Back to GetFilings.com
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 March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-4408
RESOURCE AMERICA, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 72-0654145
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1845 Walnut Street
Suite 1000
Philadelphia, PA 19103
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (215) 546-5005
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:
17,089,700 Shares April 30, 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 - March 31, 2003 (Unaudited)
and September 30, 2002.......................................................... 2
Consolidated Statements of Income (Unaudited)
Three Months and Six Months Ended March 31, 2003 and 2002....................... 3
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
Six Months Ended March 31, 2003................................................. 4
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended March 31, 2003 and 2002........................................ 5
Notes to Consolidated Financial Statements - March 31, 2003 (Unaudited)............. 6 - 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 17 - 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 27 - 28
Item 4. Controls and Procedures............................................................... 29
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................... 30 - 31
SIGNATURES.......................................................................................... 32
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESOURCE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, September 30,
2003 2002
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 27,583 $ 25,736
Accounts receivable....................................................... 16,670 16,060
Assets held for disposal.................................................. - 5,488
Prepaid expenses.......................................................... 4,599 2,696
--------- ---------
Total current assets.................................................... 48,852 49,980
Investments in real estate loans and ventures................................. 201,425 202,423
Investment in RAIT Investment Trust........................................... 24,527 29,580
Property and equipment:
Oil and gas properties and equipment (successful efforts)................. 140,482 126,983
Gas gathering and transmission facilities................................. 30,569 28,091
Other..................................................................... 8,715 8,390
--------- ---------
179,766 163,464
Less - accumulated depreciation, depletion and amortization................... (49,681) (44,287)
--------- ---------
Net property and equipment.............................................. 130,085 119,177
Goodwill...................................................................... 37,471 37,471
Intangible assets............................................................. 8,971 9,589
Other assets.................................................................. 18,763 19,278
--------- ---------
$ 470,094 $ 467,498
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................... $ 3,731 $ 4,320
Accounts payable.......................................................... 16,151 12,378
Accrued interest.......................................................... 1,628 1,760
Liabilities associated with assets held for disposal...................... - 11,317
Accrued liabilities....................................................... 11,029 9,808
Estimated income taxes.................................................... 812 893
Deferred revenue on drilling contracts.................................... 9,034 4,948
--------- ---------
Total current liabilities............................................... 42,385 45,424
Long-term debt:
Senior.................................................................... 65,336 65,336
Non-recourse.............................................................. 65,722 68,220
Other..................................................................... 23,283 17,634
--------- ---------
154,341 151,190
Liabilities associated with assets held for disposal.......................... - 3,144
Asset retirement obligations.................................................. 3,300 -
Deferred revenue and other liabilities........................................ 802 1,074
Deferred income taxes......................................................... 15,943 13,733
Minority interest............................................................. 19,140 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................ 251 250
Additional paid-in capital................................................ 223,747 223,824
Less treasury stock, at cost.............................................. (77,651) (74,828)
Less ESOP loan receivable................................................. (1,185) (1,201)
Accumulated other comprehensive income.................................... 5,718 5,911
Retained earnings......................................................... 83,303 79,583
--------- ---------
Total stockholders' equity.............................................. 234,183 233,539
--------- ---------
$ 470,094 $ 467,498
========= =========
See accompanying notes to consolidated financial statements
2
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands, except per share data)
REVENUES:
Energy..................................................... $ 36,336 $ 26,670 $ 54,296 $ 55,427
Real estate finance........................................ 3,489 5,620 6,648 9,304
Equity in earnings of unconsolidated investees............. 108 - 108 -
Interest and other......................................... 1,736 1,913 4,004 3,254
--------- --------- --------- ---------
41,669 34,203 65,056 67,985
COSTS AND EXPENSES:
Energy..................................................... 25,830 20,260 36,816 40,861
Real estate finance........................................ 937 464 1,783 987
General and administrative................................. 1,306 1,574 2,904 2,840
Provision for legal settlement............................. 1,185 - 1,185 -
Depreciation, depletion and amortization................... 3,103 2,583 6,086 5,380
Interest................................................... 3,071 3,077 6,409 6,392
Provision for possible losses.............................. 800 650 1,173 800
Minority interest in Atlas Pipeline Partners, L.P.......... 884 642 1,529 1,395
--------- --------- --------- ---------
37,116 29,250 57,885 58,655
--------- --------- --------- ---------
Income from continuing operations before income taxes......... 4,553 4,953 7,171 9,330
Provision for income taxes.................................... 1,458 1,640 2,295 3,087
--------- --------- --------- ---------
Income from continuing operations............................. 3,095 3,313 4,876 6,243
Discontinued operations:
Loss on discontinued operations, net of tax benefit of
$94 and $448............................................. - (175) - (916)
--------- --------- --------- ---------
Net income.................................................... $ 3,095 $ 3,138 $ 4,876 $ 5,327
========= ========= ========= =========
Net income per common share - basic:
From continuing operations................................. $ .18 $ .19 $ .28 $ .36
From discontinued operations............................... - (.01) - (.05)
--------- --------- --------- ---------
Net income per common share - basic........................... $ .18 $ .18 $ .28 $ .31
========= ========= ========= =========
Weighted average common shares outstanding.................... 17,118 17,444 17,245 17,438
========= ========= ========= =========
Net income per common share - diluted:
From continuing operations................................. $ .18 $ .19 $ .28 $ .35
From discontinued operations............................... - (.01) - (.05)
--------- --------- --------- ---------
Net income per common share - diluted......................... $ .18 $ .18 $ .28 $ .30
========= ========= ========= =========
Weighted average common shares................................ 17,398 17,785 17,524 17,768
========= ========= ========= =========
See accompanying notes to consolidated financial statements
3
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 2003
(Unaudited)
(in thousands, except share data)
Common stock Additional Treasury Stock ESOP
-------------------------- Paid-In --------------------------- Loan
Shares Amount Capital Shares Amount Receivable
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, October 1, 2002 ........... 25,044,066 $ 250 $ 223,824 (7,623,198) $(74,828) $(1,201)
Common shares issued ............... 38,510 1 176 177
Treasury shares issued ............. (253) 19,759 415
Purchase of treasury shares ........ (389,950) (3,238)
Other comprehensive income .........
