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UNITED STATES
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 December 31, 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)
Registrant's telephone number, including area code: (215) 546-5005
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 shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
17,160,500 Shares February 3, 2003
RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 2002 (Unaudited)
and September 30, 2002.................................................................. 3
Consolidated Statements of Income (Unaudited)
Three Months Ended December 31, 2002 and 2001........................................... 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
Three Months Ended December 31, 2002.................................................... 5
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended December 31, 2002 and 2001........................................... 6
Notes to Consolidated Financial Statements (Unaudited)
December 31, 2002....................................................................... 7 - 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................... 16 - 24
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 25 - 27
Item 4. Controls and Procedures..................................................................... 27
PART II OTHER INFORMATION
Item 5. Other Information............................................................................... 28
Item 6. Exhibits and Reports on Form 8-K................................................................ 28 - 29
SIGNATURES................................................................................................ 30
CERTIFICATIONS............................................................................................ 31 - 32
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESOURCE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, September 30,
2002 2002
------------ -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 44,041 $ 25,736
Accounts and notes receivable............................................. 27,332 16,060
Assets held for disposal.................................................. - 5,488
Prepaid expenses.......................................................... 3,038 2,696
---------- ----------
Total current assets.................................................... 74,411 49,980
Investments in real estate loans and ventures (less allowance for
possible losses of $3,853 and $3,480)..................................... 200,450 202,423
Investment in RAIT Investment Trust........................................... 27,485 29,580
Property and equipment:
Oil and gas properties and equipment (successful efforts)................. 129,724 126,983
Gas gathering and transmission facilities................................. 29,371 28,091
Other..................................................................... 8,541 8,390
---------- ----------
167,636 163,464
Less - accumulated depreciation, depletion and amortization................... (46,917) (44,287)
---------- ----------
Net property and equipment.............................................. 120,719 119,177
Goodwill...................................................................... 37,471 37,471
Other assets.................................................................. 34,673 28,867
---------- ----------
$ 495,209 $ 467,498
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................... $ 8,499 $ 4,320
Accounts payable.......................................................... 16,346 12,378
Accrued interest.......................................................... 3,730 1,760
Liabilities associated with assets held for disposal...................... - 11,317
Accrued liabilities....................................................... 9,495 9,808
Estimated income taxes.................................................... - 893
Deferred revenue on drilling contracts.................................... 22,194 4,948
---------- ----------
Total current liabilities............................................... 60,264 45,424
Long-term debt:
Senior.................................................................... 65,336 65,336
Non-recourse.............................................................. 76,970 68,220
Other..................................................................... 23,703 17,634
---------- ----------
166,009 151,190
Liabilities associated with assets held for disposal.......................... - 3,144
Deferred revenue and other liabilities........................................ 1,174 1,074
Deferred income taxes......................................................... 15,376 13,733
Minority interest............................................................. 19,164 19,394
Commitments and contingencies................................................. - -
Stockholders' equity:
Preferred stock, $1.00 par value: 1,000,000 authorized shares............. - -
Common stock, $.01 par value; 49,000,000 authorized shares................ 250 250
Additional paid-in capital................................................ 223,766 223,824
Less treasury stock, at cost.............................................. (76,330) (74,828)
Less loan receivable from Employee Stock Ownership Plan ("ESOP").......... (1,193) (1,201)
Accumulated other comprehensive income.................................... 5,947 5,911
Retained earnings......................................................... 80,782 79,583
---------- ----------
Total stockholders' equity.............................................. 233,222 233,539
---------- ----------
$ 495,209 $ 467,498
========== ==========
See accompanying notes to consolidated financial statements
3
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share data)
Three Months Ended
December 31,
--------------------------
2002 2001
--------- ---------
REVENUES:
Energy.................................................................... $ 17,960 $ 28,757
Real estate finance....................................................... 3,159 3,684
Interest and other........................................................ 2,268 1,341
--------- ---------
23,387 33,782
COSTS AND EXPENSES:
Energy.................................................................... 10,986 20,601
Real estate finance....................................................... 846 523
General and administrative................................................ 1,598 1,266
Depreciation, depletion and amortization.................................. 2,983 2,797
Interest.................................................................. 3,338 3,315
Provision for possible losses............................................. 373 150
Minority interest in Atlas Pipeline Partners, L.P......................... 645 753
--------- ---------
20,769 29,405
Income from continuing operations before income taxes......................... 2,618 4,377
Provision for income taxes.................................................... 837 1,447
--------- ---------
Income from continuing operations............................................. 1,781 2,930
Discontinued operations:
Loss on discontinued operations, net of income tax benefit of $354........ - (741)
--------- ---------
Net income................................................................ $ 1,781 $ 2,189
========= =========
Net income (loss) per common share - basic:
From continuing operations.................................................... $ .10 $ .17
Discontinued operations....................................................... - (.04)
--------- ---------
Net income per common share - basic........................................... $ .10 $ .13
========= =========
Weighted average common shares outstanding.................................... 17,369 17,432
========= =========
Net income (loss) per common share - diluted:
From continuing operations.................................................... $ .10 $ .17
Discontinued operations....................................................... - (.05)
--------- ---------
Net income per common share - diluted......................................... $ .10 $ .12
========= =========
Weighted average common shares outstanding.................................... 17,647 17,749
========= =========
See accompanying notes to consolidated financial statements
4
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 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, 2002.................. 25,044,066 $ 250 $ 223,824 (7,623,198) $ (74,828) $ (1,201)
Treasury shares issued.................... (58) 4,503 95
Purchase of treasury shares............... (202,950) (1,597)
Other comprehensive income................
Cash dividends ($.033 per share)..........
Repayment of ESOP Loan.................... 8
Net income................................
