of SFAS 145 did not have a material effect on our
consolidated financial position or results of operations.
In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities" was issued. SFAS 146 is effective for exit or disposal
activities initiated after December 31, 2002. We have not yet adopted SFAS 146
nor determined the effect of the adoption of SFAS 146 on our consolidated
financial position or results of operations.
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. We are exposed to various market risk factors such as
fluctuating interest rates and changes in commodity prices. These risk factors
can impact results of operations, cash flows and financial position. We manage
these risks through regular operating and financing activities and periodically
use derivative financial instruments such as forward contracts and interest rate
cap and swap agreements.
The following analysis presents the effect on our earnings, cash flows
and financial position as if the hypothetical changes in market risk factors
occurred on June 30, 2002. Only the potential impacts of hypothetical
assumptions are analyzed. The analysis does not consider other possible effects
that could impact the business.
Energy. At June 30, 2002, the amount outstanding under a revolving loan
attributable to our energy operations increased to $42.8 million from $41.2
million at September 30, 2001. The weighted average interest rate for this
facility decreased from 5.67% at September 30, 2001 to 4.6% at June 30, 2002 due
to a decrease in market index rates used to calculate the facility's interest
rates. Holding all other variables constant, if interest rates hypothetically
increased or decreased by 10%, our net income would change by approximately
$200,000.
We have a $10.0 million revolving credit facility to fund the expansion
of Atlas Pipeline Partners' existing gathering systems and the acquisitions of
other gas gathering systems. In the nine months ended June 30, 2002, we drew
$1.7 under this facility. The balance outstanding as of June 30, 2002 is $3.7
million. At June 30, 2002, the weighted average interest rate was 3.4%. A
hypothetical 10% change in the average interest rate applicable to this debt
would result in an immaterial change in our earnings, cash flow and financial
position.
Commodity Price Risk. Our major market risk exposure in commodities is
the pricing applicable to our gas and oil production. Realized pricing is
primarily driven by the prevailing worldwide prices for crude oil and spot
market prices applicable to U.S. natural gas production. Pricing for gas and oil
production has been volatile and unpredictable for many years. We periodically
enter into financial hedging activities with respect to a portion of our
projected gas production. We recognize gains and losses from the settlement of
these hedges in gas revenues when the associated production occurs. The gains
and losses realized as a result of hedging are substantially offset in the
market when we deliver the associated natural gas. We do not hold or issue
derivative instruments for trading purposes. Through our hedges, we seek to
provide a measure of stability in the volatile environment of natural gas
prices. Our risk management objective is to lock in a range of pricing for
expected production volumes. This allows us to forecast future earnings within a
predictable range.
34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (Continued)
We set forth in the following table our natural gas hedge transactions
in place as of June 30, 2002. The total fiscal 2002 hedged natural gas volumes
represent approximately 8% of our fiscal 2001 total gas production. A 10%
variation in the market price of natural gas from its levels at June 30, 2002
would not have a material impact on our net assets, net earnings or cash flows
as derived from commodity option contracts.
Weighted
Average
Volumes Settlement
Natural Gas Settlement Date Price Unrealized
Open contracts (Dth) Quarter Ended Per Dth Gains (Losses)
-------------- ----------- ------------------------ ------------ --------------
20 56,000 September 2002 $ 3.18 $ (4,600)
19 53,200 December 2002 $ 3.30 (18,100)
27 75,600 March 2003 $ 3.51 (30,500)
83 232,400 June 2003 $ 3.48 (58,200)
81 226,800 September 2003 $ 3.56 (57,600)
--- ----------- -----------
230 644,000 $ 3.47 $ (169,000)
=== =========== =========== ===========
Real Estate Finance. The following information is based on our loans
that are not interest rate sensitive. During the nine months ended June 30,
2002, our outstanding loans receivable (to our interest) decreased $437,000
(.15%) to $291.9 million in the aggregate and the carried cost of our loans
decreased $5.5 million (3%) to $184.2 million in the aggregate. The principal
balance of related senior lien interests decreased $18.4 million (8%) to $202.3
million in the aggregate. These changes were principally attributable to the
repayment of two senior lien interests and the resolution of two loans.
The interest rate payable with respect to the senior lien interest
underlying one loan in our portfolio that may be deemed to be interest rate
sensitive remained unchanged due to our purchase of an interest rate swap which
locked in the interest pay rate at 8.8%. Although the stated interest rate on
the loan continues to fluctuate over LIBOR, we pay only the 8.8% locked-in rate.
If the effective rate for a particular payment period is greater than the
locked-in rate, we receive the benefit of this difference.
The interest rates on our real estate revolving lines of credit, which
are at the prime rate minus 1% for the outstanding $6.4 million line at Hudson
United Bank and at prime for the outstanding $13.8 million and $5.0 million
lines of credit at Sovereign Bank, decreased during the period ended June 30,
2002 because there were three decreases in the defined prime rate. This defined
rate was the "prime rate" as reported in The Wall Street Journal (4.75% at June
30, 2002). A hypothetical 10% change in the average interest rate applicable to
these lines of credit would change our net income by approximately $130,000.