Cash dividends ($.066 per share) ...
Repayment of ESOP Loan ............. 16
Net income .........................
-----------------------------------------------------------------------------------------------
Balance, March 31, 2003 ............ 25,082,576 $ 251 $ 223,747 (7,993,389) $(77,651) $(1,185)
========== ======= ========= ========== ======== =======
Accumulated
Other Totals
Comprehensive Retained Stockholders'
Income Earnings Equity
- --------------------------------------------------------------------------------
Balance, October 1, 2002 ........... $ 5,911 $79,583 $233,539
Common shares issued ...............
Treasury shares issued ............. 162
Purchase of treasury shares ........ (3,238)
Other comprehensive income ......... (193) (193)
Cash dividends ($.066 per share) ... (1,156) (1,156)
Repayment of ESOP Loan ............. 16
Net income ......................... 4,876 4,876
--------------------------------------------
Balance, March 31, 2003 ............ $ 5,718 $83,303 $234,183
======= ======= ========
See accompanying notes to consolidated financial statements
4
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
March 31,
---------------------------
2003 2002
---------- ----------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................ $ 4,876 $ 5,327
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization............................................ 6,086 5,380
Amortization of discount on senior debt and deferred finance costs.................. 650 504
Provision for possible losses....................................................... 1,173 800
Equity in earnings of equity investees.............................................. (108) -
Minority interest in Atlas Pipeline Partners, L.P................................... 1,529 1,395
Loss on discontinued operations .................................................... - 916
Gain on asset dispositions.......................................................... (867) (2,108)
Gain on sale of RAIT Investment Trust shares........................................ (2,119) -
Property impairments and abandonments............................................... 12 12
Deferred income taxes............................................................... 2,250 3,904
Accretion of discount............................................................... (1,409) (2,186)
Collection of interest.............................................................. 91 4,969
Non-cash compensation .............................................................. 162 303
Changes in operating assets and liabilities:
Increase in accounts receivable and other assets.................................... (1,624) (844)
Increase (decrease) in accounts payable and other liabilities....................... 6,708 (16,499)
---------- ----------
Net cash provided by operating activities............................................. 17,410 1,873
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................................. (12,898) (11,780)
Principal payments on notes receivable and proceeds from sales of assets.............. 4,578 20,824
Proceeds from (purchase of) RAIT Investment Trust shares.............................. 7,357 (1,890)
Increase in other assets.............................................................. (2,824) (464)
Investments in real estate loans and ventures......................................... (2,133) (9,121)
Decrease in other liabilities......................................................... (29) -
---------- ----------
Net cash used in investing activities................................................. (5,949) (2,431)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings............................................................................ 64,139 73,866
Principal payments on borrowings...................................................... (61,253) (85,933)
Dividends paid ....................................................................... (1,156) (1,162)
Distributions paid to minority interests of Atlas Pipeline Partners, L.P.............. (1,751) (1,913)
Purchase of treasury stock............................................................ (3,238) (493)
Decrease in restricted cash........................................................... - 33
Repayment of ESOP loan................................................................ 16 48
Increase in other assets.............................................................. (772) (241)
Proceeds from issuance of stock....................................................... 25 -
---------- ----------
Net cash used in financing activities................................................. (3,990) (15,795)
---------- ----------
Net cash used in discontinued operations.............................................. (5,624) (1,165)
---------- ----------
Increase (decrease) in cash and cash equivalents...................................... 1,847 (17,518)
Cash and cash equivalents at beginning of period...................................... 25,736 48,648
---------- ----------
Cash and cash equivalents at end of period............................................ $ 27,583 $ 31,130
========== ==========
See accompanying notes to consolidated financial statements
5
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE 1 - MANAGEMENT'S OPINION REGARDING INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of the Company and its
wholly-owned subsidiaries as of March 31, 2003 and for the three months and six
months ended March 31, 2003 and 2002 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/A for the fiscal year ended September 30,
2002. The results of operations for the three months and six months ended March
31, 2003 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 as of and for the three months and six months ended March 31, 2002 to
conform to the three months and six months ended March 31, 2003 presentation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Comprehensive Income
The following table presents comprehensive income for the periods
indicated:
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands)
Net income.................................................... $ 3,095 $ 3,138 $ 4,876 $ 5,327
Other comprehensive income (loss):
Unrealized gain on investment in RAIT Investment Trust:
Unrealized holding gain arising during the period,
net of taxes of $322, $1,797, $729, and
$1,994................................................. 615 3,648 1,481 4,048
Less: reclassification adjustment for gain realized
in net income, net of taxes of $363 and $664........... (738) - (1,356) -
--------- --------- --------- ---------
(123) 3,648 125 4,048
Unrealized loss on natural gas futures and
options contracts, net of taxes of $50, $91, $145 and
$55......................................................... (106) (184) (318) (111)
--------- --------- --------- ---------
(229) 3,464 (193) 3,937
--------- --------- --------- ---------
Comprehensive income.......................................... $ 2,866 $ 6,602 $ 4,683 $ 9,264
========= ========= ========= =========
6
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2003
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
At March 31, At September 30,
2003 2002
----------- -----------
(in thousand)
Accumulated other comprehensive income (loss) is related to the following
items, net of taxes:
Marketable securities - unrealized gains................................. $ 6,269 $ 6,144
Unrealized hedging losses................................................ (551) (233)
----------- -----------
$ 5,718 $ 5,911
=========== ===========
Investment in RAIT Investment Trust
The Company accounts for its investment in RAIT Investment Trust
("RAIT") in accordance with Statement of Financial Accounting Standard ("SFAS")
No. 115 "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"). This investment is classified as available-for-sale and as such is
carried at fair market value based on market quotes. Unrealized gains and
losses, net of taxes, are reported as a separate component of stockholders'
equity. The cost of securities sold is based on the specific identification
method.