-------------------------------------------------------------------------------------
Balance, December 31, 2002................ 25,044,066 $ 250 $ 223,766 (7,821,645) $ (76,330) $ (1,193)
========== ========= ========== ========== ========== =========
Accumulated
Other Totals
Comprehensive Retained Stockholders'
Income Earnings Equity
----------------------------------------------
Balance, October 1, 2002.................. $ 5,911 $ 79,583 $ 233,539
Treasury shares issued.................... 37
Purchase of treasury shares............... (1,597)
Other comprehensive income................ 36 36
Cash dividends ($.033 per share).......... (582) (582)
Repayment of ESOP Loan.................... 8
Net income................................ 1,781 1,781
----------------------------------------------
Balance, December 31, 2002................ $ 5,947 $ 80,782 $ 233,222
============ ========== ===========
See accompanying notes to consolidated financial statements
5
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
December 31,
--------------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................... $ 1,781 $ 2,189
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization.................................. 2,983 2,797
Amortization of discount on senior notes and deferred finance costs....... 333 251
Provision for possible losses............................................. 373 150
Minority interest in Atlas Pipeline Partners, L.P......................... 645 753
Loss on discontinued operations........................................... - 741
Non-cash compensation..................................................... 36 83
Deferred income taxes..................................................... 1,573 390
Accretion of discount..................................................... (695) (1,201)
Collection of interest.................................................... 91 -
(Gain) loss on asset dispositions......................................... (1,787) 14
Property impairments and abandonments..................................... 6 6
Changes in operating assets and liabilities .................................. 10,474 (1,616)
--------- ---------
Net cash provided by operating activities..................................... 15,813 4,557
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................................... (4,185) (3,957)
Principal payments on notes receivable........................................ 3,764 687
Proceeds from sale of assets.................................................. 3,407 5
Increase in other assets...................................................... (5,963) (1,996)
Investments in real estate loans and ventures................................. (1,160) (6,534)
Decrease in other liabilities................................................. (72) (50)
--------- ---------
Net cash used in investing activities......................................... (4,209) (11,845)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings.................................................................... 42,695 49,083
Principal payments on borrowings.............................................. (26,828) (48,768)
Dividends paid to minority interest of Atlas Pipeline Partners, L.P........... (875) (973)
Dividends paid................................................................ (582) (582)
Repayment of ESOP loan........................................................ 8 8
Treasury shares purchased..................................................... (1,597) (298)
Increase in other assets...................................................... (496) (62)
--------- ---------
Net cash provided by (used in) financing activities........................... 12,325 (1,592)
--------- ---------
Net cash used in discontinued operations...................................... (5,624) (262)
--------- ---------
Increase (decrease) in cash and cash equivalents.............................. 18,305 (9,142)
Cash and cash equivalents at beginning of period.............................. 25,736 48,648
--------- ---------
Cash and cash equivalents at end of period.................................... $ 44,041 $ 39,506
========= =========
See accompanying notes to consolidated financial statements
6
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
(Unaudited)
NOTE 1 - MANAGEMENT'S OPINION REGARDING INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of the Company and its
wholly-owned subsidiaries as of December 31, 2002 and for the three month
periods ended December 31, 2002 and 2001 are unaudited. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted in this Form 10-Q pursuant to the rules
and regulations of the Securities and Exchange Commission. However, in the
opinion of management, these interim financial statements include all the
necessary adjustments to fairly present the results of the interim periods
presented. The unaudited interim consolidated financial statements should be
read in conjunction with the audited financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2002. The results of operations for the three month period ended December 31,
2002 may not necessarily be indicative of the results of operations for the full
fiscal year ending September 30, 2003.
Certain reclassifications have been made to the consolidated financial
statements for the three month period ended December 31, 2001 to conform to the
three month period ended December 31, 2002 presentation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Other Assets
The following table provides information about other assets at the
dates indicated:
December 31, September 30,
2002 2002
---------- ----------
(in thousands)
Contracts acquired (including syndication network), net of
accumulated amortization of $5,355 and $5,038............................. $ 9,029 $ 9,305
Net investment in leases...................................................... 5,781 2,834
Deferred financing costs (net of accumulated amortization
of $4,075 and $3,742)..................................................... 2,262 2,122
Equity method investments in and advances to Trapeza entities................. 6,111 3,085
Investments at lower of cost or market........................................ 9,832 9,832
Other......................................................................... 1,658 1,689
---------- ----------
$ 34,673 $ 28,867
========== ==========
Contracts acquired relate primarily to partnership management and
operating contracts acquired through acquisitions recorded at fair value on
their acquisition dates. The Company amortizes contracts acquired on a declining
balance method, over their respective estimated lives, ranging from five to 30
years. The Company amortizes deferred financing costs over the terms of the
related loans (two to seven years).
7
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2002
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Goodwill
On October 1, 2001, the Company adopted Statement of Financial
Accounting Standards 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 $37.5 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 the impairment is indicated.
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 about other financial
instruments as of the dates indicated:
December 31, 2002 September 30, 2002
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- --------- ----------
(in thousands) (in thousands)
Energy debt................................ $ 58,255 $ 58,255 $ 49,345 $ 49,345
Real estate finance debt................... 32,791 32,791 33,214 33,214
Senior debt................................ 65,336 67,623 65,336 67,623
Other debt................................. 18,126 18,126 7,615 7,615
--------- --------- --------- ---------
$ 174,508 $ 176,795 $ 155,510 $ 157,797
========= ========= ========= =========
8
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2002
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Earnings Per Share
The following table presents a reconciliation of the components used in
the computation of net income per common share-basic and net income per common
share-diluted for the periods indicated:
Three Months Ended
December 31,
------------------------
2002 2001
-------- --------
(in thousands)
Income from continuing operations............................................. $ 1,781 $ 2,930
Loss from discontinued operations............................................. - (741)
-------- --------
Net income.................................................................... $ 1,781 $ 2,189
======== ========
Basic average shares of common stock outstanding.............................. 17,369 17,432
Dilutive effect of stock option and award plans............................... 278 317
-------- --------
Dilutive average shares of common stock....................................... 17,647 17,749
======== ========
Comprehensive Income
The following table presents comprehensive income (loss) for the
periods indicated:
Three Months Ended
December 31,
------------------------
2002 2001
-------- --------
(in thousands)
Net income.................................................................... $ 1,781 $ 2,189
Other comprehensive income (loss):
Unrealized income on investment, net of taxes of $89 and $206............. 248 400
Unrealized (loss) income on natural gas futures contracts,
net of taxes of $95 and $39............................................. (212) 73
-------- --------
36 473
-------- --------
Comprehensive income.......................................................... $ 1,817 $ 2,662
======== ========
Recently Issued Financial Accounting Standard
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statements of Financial Accounting Standards, "Accounting for Stock-Based
Compensation - Transition and Disclosure" No. 148 ("SFAS 148"). SFAS 148, which
is generally effective for fiscal years ending after December 15, 2002 and, as
to certain disclosure requirements, for interim periods beginning after December
15, 2002 the Company does not believe the adoption of SFAS 148 will have a
material effect on its consolidated financial position or results of operations.
9
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2002
(Unaudited)
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
The Company considers temporary investments with a maturity at the date
of acquisition of 90 days or less to be cash equivalents.
Supplemental disclosure of cash flow information:
Three Months Ended
December 31,
----------------------
2002 2001
------- -------
(in thousands)
Cash paid during the period for:
Interest.................................................................. $ 1,035 $ 891
Income taxes.............................................................. $ - $ 1,500
Non-cash activities:
Receipt of a note in satisfaction of a real estate loan sale.............. $ 1,350 $ -
NOTE 4 - INVESTMENTS IN REAL ESTATE LOANS AND VENTURES
The Company primarily focuses its real estate activities on managing
its existing real estate loan portfolio. In addition, one real estate
partnership which we sponsored is in the offering phase. Real estate loans
generally were acquired at discounts from both their face value and the
appraised value of the properties underlying the loans. Cash received by the
Company for payment on each real estate loan is allocated between principal and
interest. The Company also 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. This accretion of discount amounted to $695,000 and $1.2
million during the three months ended December 31, 2002 and 2001, respectively.
As the Company sells senior lien interests or receives funds from refinancings
of such loans by the borrower, a portion of the cash received is employed to
reduce the cumulative accretion of discount included in the carrying value of
the Company's investments in real estate loans.