We also have a $10.0 million term loan agreement. The loan bears
interest at the three month LIBOR rate plus 350 basis points adjusted annually.
Principal and interest is payable monthly based on a five year amortization
schedule maturing on October 31, 2006. At June 30, 2002, $8.3 million was
outstanding on this loan at an interest rate of 5.6%. A hypothetical 10% change
in the average interest rate applicable to this loan would change our net
income by approximately $50,000.
In June 2002, we established a $5.0 million revolving line of credit
with Commerce Bank. The facility has a term of two years and bears interest at
one of two rates (elected at the borrower's option); (i) the prime rate, or (ii)
LIBOR plus 250 basis points; both of which are subject to a floor of 5.5% and a
ceiling of 9.0%. As of June 30, 2002, we had no outstanding borrowings under
this facility.
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (Continued)
In June 2002, LEAF Financial Corporation, our equipment-leasing
subsidiary, entered into a $10.0 million secured revolving credit facility with
National City Bank. The facility is guaranteed by us and has a term of 364 days.
Outstanding loans will bear interest at one of two rates (elected at borrower's
option); (i) the lender's prime rate plus 200 basis points, or (ii) LIBOR plus
300 basis points. As of June 30, 2002, the balance outstanding was $1.2 million
at an average interest rate of 4.75%. A hypothetical 10% change in the average
interest rate on this facility would have an immaterial effect on our earnings,
cash flow and financial position.
Due to the current interest rate environment, we have been negotiating
with our senior lienholders to reduce the interest rates on our senior liens. In
the nine months ended June 30, 2002, we have negotiated interest rate reductions
with three of our senior participants.
36
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a defendant, together with certain of our officers and directors
and our independent auditor, Grant Thornton LLP, in consolidated actions that
were instituted on October 14, 1998 in the U.S. District Court for the Eastern
District of Pennsylvania by stockholders, putatively on their own behalf and as
class actions on behalf of similarly situated stockholders, who purchased shares
of our common stock between December 17, 1997 and February 22, 1999. The
consolidated amended class action complaint seeks damages in an unspecified
amount for losses allegedly incurred as the result of misstatements and
omissions allegedly contained in our periodic reports and a registration
statement filed with the SEC. We have agreed in principle to settle this matter
for a maximum of $7.0 million, of which $5.0 million will be paid by two of our
directors' and officers' liability insurers. We will seek to obtain the balance
of $2.0 million through an action against a third insurer who has not agreed to
participate in the settlement. Plaintiffs have agreed in principle to reduce the
settlement amount by 50% of the amount by which the $2.0 million exceeds the net
recovery from the insurer.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company held on April 29,
2002, the stockholders elected certain directors to serve until the 2005 Annual
Meeting of Stockholders and ratified the adoption of the Company's 2002 Key
Employee Stock Option Plan and 2002 Non-Employee Director Deferred Stock and
Deferred Compensation Plan.
For Against Abstained Withheld
------------ ------- --------- --------
Election as a director of the Company of:
Carlos Campbell............................................... 15,250,148 - - 964,416
Edward E. Cohen............................................... 14,590,082 - - 1,624,482
Scott F. Schaeffer............................................ 15,252,676 - - 961,888
Approval of the 2002 Key Employee Stock Option Plan.............. 12,645,870 3,513,527 55,166 -
Approval of the 2002 Non-Employee Director Deferral
and Deferred Compensation Plan................................ 12,999,468 3,158,753 56,342 -
37
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
----------- -----------
2.0 Purchase Agreement among New Vulcan Coal Holdings, L.L.C., AIC, Inc., Viking
Resources Corporation, Resource Energy, Inc., Atlas Energy Group, Inc., Atlas
Resources, Inc. and REI-NY, Inc. (1)
3.1 Restated Certificate of Incorporation of Resource America (2)
3.2 Amended and Restated Bylaws of Resource America (2)
4.1 Indenture, dated as of July 22, 1997, between Resource America and The Bank of
New York, as Trustee, with respect to Resource America's 12% Senior Notes due
2004 (3)
10.1 Contribution Agreement among Vulcan Intermediary, L.L.C., New Vulcan Coal Holding,
L.L.C., Atlas Pipeline Partners GP, LLC, Atlas Pipeline Partners, L.P. and Resource
America, Inc. (1)
99.1 Certification Pursuant to 18 U.S.C., Section 1350, as Adopted Pursuant to Section
906 of The Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C., Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
- ---------------
(1) Filed previously as an exhibit to our current report on Form 8-K dated
January 22, 2002 and by this reference incorporated herein.
(2) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 and by this reference incorporated herein.
(3) Filed previously as an exhibit to our Registration Statement on Form S-4
(Registration No. 333-40231) and by this reference incorporated herein.
(b) Reports on Form 8-K:
None
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESOURCE AMERICA, INC.
(Registrant)
Date: August 14, 2002 By: /s/ Steven J. Kessler
--------------- ---------------------
STEVEN J. KESSLER
Senior Vice President and
Chief Financial Officer
Date: August 14, 2002 By: /s/ Nancy J. McGurk
--------------- -------------------
NANCY J. McGURK
Vice President-Finance and
Chief Accounting Officer
39