The following table discloses the pre-tax unrealized gains relating to
the Company's investment in RAIT at the dates indicated:
At March 31, At September 30,
2003 2002
----------- ----------
(in thousands)
Cost............................... $ 15,029 $ 20,268
Unrealized gains................... 9,498 9,312
----------- ----------
Estimated fair value............... $ 24,527 $ 29,580
=========== ==========
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
recoverable based upon the estimated value of the underlying collateral.
7
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2003
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Fair Value of Financial Instruments - (Continued)
The following table provides information about other financial
instruments at the dates indicated:
March 31, 2003 September 30, 2002
----------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ------------ ---------- ------------
(in thousands) (in thousands)
Energy non-recourse debt................... $ 47,722 $ 47,722 $ 49,345 $ 49,345
Real estate finance debt................... 31,480 31,480 33,214 33,214
Senior debt................................ 65,336 67,623 65,336 67,623
Other debt................................. 13,534 13,534 7,615 7,615
----------- ------------ ---------- ------------
$ 158,072 $ 160,359 $ 155,510 $ 157,797
=========== ============ ========== ============
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 Six Months Ended
March 31, March 31,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands)
Income from continuing operations............................. $ 3,095 $ 3,313 $ 4,876 $ 6,243
Loss from discontinued operations, net of taxes of $94
and $448................................................... - (175) - (916)
--------- --------- --------- ---------
Net income................................................. $ 3,095 $ 3,138 $ 4,876 $ 5,327
========= ========= ========= =========
Weighted average common shares outstanding-basic.............. 17,118 17,444 17,245 17,438
Dilutive effect of stock option and award plans............... 280 341 279 330
--------- --------- --------- ---------
Weighted average common shares-diluted........................ 17,398 17,785 17,524 17,768
========= ========= ========= =========
Asset Retirement Obligations
SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS
143"), establishes requirements for the accounting for the removal costs
associated with asset retirements. The adoption of SFAS 143 on October 1, 2002
resulted in the recording of an additional cost basis of $3.3 million to oil and
gas properties and equipment representing the Company's share of estimated
future well plugging costs (as discounted to the present value at the dates the
wells began operations). In addition, the Company recorded a corresponding
retirement obligation liability of $3.3 million (which includes accretion of the
discounted present value to September 30, 2002). Accumulated depreciation and
depletion did not change as the additional cost basis associated with the
plugging liability was offset by the estimated salvage value to be realized upon
the disposal of the wells. The cumulative and pro forma effects of initially
applying SFAS 143 were not material to the Company's Consolidated Statements of
Income.
Except for the item above, the Company has determined that there are no
other material retirement obligations associated with tangible long-lived
assets.
8
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2003(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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:
Six Months Ended
March 31,
------------------------
2003 2002
--------- ---------
(in thousands)
Cash paid during the period for:
Interest................................................................................ $ 5,891 $ 5,948
Income taxes............................................................................ $ - $ 1,500
Non-cash activities include the following:
Receipt of a note in connection with the sale of a real estate loan..................... $ 1,350 $ -
Leases transferred to LEAF's sponsored investment partnership........................... $ 3,550 $ -
Debt transferred to LEAF's sponsored investment partnership............................. $ 3,550 $ -
Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"). SFAS 148 which is generally effective for fiscal years
ending after December 15, 2002. SFAS 148 requires quarterly disclosure of the
effects that would have occurred if the financial statements had applied the
fair value recognition principles of SFAS 123, "Accounting for Stock-Based
Compensation." The Company accounts for stock-based employee compensation plans
under the recognition and measurement principles of Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees," and related
interpretations. For certain grants, no stock-based employee compensation cost
is reflected in net income, since each option granted had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table provides the pro forma effects of recognizing compensation
expense in accordance with SFAS 123:
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands, except per share data)
Net income as reported........................................ $ 3,095 $ 3,313 $ 4,876 $ 6,243
Stock-based employee compensation expense reported in net
income, net of tax.......................................... - - - -
Total stock-based employee compensation under fair value
method for all grants, net of tax........................... (376) (528) (751) (1,056)
--------- --------- --------- ---------
Pro forma net income.......................................... $ 2,719 $ 2,785 $ 4,125 $ 5,187
========= ========= ========= =========
Net income per common share:
Basic - as reported........................................... $ .18 $ .18 $ .28 $ .31
Basic - proforma.............................................. $ .16 $ .16 $ .24 $ .30
Diluted - as reported......................................... $ .18 $ .18 $ .28 $ .30
Diluted - pro forma........................................... $ .16 $ .16 $ .24 $ .29
9
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2003
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Recently Issued Financial Accounting Standards
In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding and requires a guarantor to recognize, at the
inception of a guarantee, a liability for the obligations it has undertaken. The
objective of the initial measurement of that liability is the fair value of the
guarantee at its inception. The initial recognition and measurement provisions
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 by the Company did not have a material
effect on its consolidated financial position or results of operations.