At December 31, 2002, the Company held real estate loans having an
aggregate face value of $616.6 million, which were being carried at an aggregate
cost of $186.4 million, including cumulative accretion. 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
December 31,
--------------------------
2002 2001
--------- ---------
(in thousands)
Loan balance, beginning of period............................................. $ 187,542 $ 192,263
New loan...................................................................... 1,350 -
Addition to existing loans.................................................... 1,160 6,261
Accretion of discount (net of collection of interest)......................... 695 1,201
Collections of principal...................................................... (4,393) -
--------- ---------
Loan balance, end of period................................................... 186,354 199,725
Real estate ventures balance, end of period................................... 17,949 16,723
Allowances for possible losses................................................ (3,853) (2,679)
--------- ---------
Balance, loans and ventures, end of period.................................... $ 200,450 $ 213,769
========= =========
10
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2002
(Unaudited)
NOTE 4 - INVESTMENTS IN REAL ESTATE LOANS AND VENTURES - (Continued)
The following is a summary of activity in the Company's allowance for
possible losses related to real estate loans and ventures for the periods
indicated:
Three Months Ended
December 31,
--------------------------
2002 2001
--------- ---------
(in thousands)
Balance, beginning of period.................................................. $ 3,480 $ 2,529
Provision for possible losses................................................. 373 150
--------- ---------
Balance, end of period........................................................ $ 3,853 $ 2,679
========= =========
NOTE 5 - DEBT
Total debt consists of the following:
December 31, September 30,
2002 2002
------------ -------------
(in thousands)
Senior debt................................................................... $ 65,336 $ 65,336
Non-recourse debt:
Energy:
Revolving and term bank loans........................................... 58,095 49,345
Real estate finance:
Revolving credit facilities............................................. 18,000 18,000
Other................................................................... 875 875
--------- ---------
Total non-recourse debt.............................................. 76,970 68,220
Other debt.................................................................... 32,202 21,954
--------- ---------
174,508 155,510
Less current maturities....................................................... 8,499 4,320
--------- ---------
$ 166,009 $ 151,190
========= =========
In December 2002, the Company's subsidiary, Atlas Pipeline ("the
Partnership"), entered into a $7.5 million credit facility with Wachovia Bank.
This facility replaced a similar $10.0 million facility administered by PNC
Bank. Borrowings under the facility are secured by a lien on and security
interest in all the property of the Partnership and its subsidiaries, including
pledges by the Partnership of the issued and outstanding equity interests in its
subsidiaries. Up to $3.0 million of the facility may be used for standby letters
of credit. No such letters of credit have been issued under the facility. The
revolving credit facility has a term ending in December 2005 and bears interest
at one of two rates, elected at the Partnership's option:
o the base rate plus the applicable margin; or
o the adjusted LIBOR plus the applicable margin.
11
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2002
(Unaudited)
NOTE 5 - DEBT - (Continued)
The base rate for any day equals the higher of the federal funds rate
plus 1/2 of 1% or the Wachovia Bank prime rate. Adjusted LIBOR is LIBOR divided
by 1.00 minus the percentage prescribed by the Federal Reserve Board for
determining the reserve requirement for euro currency funding. The applicable
margin is as follows:
o where utilization of the borrowing base is equal to or less than
50%, the applicable margin is 0.00% for base rate loans and 1.50%
for LIBOR loans;
o where utilization of the borrowing base is greater than 50%, but
equal to or less than 75%, the applicable margin is 0.25% for base
rate loans and 1.75% for LIBOR loans; and
o where utilization of the borrowing base is greater than 75%, the
applicable margin is 0.50% for base rate loans and 2.00% for LIBOR
loans.
The Wachovia credit facility requires the Partnership to maintain
specified net worth and specified ratios of current assets to current
liabilities and debt to EBITDA, and requires it to maintain a specified interest
coverage ratio. The Partnership used this credit facility to pay off our
previous revolving credit facility at PNC Bank. At December 31, 2002, $6.5
million was outstanding under this facility at an interest rate of 2.92%.
In January 2003, the borrowing limit under this facility increased to
$10.0 million through June 2003, the Company is actively seeking to secure the
availability to $15.0 million.
NOTE 6 - 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
the delivery of natural gas.
12
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2002
(Unaudited)
NOTE 6 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - (Continued)
The Company formally documents all relationships between hedging
instruments and the items being hedged, including the Company's risk management
objective and strategy for undertaking the hedging transactions. This includes
matching the natural gas futures and options contracts to the hedged asset. The
Company assesses, both at the inception of the hedge and on an ongoing basis,
whether the derivatives are highly effective in offsetting changes in fair value
of hedged items. When it is determined that a derivative is not highly effective
as a hedge or it has ceased to be a highly effective hedge, due to the loss of
correlation between changes in gas reference prices under a hedging instrument
and actual gas prices, the Company will discontinue hedge accounting for the
derivative and further changes in fair value for the derivative will be
recognized immediately into earnings. Gains or losses on these instruments are
accumulated in other comprehensive income (loss) to the extent that these hedges
are deemed to be highly effective as hedges, and are recognized in earnings in
the period in which the hedged item is recognized in earnings.
At December 31, 2002, the Company had 231 open natural gas futures
contracts related to natural gas sales covering 693,000 dekatherm ("Dth") (net
to the Company) maturing through September 2003 at a combined average settlement
price of $3.58 per Dth. Based on quoted market prices, the fair value of the
Company's open natural gas futures contracts at December 31, 2002, is $3.1
million. 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 sales revenues in the month the gas is sold, unless
the hedges are no longer "highly effective." Gains or losses on futures
contracts are determined as the difference between the contract price and a
reference price, generally prices on NYMEX. The Company's net unrealized loss
related to open NYMEX contracts was approximately $622,500 at December 31, 2002
and $316,600 at September 30, 2002. The unrealized loss, net of applicable
taxes, has been recorded as a liability in the Company's December 31, 2002,
Consolidated Balance Sheets and in Stockholders' Equity as a component of
Accumulated Other Comprehensive Income. The Company recognized a loss of $96,000
on settled contracts for the quarter ended December 31, 2002. No contracts were
settled for the quarter ended December 31, 2001. As of December 31, 2002, all of
the deferred net losses on derivative instruments included in accumulated other
comprehensive income (loss) are expected to be reclassified to earnings during
the next nine months. The Company recognized no gains or losses during the
quarter ended December 31, 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.
13
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2002
(Unaudited)
NOTE 7 - OPERATING SEGMENT INFORMATION
The operating segments reported below are the segments of the Company
for which separate financial information is available and for which segment
operating income or loss amounts are evaluated regularly by management in
deciding how to allocate resources and in assessing performance.
Three Months Ended
December 31,
--------------------------
2002 2001
--------- ---------
(in thousands)
Revenues:
Energy............................... $ 18,025 $ 28,984
Real estate finance.................. 3,159 3,669
Corporate............................ 2,290 1,192
--------- ---------
$ 23,474 $ 33,845
========= =========
Operating profit (loss):
Energy............................... $ 2,964 $ 4,388
Real estate finance.................. 1,474 1,663
Corporate............................ (1,820) (1,674)
--------- ---------
$ 2,618 $ 4,377
========= =========
December 31, September 30,
2002 2002
------------ -------------
(in thousands)
Identifiable assets:
Energy............................... $ 197,077 $ 183,693
Real estate finance.................. 201,637 204,327
Corporate............................ 96,495 79,478
--------- ---------
$ 495,209 $ 467,498
========= =========
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 depreciation, depletion and amortization. The information
presented does not eliminate intercompany transactions of $87,000 and $63,000 in
the three months ended December 31, 2002 and 2001, respectively.
14
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2002
(Unaudited)
NOTE 7 - OPERATING SEGMENT INFORMATION - (Continued)
The Company markets its production on a competitive basis. Gas is sold
under various types of contracts ranging from life-of-the-well to short-term
contracts. The Company is party to a ten-year agreement which expires March 2009
to sell the majority of its existing and future production to First Energy
Services Inc. (FES). Pricing under the contract is established by an index-based
formula which we negotiate annually. Approximately 80% of the Company's current
production was dedicated to the performance of this agreement for the three
month period ending December 31, 2002. Payments from FES are guaranteed by its
parent, First Energy Corporation, a publicly-traded company (NYSE:FE).
The Company anticipates that it will negotiate mutually agreeable
pricing terms for subsequent 12-month periods pursuant to the aforementioned
agreement with FES. Management believes that the loss of any one customer would
not have a material adverse effect as it believes that, under current market
conditions, the Company's production could readily be absorbed by other
purchasers.
NOTE 8 - DISCONTINUED OPERATIONS
In June 2002, the Company adopted a plan to dispose of Optiron
Corporation ("Optiron"). The Company has reduced its 50% interest in Optiron to
10% through a sale to management which was completed in September 2002. In
connection with the sale, the Company forgave $4.3 million of the $5.9 million
of indebtedness owed by Optiron. The remaining $1.6 million was retained by the
Company in the form of a promissory note which is secured by all of Optiron's
assets and by the common stock of Optiron's 90% shareholder. The note bears
interest at the prime rate plus 1% payable monthly; an additional 1% will accrue
until the maturity date of the note in 2022.
In accordance with SFAS No. 144, the results of operations have been
prepared under the financial reporting requirements for discontinued operations,
pursuant to which, all historical results of Optiron are included in the results
of discontinued operations rather than the results of continuing operations for
all periods presented.
Summarized operating results of the discontinued Optiron operations are
as follows:
Three Months Ended
December 31,
---------------------
2002 2001
------ --------
(in thousands)
Loss from discontinued operations before income taxes......................... $ - $ (1,095)
Income tax benefit............................................................ - 354
------ --------
Loss from discontinued operations............................................. $ - $ (741)
====== ========
15
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 certain risks and uncertainties more
particularly described in Item 1, under the caption "Risk Factors", in our
annual report on Form 10-K for fiscal 2002. 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.
Overview of First Quarter of Fiscal 2003
Our operating results and financial condition for the first quarter of
fiscal 2003 reflect the continuing importance to us of our energy operations, as
shown in the following tables:
Revenues as a Percent of Total Revenues (1)
Three Months Ended
December 31,
----------------------------
2002 2001
------ ------
Energy (2)................................... 77% 85%
Real estate finance.......................... 14% 11%
Assets as a Percent of Total Assets (3)
December 31, September 30,
2002 2002
------------ -------------
Energy....................................... 40% 39%
Real estate finance.......................... 41% 44%
- -----------------
(1) We attribute the balance (9% and 4% for the three months ended December
31, 2002 and 2001, respectively) to revenues derived from corporate assets
not allocated to a specific industry segment, including cash, common
shares held in RAIT Investment Trust and other corporate investments.
(2) Energy revenues decreased in the first fiscal quarter ended December 31,
2002 as compared to the first fiscal quarter ended December 31, 2001, as a
result of the timing of drilling funds raised and subsequently converted
to earnings as wells are drilled. We expect this ratio to increase for the
remaining quarters of fiscal 2003.
(3) We attribute the balance (19% and 17% at December 31, 2002 and September
30, 2002, respectively) to corporate assets not attributable to a specific
industry segment, as referred to in (1) above.
16
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
December 31,
---------------------------
2002 2001
-------- --------
(in thousands)
Revenues:
Production.................................. $ 8,069 $ 7,326
Well drilling............................... 6,583 17,981
Well services............................... 1,900 2,098
Transportation.............................. 1,408 1,352
-------- --------
$ 17,960 $ 28,757
======== ========
Costs and expenses:
Production and exploration.................. $ 1,586 $ 2,042
Well drilling............................... 5,725 15,620
Well services............................... 855 917
Transportation.............................. 591 567
Non-direct.................................. 2,229 1,455
-------- --------
$ 10,986 $ 20,601
======== ========
Three Months Ended
December 31,
---------------------------
2002 2001
-------- --------
Revenues (in thousands):
Gas (1)..................................... $ 7,050 $ 6,413
Oil......................................... $ 1,016 $ 908
Production volumes:
Gas (Mcf/day) (1) (2)....................... 19,346 20,577
Oil (Bbls/day) (2).......................... 447 533
Average sales prices:
Gas (per Mmcf) (2).......................... $ 3.96 $ 3.39
Oil (per Bbl)............................... $ 24.71 $ 18.53
Production costs:
As a percent of production revenues......... 19% 22%
Per equivalent Mcfe (2)..................... $ .76 $ .74
- -----------------
(1) Excludes sales of residual gas and sales to landowners.
(2) As used in this discussion, "Mcf" and Mmcf" means thousand cubic feet and
million cubic feet; "Mcfe" and Mmcfe" means thousand cubic feet equivalent
and million cubic feet equivalent, and "Bbls" means barrels. Bbls are
converted to Mcfs equivalent using the ratio of 6 Bbls to one Mcf.
17
Our natural gas revenues were $7.0 million in the first quarter of
fiscal 2003, an increase of $637,000 (10%) from $6.4 million in the first
quarter of fiscal 2002. The increase was due to a 17% increase in the average
sales price of natural gas partially offset by a 6% decrease in production
volumes. The $649,000 increase in gas revenues consisted of $1.1 million
attributable to price increases, partially offset by $449,000 attributable to
volume decreases. We received $3.96 and $3.39 per mcf for our natural gas in the
first quarter of fiscal 2003 and 2002, respectively. As a result, if current
market conditions continue, we believe that our natural gas production revenues
will be higher in the remainder of fiscal 2003 than in fiscal 2002. Natural gas
volume decreases are attributable to constraints on our production throughput
due to both pipeline capacity and inclement weather. Capacity constraints will
be eased in the second quarter of fiscal 2003 upon the completion of an
additional delivery point into an interstate pipeline system.
Our oil revenues were $1.0 million in the first quarter of fiscal 2003,
an increase of $108,000 (12%) from $908,000 in the first quarter of fiscal 2002.
The increase resulted from a 33% increase in the average sales price of oil and
a 16% decrease in production volumes. The $108,000 increase in oil revenues
consisted of $303,000 attributable to price increases, partially offset by
$195,000 attributable to volume decreases. Oil prices were higher in the first
quarter of fiscal 2003 than in fiscal 2002. The prices we have received for our
oil sold in the first quarter of fiscal 2003 have increased to approximately
$25.00 per barrel. The decrease in oil volumes is a result of the natural
production decline inherent in the life of a well. This decline was not offset
by new wells added, as the majority of the wells we have drilled during the past
several years have targeted gas reserves.