In January 2003, the FASB issued Interpretation 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which the Company is required to adopt
on July 1, 2003. FIN 46's consolidation criteria are based on an analysis of
risks and rewards, not control, and represent a significant and complex
modification of previous accounting principles. FIN 46 represents an accounting
change, not a change in the underlying economics of the applicable investment.
Management is assessing the impact of the adoption of FIN 46. However, based on
management's preliminary assessment, it is reasonably possible that the Company
may be required to consolidate several entities in which it has an investment.
Under FIN 46 certain real estate loans presently carried on the Company's books
could be removed and replaced by real property and associated third-party debt.
In the event the Company is required to consolidate any of these entities, the
Company would not acquire any legal ownership of the property owned by the
entity, nor would its legal rights and obligations change. The complexity of the
new consolidation rules and their evolving clarification make forecasting their
effect impracticable.
NOTE 3 - GOODWILL, INTANGIBLE ASSETS AND OTHER ASSETS
Goodwill
On October 1, 2001, the Company early-adopted SFAS 142 "Goodwill and
Other Intangible Assets," which requires that goodwill no longer be amortized,
but instead tested for impairment at least annually. The Company evaluates its
goodwill at each year end, 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. All goodwill recorded on the Company's balance sheets
is related to the Company's energy segment.
10
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2003
(Unaudited)
NOTE 3 - GOODWILL, INTANGIBLE ASSETS AND OTHER ASSETS - (Continued)
Intangible Assets
Partnership management and operating contracts and the Company's
equipment leasing operating system, or leasing platform, were acquired through
acquisitions and 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 eight to thirteen years. The leasing platform is
amortized on the straight-line method over its remaining life of six years.
Amortization expense for the six months ended March 31, 2003 was $658,000. The
aggregate estimated annual amortization expense is approximately $1.3 million
for each of the succeeding five years.
At March 31, At September 30,
2003 2002
----------- -----------
(in thousands)
Partnership management and operating contracts............................ $ 14,383 $ 14,343
Leasing platform.......................................................... 918 918
----------- -----------
15,301 15,261
Accumulated amortization.................................................. (6,330) (5,672)
----------- -----------
Intangible assets, net.................................................... $ 8,971 $ 9,589
=========== ===========
Other Assets
The following table provides information about other assets at the
dates indicated.
At March 31, At September 30,
2003 2002
----------- -----------
(in thousands)
Deferred financing costs (net of accumulated amortization
of $4,392 and $3,742)................................................... $ 2,244 $ 2,122
Equity method investments in and advances to Trapeza entities............... 3,972 3,085
Investments at lower of cost or market...................................... 6,137 6,137
Other....................................................................... 6,410 7,934
----------- -----------
$ 18,763 $ 19,278
=========== ===========
Deferred financing costs are amortized over the terms of the related
loans (two to seven years).
Investments in Trapeza entities are accounted for by the equity method
of accounting since the Company, as a 50% owner of the general partner of these
entities, has the ability to exercise significant influence over its operating
and financial decisions. The Company's combined general and limited partner
interests in these entities range from 16% to 18%.
Investments at the lower of cost or market include non-marketable
investments in entities in which the Company has less than a 20% ownership
interest, and in which it does not have the ability to exercise significant
influence over their operating and financial decisions. These investments
include approximately 10% of the outstanding shares of The Bancorp, Inc., a
related party as disclosed in Note 4 in the Company's Annual Report on Form
10K/A for the fiscal year ended September 30, 2002.
11
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2003
(Unaudited)
NOTE 4 - INVESTMENTS IN REAL ESTATE LOANS AND VENTURES
The Company focuses its real estate activities on managing its existing
real estate loan portfolio and one real estate partnership it sponsored which
closed its initial transaction during the three months ended March 31, 2003.