Our well drilling revenues and expenses represent the billing and costs
associated with the completion of 37 and 91 net wells for partnerships sponsored
by Atlas America in the first quarter of fiscal 2003 and 2002, respectively. Our
well drilling gross margin was $858,000 in the first quarter of fiscal 2003, a
decrease of $1.5 million from $2.4 million in the first quarter of fiscal 2002
due to a decrease in the number of wells drilled ($1.25 million) and the gross
margin per well ($250,000). The decrease in the number of wells drilled was a
result of an acceleration of the timing of funds raised through our private
investment partnerships and, thus, the drilling of wells. We recognized the
majority of the drilling revenue from our calendar 2002 private investment
partnerships through September 30, 2002. The majority of the revenue associated
with our calendar 2001 private investment partnerships was recognized through
December 31, 2001. We anticipate that drilling revenues for the second quarter
of fiscal 2003 will be greater than the drilling revenues for the second quarter
of fiscal 2002 as a result of an increase in the amount of funds raised in our
calendar 2002 public investment partnership as compared to our calendar 2001
public investment partnership. Demand for drilling equipment and services
increased in the fiscal year ended September 30, 2002, resulting in an increase
in the cost to us of obtaining such equipment and services in the quarter ended
December 31, 2001. These costs have decreased slightly in the first quarter of
fiscal 2003. In fiscal 2002, we changed the structure of our drilling contracts
to a cost-plus basis from a turnkey basis. Cost-plus contracts protect us in an
inflationary environment while limiting our profit margin. We continue to enter
into drilling contracts with gross margin rates of 13% and expect to obtain that
margin through fiscal 2003.
18
Our well services revenues decreased $198,000 (9%) primarily as a
result of a decrease in services provided for third parties in the first quarter
of fiscal 2003 as compared to the first quarter of fiscal 2002. Our well service
expenses decreased $62,000 (7%) in the first quarter of fiscal 2003 as compared
to the first quarter of fiscal 2002. The decrease in fiscal 2003 also resulted
from a reduction in services provided for third parties.
Our production and exploration expenses were $1.6 million in the first
quarter of fiscal 2003, a decrease of $456,000 (22%) from $2.0 million in the
first quarter of fiscal 2002. This decrease resulted primarily from an increase
in credit received for our contribution of leases to our investment partnership,
which offsets our exploration expense.
Our non-direct expenses were $2.2 million in the first quarter of
fiscal 2003, an increase of $774,000 (53%) from $1.5 million in the first
quarter of fiscal 2002. These expenses include, among other things, salaries and
benefits not allocated to a specific energy activity, costs of running our
energy corporate office, partnership syndication activities and outside
services. These expenses are partially offset by reimbursements we receive from
our partnership drilling activities. These reimbursements decreased $670,000 as
a result of 54 less wells drilled in the first quarter of fiscal 2003 as
compared to the first quarter of 2002, discussed earlier. We anticipate that our
reimbursements from our drilling investment partnerships for the second quarter
of fiscal 2003 will be greater than the reimbursements for the second quarter of
fiscal 2002 as a result of an increase in the amount of funds raised in our
calendar 2002 public investment partnership as compared to our 2001 public
investment partnerships. In addition, the cost of running our energy corporate
office, including postage and telephone costs, increased approximately $100,000
as a result of continued growth in our energy operations.
Results of Operations: Real Estate Finance
The following table sets forth certain information relating to the
revenue recognized and costs and expenses incurred in our real estate finance
operations during the periods indicated:
Three Months Ended
December 31,
-------------------------
2002 2001
------- -------
(in thousands)
Revenues:
Interest.................................................................. $ 1,931 $ 2,328
Accreted discount......................................................... 695 1,201
Gain on resolution of loan................................................ 813 -
Equity in (loss) income of unconsolidated real estate investments......... (348) 87
Net rental and fee income................................................. 68 68
------- -------
$ 3,159 $ 3,684
======= =======
Costs and expenses............................................................ $ 846 $ 523
======= =======
Revenues from our real estate finance operations decreased $525,000
(14%), from $3.7 million in the first quarter of fiscal 2002 to $3.2 million in
the first quarter of fiscal 2003. This decrease primarily resulted from the
following:
A decrease of $903,000 (26%) in interest and accreted discount
resulting primarily from the following:
o The sale of two loans, one in January 2002 and one in June 2002,
which decreased interest income by $782,000 in the first quarter
of fiscal 2003 as compared to the first quarter of fiscal 2002.
o The completion of accretion of discount on three loans decreased
interest income by $383,000 in the first quarter of fiscal 2003 as
compared to the first quarter of fiscal 2002.
o An increase of $243,000 in our accretion due to an increase in our
estimated cash flows relating to several properties. These
increases resulted from improvements in general economic
conditions in the areas in which these properties are located,
which enabled the properties to obtain increased current rents or
occupancy rates and thus increased our estimates of cash flows
from these properties.
19
An increase of $813,000 in gain on resolution of a loan in the first
quarter of fiscal 2003 due to the sale of one loan having a book value of $4.2
million for $5.0 million. No loans were sold in the first quarter of fiscal
2002.
A loss of $348,000 from our share of the operating results of our
unconsolidated real estate investments accounted for on the equity method in the
first quarter of fiscal 2003 as compared to income of $87,000 in the first
quarter of fiscal 2002. The loss was the result of an increase in depreciation
and an operating losses on property in which we acquired an interest in March
2002.
Costs and expenses of our real estate finance operations were $846,000
in the first quarter of fiscal 2003, an increase of $323,000 (62%) from $523,000
in the first quarter of fiscal 2002. The increase primarily resulted from
approximately $250,000 in non-recoverable payments made to protect our interests
in certain properties underlying our investments in real estate loans. In
addition, wages and benefits increased $76,000 in the first quarter of fiscal
2003 as a result of the addition of a new president and other personnel in our
real estate subsidiary in anticipation of the expansion of our real estate
operations through the sponsorship of real estate investment partnerships as
well as the on-going management of our existing portfolio of commercial loans
and real estate joint ventures. The one real estate partnership we sponsored in
fiscal 2002 is still in its offering phase and, consequently, did not generate
fees or other revenues for us.
Results of Operations: Other Revenues, Costs and Expenses
Our interest and other income was $2.3 million in the first quarter of
fiscal 2003, an increase of $927,000 (69%) as compared to $1.3 million for the
first quarter of fiscal 2002. The following table sets forth information
relating to interest and other income during the periods indicated:
Three Months Ended
December 31,
---------------------
2002 2001
------- -------
(in thousands)
Interest income............................. $ 251 $ 347
Dividend income............................. 789 804
Gains (losses) on sale of assets............ 974 (14)
Other....................................... 254 204
------- -------
$ 2,268 $ 1,341
======= =======
Interest income decreased $96,000 to $251,000 for the first quarter of
fiscal 2003 from $347,000 for the first quarter of fiscal 2002. The decrease was
primarily due to lower average rates earned on temporary funds invested. Gains
on sale of assets for the first quarter of fiscal 2003 were $974,000, as
compared to a loss of $14,000 for the first quarter of fiscal 2002. This
primarily reflects the sale of 163,500 shares in RAIT Investment Trust from
which we received net proceeds of $3.4 million and a realized a gain of
$969,000.