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 there from. This accretion of discount amounted
to $714,000 and $985,000 during the three months ended March 31, 2003 and 2002
and $1.4 million and $2.2 million during the six months ended March 31, 2003 and
2002, respectively. As the Company sells senior lien interests or receives funds
from refinancing 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 March 31, 2003, the Company held real estate loans having an
aggregate face value of $614.2 million. The investment in these loans at that
date was carried at an aggregate cost of $187.7 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 Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(in thousands)
Loan balance, beginning of period............................. $ 186,354 $ 199,725 $ 187,542 $ 192,263
New loan...................................................... - - 1,350 -
Additions to existing loans................................... 1,261 1,087 2,421 7,348
Accretion of discount (net of collection of interest)......... 714 985 1,409 2,186
Write-downs................................................... (393) (500) (393) (500)
Collection of principal....................................... (208) - (4,601) -
Cost of loans resolved........................................ - (22,344) - (22,344)
----------- ----------- ----------- -----------
Loan balance, end of period................................... $ 187,728 $ 178,953 $ 187,728 $ 178,953
Real estate ventures balance, end of period................... $ 17,957 $ 18,294 $ 17,957 $ 18,294
Allowance for possible losses................................. (4,260) (2,829) (4,260) (2,829)
----------- ----------- ----------- -----------
Balance, loans and ventures, end of period.................... $ 201,425 $ 194,418 $ 201,425 $ 194,418
=========== =========== =========== ===========
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 Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(in thousands)
Balance, beginning of period.................................. $ 3,853 $ 2,679 $ 3,480 $ 2,529
Provision for possible losses................................. 800 650 1,173 800
Write-downs................................................... (393) (500) (393) (500)
----------- ----------- ----------- -----------
Balance, end of period........................................ $ 4,260 $ 2,829 $ 4,260 $ 2,829
=========== =========== =========== ===========
12
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2003
(Unaudited)
NOTE 5 - DEBT
Total debt consists of the following:
At March 31, At September 30,
2003 2002
----------- -----------
(in thousands)
Senior debt.............................. $ 65,336 $ 65,336
Non-recourse debt:
Energy:
Revolving and term bank loans...... 47,722 49,345
Real estate finance:
Revolving credit facilities........ 18,000 18,000
Other.............................. - 875
----------- -----------
Total non-recourse debt......... 65,722 68,220
Other debt............................... 27,014 21,954
----------- -----------
158,072 155,510
Less current maturities.................. 3,731 4,320
----------- -----------
$ 154,341 $ 151,190
=========== ===========
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.
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.
13
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2003
(Unaudited)
NOTE 6 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - (Continued)
At March 31, 2003, the Company had 172 open natural gas futures
contracts related to natural gas sales covering 516,000 dekatherm ("Dth") (net
to the Company) maturing through September 2003 at a combined average settlement
price of $3.59 per Dth. Based on quoted market prices, the fair value of the
Company's open natural gas futures contracts at March 31, 2003, is $8.8 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 $780,000 at March 31, 2003 and $316,600 at
September 30, 2002. The unrealized losses, net of applicable taxes, have been
recorded as a liability in the Company's Consolidated Balance Sheets and in
Stockholders' Equity as a component of Accumulated Other Comprehensive Income.
The Company recognized a loss of $448,000 and $544,000 on settled contracts for
the three months and six months ended March 31, 2003. The Company recognized no
gains or losses during the three months and six months ended March 31, 2003 for
hedge ineffectiveness or as a result of the discontinuance of cash flow hedges.
As of March 31, 2003, 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 six months.
Although hedging provides the Company some protection against falling
prices, these activities could also reduce the potential benefits of price
increases, depending upon the instrument.
NOTE 7 - 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 Six Months Ended
March 31, March 31,
------------------------- ---------------------
2003 2002 2003 2002
--------- --------- -------- --------
(in thousands)
Loss from discontinued operations before
income taxes............................................. $ - $ (269) $ - $ (1,364)
Income tax benefit........................................... - 94 - 448
--------- --------- -------- --------
Loss from discontinued operations............................ $ - $ (175) $ - $ (916)
========= ========= ======== ========
14
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2003
(Unaudited)
NOTE 8 - OPERATING SEGMENT AND MAJOR CUSTOMER 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 Six Months Ended
March 31, March 31,
------------------------ ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands)
Revenues:
Energy.................................................... $ 36,336 $ 26,723 $ 54,296 $ 55,543
Real estate finance....................................... 3,489 5,620 6,648 9,304
Intercompany interest..................................... (32) (53) (119) (116)
All other (1)............................................. 1,876 1,913 4,231 3,254
--------- --------- --------- ---------
$ 41,669 $ 34,203 $ 65,056 $ 67,985
========= ========= ========= =========
Operating profit (loss):
Energy.................................................... $ 6,387 $ 3,546 $ 9,351 $ 7,934
Real estate finance....................................... 1,316 4,017 2,790 6,435
All other (1)............................................. (3,150) (2,610) (4,970) (5,039)
--------- --------- --------- ---------
$ 4,553 $ 4,953 $ 7,171 $ 9,330
========= ========= ========= =========
At March 31, At September 30,
2003 2002
--------- ----------
(in thousands)
Identifiable assets:
Energy............................................................... $ 195,684 $ 183,693
Real estate finance.................................................. 202,518 204,327
All other (1)........................................................ 71,892 79,478
--------- ----------
$ 470,094 $ 467,498
========= ==========
- ---------------
(1) Revenue and assets of the Company's financial services subsidiaries are
included in the "All other" categories along with corporate interest and
dividend income and corporate assets. Financial services does not meet the
criteria of an operating segment under SFAS 131.
15
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2003
(Unaudited)
NOTE 8 - OPERATING SEGMENT AND MAJOR CUSTOMER INFORMATION - (Continued)
Operating profit (loss) per segment represents total revenues less
costs and expenses attributable thereto, including interest, provision for
possible losses and depreciation, depletion and amortization, excluding general
corporate expenses.
The Company 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 an affiliate of
First Energy Corporation ("FEC"). Pricing under the contract is established by
index-based formulas which the Company negotiates annually. Approximately 80% of
the Company's current production was dedicated to the performance of this
agreement for the six month period ended March 31, 2003. Payments from the
affiliate are guaranteed by its parent, FEC, 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. 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 9 - LEGAL SETTLEMENT
The Company settled an action filed in the U.S. District Court for the
District of Oregon by the former chairman of TRM Corporation and his children.