Our general and administrative expenses increased $332,000 (26%) to
$1.6 million in the first quarter of fiscal 2003, as compared to $1.3 million in
the first quarter of fiscal 2002. This increase primarily resulted from
increases in salaries and benefits due to the addition of personnel.
Our depletion, depreciation and amortization consists mainly of
depletion of oil and gas properties and amortization of contracts acquired. Our
depletion as a percentage of oil and gas production revenues was 24% in the
first quarter of fiscal 2003 compared to 26% in the first quarter of fiscal
2002. The variance from period to period is directly attributable to changes in
our oil and gas reserve quantities, product prices and fluctuations in the
depletable cost basis of oil and gas properties.
The minority interest in Atlas Pipeline Partners represents 48% of the
net earnings of Atlas Pipeline Partners. The minority interest arose from the
sale in February 2000 of our natural gas gathering operations to Atlas Pipeline
Partners and Atlas Pipeline Partners' subsequent initial public offering.
Because we own a 52% interest in Atlas Pipeline Partners, it is included in our
consolidated financial statements and the ownership by the public is shown as a
minority interest.
20
Our provision for possible losses increased $223,000 (149%) to $373,000
in the first quarter of fiscal 2003 as compared to $150,000 in the first quarter
of fiscal 2002. This increase resulted from certain payments for operating
expenses of the properties underlying our loans, including insurance and
property taxes and our assessment of economic conditions in the areas in which
properties underlying our real estate loans are located.
Our effective tax rate decreased to 32% in the first quarter of fiscal
2003 as compared to 33% in the first quarter of fiscal 2002 as a result of a
decrease in certain unfavorable permanent differences, partially offset by a
decrease in tax credits utilized.
Discontinued Operations
In accordance with SFAS 144 "Accounting for the Impairment or Disposal
of Long Lived Assets," our decision in fiscal 2002 to dispose of Optiron
Corporation, our former energy technology subsidiary, resulted in the
presentation of Optiron as a discontinued operation for the three months ended
December 31, 2001. We had held a 50% equity interest in Optiron; as a result of
the disposition, we currently hold a 10% equity interest in Optiron.
Liquidity and Capital Resources
General. For the quarters ended December 31, 2002 and 2001, our major
sources of liquidity have been 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, real estate finance and
corporate credit facilities and the sale of our RAIT shares. We have employed
these funds principally in the expansion of our energy operations, the
repurchase of our common stock and the acquisition of senior lien interests
relating to our real estate loans. The following table sets forth our sources
and uses of cash for the periods indicated:
Three Months Ended
December 31,
---------------------------
2002 2001
------- ---------
(in thousands)
Provided by operations...................... $ 15,813 $ 4,557
Used in investing activities................ (4,209) (11,845)
Provided by (used in) financing activities.. 12,325 (1,592)
Used in discontinued operations............. (5,624) (262)
-------- ---------
$ 18,305 $ (9,142)
======== =========
We had $44.0 million in cash and cash equivalents on hand at December
31, 2002, as compared to $25.7 million at September 30, 2002. Our ratio of
earnings from continuing operations before income taxes, minority interest and
interest expense to fixed charges was 2.0 to 1.0 in the first quarter of fiscal
2003 as compared to 2.6 to 1.0 in the first quarter of fiscal 2002. Our working
capital at December 31, 2002 was $14.1 million, an increase of $9.5 million from
$4.6 million at September 30, 2002. This increase in working capital is due to
an increase in cash at December 31, 2002 due to higher borrowings than at
September 30, 2002, credit availability on our energy line of credit was
increased by $7.5 million in the quarter ended December 31, 2002, we also
borrowed $5.0 million from Commerce Bank in the quarter ended December 31, 2002.
Our long-term debt (including current maturities) to total capital ratio at
December 31, 2002 was 43% as compared to 40% at September 30, 2002.
21
Cash flows from operating activities. Cash provided by operations is an
important source of short-term liquidity for us. It is directly affected by
changes in the price of natural gas and oil, and interest rates as well as our
ability to raise funds for our drilling investment partnerships and the strength
of the market for rentals of the types of properties secured by our real estate
loans. Net cash provided by operating activities increased $11.3 million in the
first quarter of fiscal 2003 to $15.8 million from $4.6 million in the first
quarter of fiscal 2002, as a result of the following:
o Changes in operating assets and liabilities increased operating
cash flow by $12.1 million in the first quarter of fiscal 2003,
compared to the first quarter of fiscal 2002. This increase was
primarily due to an increase of $5.9 million in current
liabilities due to the timing of payments for payables and accrued
interest and an increase of $4.2 million in investor funds raised
in the quarter ended December 31, 2002 as compared to September
30, 2002. In addition, a tax payment of $1.5 million was made in
the quarter ended December 31, 2001. No such tax payment was
required in the quarter ended December 31, 2002.
o Net income from operations in our energy and real estate segments
decreased $1.8 million. Our energy net income decreased primarily
due to the decreased number of wells drilled in the first quarter
of fiscal 2003 compared to the first quarter of fiscal 2002, as we
discussed in "Results of Operations: Energy." In real estate
finance, interest income decreased and costs associated with loans
increased in the first quarter of fiscal 2003 as compared to the
first quarter of fiscal 2002.
Cash flows from investing activities. Net cash used in our investing
activities decreased $7.6 million in the first quarter of fiscal 2003 as
compared to the first quarter of fiscal 2002, as a result of the following:
o Net payments on notes receivable and investments in real estate
loans and ventures increased $8.5 million. Payments received on
real estate investments and ventures are normally dependent on
third party refinancing or from the sale of a loan and vary from
period to period. Additionally, investments in loans and ventures
are unique to each property and will vary from period to period
depending upon a number of factors. In the first quarter of fiscal
2003, we received proceeds of $3.7 million from the resolution of
one loan. In the prior fiscal period we invested $2.9 million in
the acquisition of two participations while additions to existing
loans were $2.2 million greater than in the quarter ended December
31, 2002.
o Proceeds from the sale of assets increased $3.4 million due to the
sale of 163,500 shares of Resource Asset Investment Trust in the
first quarter of fiscal 2003.
o Investments in other assets increased by $4.0 million. For the
first quarter of fiscal 2003 we invested $1.3 million in, and lent
$1.8 million to our Trapeza entities and invested $3.2 million in
leases associated with our equipment leasing subsidiary, LEAF
Financial Corporation ("LEAF"). Offsetting these increases was
$1.9 million in RAIT shares purchased in the quarter ended
December 31, 2001.
Cash flows from financing activities. Net cash provided by our
financing activities increased $13.9 million in the first quarter of fiscal 2003
as compared to the first quarter of fiscal 2002, as a result of the following:
o Net borrowings increased $15.6 million, in part to fund our
drilling investment programs.
o Purchases of treasury shares increased $1.3 million.
Capital Requirements
During the quarter ended December 31, 2002, our capital requirements
related primarily to our investments in our drilling partnerships and pipeline
expansions in which we invested $2.3 million and $1.3 million, respectively. For
the quarter ended December 31, 2002 and the remaining quarters of fiscal 2003 we
funded and expect to fund these capital expenditures through cash on hand,
borrowings under the credit facilities, and from operations. We, through our
energy subsidiaries, have established two credit facilities to facilitate the
funding of our capital expenditures. In December 2002, we obtained an increase
in our borrowing base on our energy credit facility administered by Wachovia
Bank to $52.5 million. In addition, we repaid our $10.0 million PNC Bank credit
facility with a new $7.5 million credit facility with Wachovia Bank. From
January 2003 through June 2003, we have obtained an increase in this facility to
$10.0 million. We are currently seeking to increase this facility on a long term
basis to $15.0 million. We cannot assure you, however, that we will obtain the
increase we seek.
22
The level of capital expenditures we must devote to our energy
operations are dependent upon the level of funds raised through our drilling
investment partnerships. We have budgeted to raise up to $60.0 million in fiscal
2003 through drilling partnerships which we sponsor. We believe cash flow from
operations and amounts available under our credit facilities will be adequate to
fund our contributions to these partnerships. However, the amount of funds we
raise and the level of our capital expenditures will vary in the future
depending on market conditions for natural gas and other factors.
We continuously evaluate acquisitions of gas and oil and pipeline
assets. In order to make any acquisition, we believe we will be required to
access outside capital either through debt or equity placements or through joint
venture operations with other energy companies. There can be no assurance that
we will be successful in our efforts to locate outside capital.
Contractual Obligations and Commercial Commitments
The following tables set forth our obligations and commitments as of
December 31, 2002.
Payments Due By Period
(in thousands)
------------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Contractual cash obligations: Total 1 Year Years Years Years
-------------- -------------- --------------- ------------ -------------
Long-term debt........................... $ 174,508 $ 8,499 $ 164,067 $ 1,942 $ -
Capital lease obligations................ - - - - -
Operating leases......................... 4,720 1,434 2,021 1,157 108
Unconditional purchase obligations....... - - - - -
Other long-term obligations.............. - - - - -
----------- ----------- ----------- ----------- ---------
Total contractual cash obligations....... $ 179,228 $ 9,933 $ 166,088 $ 3,099 $ 108
=========== =========== =========== =========== =========
Amount of Commitment Expiration Per Period
(in thousands)
------------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Other commercial commitments: Total 1 Year Years Years Years
-------------- -------------- --------------- ------------ -------------
Lines of credit........................ $ 6,048 $ 5,048 $ 1,000 $ - $ -
Standby letter of credit............... 905 - 905 - -
Guarantees............................. 3,176 980 2,196 - -
Standby replacement commitments........ 10,533 5,860 4,673 - -
Other commercial commitments........... 194,482 2,979 61,051 3,971 126,481
----------- ----------- ------------ ----------- ---------
Total commercial commitments........... $ 215,144 $ 14,867 $ 69,825 $ 3,971 $ 126,481
=========== =========== ============ =========== =========
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of our assets,
liabilities, revenues and cost and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to provision for possible losses, deferred
tax assets and liabilities, goodwill and identifiable intangible assets, and
certain accrued liabilities. We base our estimates on historical experience and
on various other assumptions that we believe reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
23
We have identified the following policies 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 2
of the "Notes to Consolidated Financial Statements" in our Annual Report on Form
10-K.
Recently Issued Financial Accounting Standard
In December 2002, the Financial Accounting Standards Board, which we
refer to as FASB issued Statement of Financial Accounting Standards, which we
refer to as SFAS 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." SFAS 148, which is generally effective for fiscal years ending
after December 15, 2002 and, as to certain disclosure requirements, for interim
periods beginning after December 15, 2002 we do not believe the adoption of SFAS
148 will have a material effect on our consolidated financial position or
results of operations.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of the following information is to provide
forward-looking quantitative and qualitative information about our potential
exposure to market risks. The term "market risk" refers to the risk of loss
arising from adverse changes in interest rates and oil and gas prices. The
disclosures are not meant to be precise indicators of expected future losses,
but rather indicators of reasonable possible losses. This forward-looking
information provides indicators of how we view and manage our ongoing market
risk exposures. All of our market risk sensitive instruments were entered into
for purposes other than trading.
General
We are exposed to various market risks, principally fluctuating
interest rates and changes in commodity prices. These risks can impact our
results of operations, cash flows and financial position. We manage these risks
through regular operating and financing activities and periodically use
derivative financial instruments.
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 December 31, 2002. Only the potential impacts of hypothetical
assumptions are analyzed. The analysis does not consider other possible effects
that could impact our business.
Energy
Interest Rate Risk. At December 31, 2002, the amount outstanding under
a revolving loan attributable to our energy operations had increased to $51.6
million from $43.7 million at September 30, 2002. The weighted average interest
rate for this facility increased from 3.86% at September 30, 2002 to 4.03% at
December 31, 2002 due to an increase of $7.9 million in prime borrowings (due to
temporary funding needs) which bear interest at a higher rate than our LIBOR
borrowings. Holding all other variables constant, if interest rates
hypothetically increased or decreased by 10%, our net annual income would change
by approximately $141,000.
We have a $7.5 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 quarter ended December 31, 2002, we drew
$895,200 under this facility. The balance outstanding as of December 31, 2002
was $6.5 million. At December 31, 2002, the weighted average interest rate was
2.92%. 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
fluctuations in the pricing of our gas and oil production. Realized pricing is
primarily driven by the prevailing worldwide prices for crude oil and spot
market prices applicable to United States natural gas production. Pricing for
gas and oil production has been volatile and unpredictable for many years. To
hedge exposure to changing natural gas prices we use both non-financial and
financial hedges. Through our hedges, we seek to provide a measure of stability
in the volatile environment of natural gas prices. Our risk management objective
is to lock in a range of pricing for expected production volumes, allowing us to
forecast future earnings within a predictable range.
Non-financial hedges allow us from time to time to "lock in" the sale
price for some of our natural gas production volumes to be delivered in either
the current month or in future months, rather than selling those same production
volumes at contract prices in the month produced. Annually, we negotiate with
certain purchasers to deliver a portion of natural gas produced for the upcoming
twelve months. Most of these contracts are index-based and the price we receive
for our gas changes as the underlying index changes. Through the year, at our
discretion, we are permitted to designate a portion of our negotiated production
volumes to be purchased at the prevailing contract price at that time, for
delivery in either the current month or in future production months. For the
quarter ended December 31, 2002, approximately 56% of produced volumes were sold
in this manner. For the fiscal year ending September 30, 2003, we estimate in
excess of 55% of our produced natural gas volumes will be sold in this manner,
leaving the remaining 45% of our produced volumes to be sold at contract prices
in the month produced or at spot market prices. Considering those volumes
already designated for the fiscal year ending September 30, 2003, and current
indices, a theoretical 10% upward or downward change in the price of natural gas
would result in approximately a 6% change in our projected natural gas revenues.