The Company's chief executive officer and a former director and officer also had
been named as defendants. The plaintiffs' claims were for breach of contract and
fraud. The Company recorded a charge of $1.2 million, including related legal
fees in the three months ended March 31, 2003.
NOTE 10 - SUBSEQUENT EVENTS
On May 9, 2003, the Company's majority-owned subsidiary, Atlas Pipeline
Partners, L.P., completed a public offering of 950,000 common units of limited
partner interest. The net proceeds after underwriting discounts and commissions
were approximately $22.2 million. These proceeds will reduce existing debt of
$8.5 million and will fund future capital expenditures.
On April 1, 2003, the Company filed registration statements on Forms
S-4 and S-3 with respect to a proposed offer to exchange its outstanding 12%
Senior Notes due 2004 for a like amount of 12% Senior Notes due 2008 and a
proposed concurrent offering of $30.0 million original principal amount of 12%
Senior Notes due 2008.
16
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/A 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 Three Months and Six Months Ended March 31, 2003 and 2002
Our operating results and financial condition for the second quarter of
fiscal 2003 reflect the continuing growth in importance to us of our energy
operations, as shown in the following tables:
Revenues as a Percent of Total Revenues (1)
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -----------------
2003 2002 2003 2002
---- ---- ---- ----
Energy....................... 87% 78% 83% 82%
Real estate finance.......... 8% 16% 10% 14%
Assets as a Percent of Total Assets (2)
March 31, September 30,
2003 2002
--------- -------------
(in thousands)
Energy...................................... 42% 39%
Real estate finance......................... 43% 44%
- --------------
(1) We attribute the balance (5% and 6%, and 7% and 4%, for the three and six
months ended March 31, 2003 and 2002, respectively) to revenues derived
from assets related to operations which do not meet the definition of a
business segment and corporate assets such as cash, common shares held in
RAIT Investment Trust and other corporate investments.
(2) We attribute the balance (15% and 17% at March 31, 2003 and September 30,
2002, respectively) to assets related to operations which do not meet the
definition of a business segment, as referred to in footnote (1) above.
17
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 Six Months Ended
March 31, March 31,
------------------------ ----------------------
2003 2002 2003 2002
-------- --------- -------- --------
(in thousands, except
sales price and production cost data)
Revenues:
Production................................................ $ 9,416 $ 6,570 $ 17,485 $ 13,896
Well drilling............................................. 23,366 16,758 29,949 34,739
Well services............................................. 2,152 2,020 4,052 4,118
Transportation............................................ 1,402 1,322 2,810 2,674
-------- --------- -------- --------
$ 36,336 $ 26,670 $ 54,296 $ 55,427
======== ========= ======== ========
Costs and expenses:
Production................................................ $ 1,644 $ 1,676 $ 3,179 $ 3,300
Exploration............................................... 958 238 1,009 656
Well drilling............................................. 20,318 14,775 26,043 30,395
Well services............................................. 1,085 991 1,940 1,908
Transportation............................................ 612 491 1,203 1,058
Non-direct................................................ 1,213 2,089 3,442 3,544
-------- --------- -------- --------
$ 25,830 $ 20,260 $ 36,816 $ 40,861
======== ========= ======== ========
Production revenues:
Gas (1)................................................... $ 8,231 $ 5,947 $ 15,281 $ 12,360
Oil....................................................... $ 1,187 $ 605 $ 2,203 $ 1,513
Production volume:
Gas (mcf/day) (1) (2)..................................... 17,933 18,771 18,648 19,684
Oil (bbls/day) (2)........................................ 410 388 429 461
Average sales prices:
Gas (per mcf) (3)........................................ $ 5.10 $ 3.52 $ 4.50 $ 3.45
Oil (per bbl)............................................. $ 32.17 $ 17.32 $ 28.24 $ 18.03
Average production costs (4):
As a percent of production revenues....................... 17% 26% 18% 24%
Per mcf equivalent unit (2)............................... $ .90 $ .88 $ .82 $ .81
- -------------
(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 six mcfs to
one bbl.
(3) Our average sales price per mcf before the effects of hedging was $5.38
and $4.66 for the three months and six months ended March 31, 2003. No
contracts were settled during the six months ended March 31, 2002.
(4) Production costs include labor to operate the wells and related
equipment, repairs and maintenance, materials and supplies, property
taxes, severance taxes, insurance, gathering charges and production
overhead.
18
Our natural gas revenues were $8.2 million and $15.3 million in the
three months and six months ended March 31, 2003, an increase of $2.3 million
(38%) and $2.9 million (24%) from $5.9 million and $12.4 million in the three
months and six months ended March 31, 2002, respectively. The increases were due
to increases in the average sales price of natural gas of 45% and 31% for the
three months and six months ended March 31, 2003, which were partially offset by
decreases of 4% and 5% in the volume of natural gas we produced in the three
months and six months ended March 31, 2003, respectively. The $2.3 million
increase in gas revenues in the three months ended March 31, 2003 as compared to
the prior period consisted of a $2.7 million increase attributable to increases
in natural gas sales prices, partially offset by a $384,000 decrease
attributable to decreased production volumes. The $2.9 million increase in
natural gas revenues in the six months ended March 31, 2003 as compared to the
prior period consisted of a $3.8 million increase attributable to an increase in
natural gas sales prices, partially offset by an $849,000 decrease attributable
to decreased production volumes. 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. There was a decline in our natural gas
volumes caused by the curtailment of natural gas deliveries during the
completion of the extension to our Crawford County, PA system; also, unusually
cold weather constrained production from some of our wells and increased
landowner gas usage. We expect volumes to rebound in subsequent periods.