25
Energy - (Continued)
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.
As of December 31, 2002, we had gas hedges in place covering 693,000
dekatherm maturing through September 30, 2003. We include an adjustment of
$622,500 on our balance sheet to mark these hedges to their fair value. "Fair
value" represents the amount that we estimate we would have realized if we had
terminated the hedges on that date. As these contracts qualify and have been
designated as cash flow hedges, we determine gains and losses on them resulting
from market price changes monthly and reflect them in accumulated other
comprehensive income (loss) until the month in which we sell the hedged
production. At that time, the amount included in accumulated other comprehensive
income (loss) related to the sold production is closed to production revenues.
We determine gains or losses on open and closed hedging transactions as the
difference between the contract price and a reference price, generally closing
prices on NYMEX. Net losses relating to these hedging contracts in the first
quarter of fiscal 2003 and 2002 were $96,000 and $ -0-, respectively.
We set forth in the following table our natural gas hedge transactions
in place as of December 31, 2002. A 10% variation in the market price of natural
gas from its levels at December 31, 2002 would not have a material impact on our
net assets, net earnings or cash flows.
Open Volumes of Settlement Date Weighted Average Unrealized
Contracts Natural Gas (Dth) Quarter Ended Price Per Dth Losses
--------- ----------------- --------------- ---------------- ----------
59 177,000 March 2003 3.56 $ (185,800)
105 315,000 June 2003 3.57 (273,100)
67 201,000 September 2003 3.63 (163,600)
--- ------- -----------
231 693,000 $ 3.58 $ (622,500)
=== ======= ======= ===========
Real Estate Finance
Portfolio Loans and Related Senior Liens. The following information is
based on our loans that are not interest rate sensitive. During the quarter
ended December 31, 2002, our outstanding loans receivable (to our interest)
increased $6.0 million (2%) to $303.3 million in the aggregate and the carried
cost of our loans decreased $1.4 million (.9%) to $147.5 million in the
aggregate. The principal balance of related senior lien interests decreased
$872,000 (.4%) to $201.4 million in the aggregate.
Debt. The interest rates on our real estate and corporate revolving
lines of credit and term loans are at the prime rate minus 1% for the
outstanding $6.4 million under our term loan at Hudson United Bank and at the
prime rate for the outstanding $18.0 million and $5.0 million lines of credit at
Sovereign Bank. These interest rates decreased during the quarter ended December
31, 2002 because there was one decrease in the defined prime rate. This defined
rate was the "prime rate" as reported in The Wall Street Journal (4.25% at
December 31, 2002). A hypothetical 10% change in the average interest rate
applicable to these lines of credit would change our net income by approximately
$102,000.
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 December 31, 2002, $7.5 million was
outstanding on this loan at an interest rate of 4.92%. A hypothetical 10% change
in the average interest rate applicable to this loan would have an immaterial
effect on earnings, cash flow and financial position.
26
Financial Services
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 bear interest at one of two rates, elected at LEAF's option: o
the lender's prime rate plus 200 basis points, or o LIBOR plus 300 basis points.
As of December 31, 2002, the balance outstanding was $5.0 million at an average
interest rate of 4.38%. 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.
Other
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: o the prime rate, or o LIBOR
plus 250 basis points. Each rate is subject to a floor of 5.5% and a ceiling of
9.0%. As of December 31, 2002, the balance outstanding was $5.0 million at an
average rate of 5.5%. 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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated
our disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c)) within 90 days prior to the filing of this report. Based upon this
evaluation, these officers believe that our disclosure controls and procedures
are effective.
Changes in Internal Controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the last evaluation of our internal controls by our Chief Executive Officer and
Chief Financial Officer.
27
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In December 2002, we agreed to a settlement of outstanding claims among
ourselves and the successor in interest to the purchasers of our former
proprietary small ticket equipment leasing subsidiary, Fidelity Leasing, Inc.
The settlement was on the terms and conditions described in Item 1,
"Business--Obligations Relating to Discontinued Obligations" in our annual
report on Form 10-K for the year ended September 30, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation of Resource America.
(2)
3.2 Amended and Restated Bylaws of Resource America. (2)
10.1 Employment Agreement between Edward E. Cohen and Resource
America. (3)
10.4 Employment Agreement between Steven J. Kessler and Resource
America. (1)
10.5 Employment Agreement between Nancy J. McGurk and Resource
America. (1)
10.6 Employment Agreement between Jonathan Z. Cohen and Resource
America. (4)
10.7 Credit Agreement among Atlas America, Inc., Resource America,
Inc. and the other guarantors party thereto and Wachovia,
National Associate, and other banks party thereto, dated July
31, 2002. (4)
10.7(a) First Amendment to Loan Agreement, dated as of January 24,
2001. (6)
10.8 Amended and Restated Loan Agreement, dated December 14, 1999,
among Resource Properties XXXII, Inc., Resource Properties
XXXVIII, Inc., Resource Properties II, Inc., Resource
Properties 51, Inc., Resource Properties, Inc., Resource
America and Jefferson Bank (now known as Hudson United Bank).
(6)
10.9(a) Modification of Revolving Credit Loan and Security Agreement
dated March 30, 2000. (6) 10.10 Revolving Credit Loan
Agreement dated July 27, 1999 by and between Resource
America, Inc. and Sovereign Bank. (6)
10.11 Term Loan Agreement between Resource Properties, Inc. and
Miller & Schroeder Investments Corporation. (7)
10.12 Credit Agreement among Atlas Pipeline Partners, L.P. and
Wachovia Bank dated December 27, 2002.
10.13 Settlement Agreement between Resource America, Inc., FLI
Holdings, Inc., AEL Leasing Co., Inc. and Citibank, N.A.
dated December 31, 2002.
28
(b) Reports on Form 8-K
None
- -------------
(1) Filed previously as an exhibit to our Current Report on Form 8-K filed on
May 18, 2000 and by this reference incorporated herein.
(2) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 and by this reference incorporated herein.
(3) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997 and by this reference incorporated herein.
(4) Filed previously as an exhibit to our Annual Report on Form 10-K for the
year ended September 30, 2001 and by this reference incorporated herein.
(5) Filed previously as an exhibit to our Annual Report on Form 10-K for the
year ended September 30, 1999 and by this reference incorporated herein.
(6) Filed previously as an exhibit to our Annual Report on Form 10-K for the
year ended September 30, 2000.
(7) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 2000 and by this reference incorporated herein.
29
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: February 14, 2003 By: /s/ Steven J. Kessler
---------------------
STEVEN J. KESSLER
Senior Vice President and
Chief Financial Officer
Date: February 14, 2003 By: /s/ Nancy J. McGurk
-------------------
NANCY J. McGURK
Vice President-Finance and
Chief Accounting Officer
30
CERTIFICATIONS
I, Edward E. Cohen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Resource America,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
/s/ Edward E. Cohen
Edward E. Cohen
Chairman of the Board, President and Chief Executive Officer
31
CERTIFICATIONS
I, Steven J. Kessler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Resource America,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
/s/ Steven J. Kessler
Steven J. Kessler
Senior Vice President and Chief Financial Officer
32