Our oil revenues were $1.2 million and $2.2 million in the three months
and six month periods ended March 31, 2003, an increase of $582,000 (96%) and
$690,000 (46%) from $605,000 and $1.5 million in the three months and six months
ended March 31, 2002, primarily due to increases in the average sales price of
oil of 86% and 57%, for the respective periods. Oil production volume increased
6% during the three months and decreased 7% during the six months ended March
31, 2003 and 2002, respectively. The $582,000 increase in oil revenues in the
three months ended March 31, 2003 as compared to the prior period consisted of
increases of $518,000 attributable to increases in oil sales prices and $64,000
attributable to increased production volumes. The $690,000 increase in oil
revenues for the six months ended March 31, 2003 as compared to the prior period
consisted of increases of $857,000 attributable to increases in oil sales prices
partially offset by $167,000 attributable to decreased production volumes. Oil
prices were higher in the first six months of fiscal 2003 than in fiscal 2002.
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 123 and 160 net wells for partnerships
sponsored by Atlas America, Inc. in the three months and six months ended March
31, 2003 as compared to 86 and 177 net wells in the three months and six months
ended March 31,2002, respectively. Our well drilling gross margin was $3.0
million and $3.9 million in the three months and six months ended March 31,
2003, an increase of $1.1 million and decrease of $438,000 from $2.0 million and
$4.3 million in the three months and six months ended March 31, 2002,
respectively. In the three month ended March 31, 2003, the increase of $1.1
million was attributable to an increase in the number of wells drilled
($917,000) and an increase in the gross margin per well ($148,000). In the six
months ended March 31, 2003, the decrease of $438,000 was attributable to a
decrease in the number of wells drilled ($415,000) and a decrease in the gross
margin per well ($23,000). 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 three months and six
months ended March 31, 2002. These costs have decreased slightly in 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 maintain
that margin through fiscal 2003.
19
Our exploration costs were $958,000 and $1.0 million in the three
months and six months ended March 31, 2003, an increase of $720,000 and $353,000
from the three months and six months ended March 31, 2002, respectively. These
increases were attributable to expenditures for lease costs of $275,000 in the
three months ended March 31, 2003, which were charged to operations upon our
decision to discontinue drilling in the area of these leases. In addition, delay
rentals increased $100,000 in the six months March 31, 2003 as compared to the
six months ended March 31, 2002.
Our transportation expenses increased 25% and 14% in the three months
and six months ended March 31, 2003, respectively, as compared to the prior
periods. These increases resulted from higher compressor expenses due to
increased compressor lease rates and the addition of more compressors to
increase the capacity of our gathering systems.
Our non-direct expenses were $1.2 million and $3.4 million in the three
months and six months ended March 31, 2003, a decrease of $876,000 (42%) and
$102,000 (3%), respectively. 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 and management activities. These
reimbursements increased $1.0 million for the three months ended March 31, 2003
as compared to the previous year period as a result of more net wells drilled in
the three months ended March 31, 2003 than in the three months ended March 31,
2002. This increase in reimbursements was partially offset by increases in the
cost of running our energy corporate office 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
revenues recognized and costs and expenses incurred in our real estate finance
operations during the periods indicated:
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ----------------------
2003 2002 2003 2002
-------- --------- -------- --------
(in thousands)
Revenues:
Interest.................................................. $ 1,799 $ 2,677 $ 3,730 $ 5,005
Accreted discount......................................... 714 985 1,409 2,186
Gains on resolution of loans ............................. - 1,641 813 1,641
Equity in earnings of equity investees.................... 387 181 39 268
Net rental and fee income................................. 589 136 657 204
-------- --------- -------- --------
$ 3,489 $ 5,620 $ 6,648 $ 9,304
======== ========= ======== ========
Costs and expenses............................................ $ 937 $ 464 $ 1,783 $ 987
======== ========= ======== ========
Revenues - Three Months Ended March 31, 2003 as Compared to the Three Months
Ended March 31, 2002
Revenues decreased $2.1 million (38%) from $5.6 million in the three
months ended March 31, 2002 to $3.5 million in the three months ended March 31,
2003. We attribute the decrease to the following:
o A decrease in interest and accreted discount income of $1.1 million
(31%) resulting from the following:
- The sale or repayment of four loans which decreased interest
income by $345,000 in the three months ended March 31, 2003 as
compared to the three months ended March 31, 2002.
- The completion of accretion of discount on four loans, which
decreased interest income by $675,000 in the three months ended
March 31, 2003 as compared to the three months ended March 31,
2002.
- A decrease in our average rate of accretion, resulting in a
decrease in interest income of $117,000 in the three months ended
March 31, 2003 as compared to the three months ended March 31,
2002.
20
o A decrease of $1.6 million in gains on resolutions of loans and loan
payments in excess of carrying value in the three months ended March
31, 2003 compared to the three months ended March 31, 2002. In the
three months ended March 31, 2002, we sold one loan having a book
value of $22.4 million for $24.0 million recognizing a gain of $1.6
million. No loans were sold in the three months ended March 31,
2003.
o An increase of $206,000 from our share of the operating results of
our unconsolidated real estate investments accounted for on the
equity method in the three months ended March 31, 2003 as compared
to the three months ended March 31, 2002. The increase was the
result of higher earnings from one of our investments.
o An increase in net rental and fee income of $453,000 in the three
months ended March 31, 2003, as compared to the three months ended
March 31, 2002, to $589,000 from $136,000. The increase resulted
primarily from fees we earned for services provided to the real
estate investment partnership which we sponsored in connection with
its purchase and third party financing of a property. We anticipate
earning additional fees from this partnership and any future real
estate investment partnerships which we may sponsor.
Revenues - Six Months Ended March 31, 2003 as Compared to the Six Months Ended
March 31, 2002
Revenues decreased $2.7 million (29%) to $6.6 million in the six months
ended March 31, 2003 from $9.3 million in the six months ended March 31, 2002.
We attribute the decrease to the following:
o A decrease in interest and accreted discount income of $2.1 million
resulting from the following:
- The sale or repayment of four loans, which decreased interest
income by $1.2 million in the six months ended March 31, 2003 as
compared to the six months ended March 31, 2002.
- The completion of accretion of discount on four loans, which
decreased interest income by $1.2 million in the six months ended
March 31, 2003 as compared to the six months ended months ended
March 31, 2002.
- These decreases were partially offset by an increase of $285,000
in our average rate of accretion on nine loans in the six months
ended March 31, 2003 as compared to the six months ended March
31, 2002.
o A decrease of $828,000 in gains on resolutions of loans. In the six
months ended March 31, 2003, we sold one loan, having a book value
of $4.2 million, for $5.0 million, recognizing a gain of $813,000,
as compared to the sale of one loan in the six months ended March
31, 2002 having a book value of $22.4 million for $24.0 million,
recognizing a gain of $1.6 million.
o A decrease of $229,000 from our share of the operating results of
our unconsolidated real estate investments accounted for on the
equity method in the six months ended March 31, 2003 as compared to
the six months ended March 31, 2002. The decrease was the result of
an increase in depreciation and an operating loss on a property in
which we acquired an interest in March 2002.
o An increase in net rental and fee income of $453,000 in the six
months ended March 31, 2003 as compared to the six months ended
March 31, 2002 to $657,000 from $204,000. The increase resulted
primarily from fees we earned for our services relating to the
purchase and financing of a property acquired by one real estate
investment partnership which we sponsored.
Gains on resolutions 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.
21
Costs and Expenses
Costs and expenses of our real estate finance operations were $937,000
and $1.8 million in the three months and six months ended March 31, 2003,
respectively, an increase of $473,000 (102%) and $796,000 (81%) from $464,000
and $987,000 in the same periods of the prior fiscal year. The increase resulted
from approximately $183,000 and $433,000 in non-recoverable payments which we
charged to earnings. These payments were made to protect our interests in
certain properties underlying our investments in real estate loans in the three
months and six months ended March 31, 2003, respectively. In addition, wages and
benefits increased $199,000 and $275,000 in the in the three months and six
months ended March 31, 2003, respectively, as compared to the prior year periods
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 ventures.
Results of Operations: Other Revenues, Costs and Expenses
Our interest and other income was $1.7 million and $4.0 million in the
three months and six months ended March 31, 2003, respectively, a decrease of
$177,000 (9%) and increase of $750,000 (23%) as compared to $1.9 million and
$3.3 million during the three months and six months ended March 31, 2002,
respectively. The following table sets forth information relating to interest
and other income during the periods indicated:
Three Months Ended Six Months Ended
March 31, March 31,
--------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands)
Interest income.............. $ 131 $ 322 $ 382 $ 669
Dividend income.............. 672 763 1,461 1,567
Gains on sale of assets...... 1,200 516 2,174 512
Other........................ (267) 634 (13) 506
-------- -------- -------- --------
$ 1,736 $ 1,913 $ 4,004 $ 3,254
======== ======== ======== ========
Interest income decreased $191,000 and $287,000 to $131,000 and
$382,000 for the three months and six months ended March 31, 2003 from $322,000
and $669,000 for the three months and six months ended March 31, 2002,
respectively. The decreases were primarily due to lower funds invested and lower
average rates earned on those funds invested. Gains on sale of assets for the
three months and six months ended March 31, 2003 were $1.2 million and $2.2
million as compared to $516,000 and $512,000 for the three months and six months
ended March 31, 2002, respectively. This primarily reflects the sale of 189,100
and 352,600 shares in RAIT Investment Trust from which we received net proceeds
of $4.0 million and $7.4 million and realized gains of $1.2 million and $2.1
million in the three and six months ended March 31, 2003, respectively. In the
three months and six months ended March 31, 2002, we realized gains of $524,000
and $529,000 associated with sales of property and equipment in our energy
segment. Other revenues decreased $901,000 and $519,000 to a net expense of
$267,000 and $13,000 for the three months and six months ended March 31, 2003
from a net income of $634,000 and $506,000 for the three months and six months
ended March 31, 2002, respectively. The three months and six months ended March
31, 2003 include net expenses from our financial services operations of $312,000
and $93,000 compared to a net income of $263,000 and $462,000 in the three
months and six months ended March 31, 2002, respectively. The net expenses in
our financial services operations reflect the startup phase of our equipment
leasing operations. These leasing operations do not meet the qualifications of
an operating segment at this time but are expected to in the near future.
Our general and administrative expenses decreased $268,000 (17%) in the
three months ended March 31, 2003 to $1.3 million from $1.6 million in the three
months ended March 31, 2002. This decrease primarily resulted from an increase
in reimbursements of expenses previously incurred by investment partnerships we
sponsor in connection with our syndication activities.
Our provision for legal settlement represents the estimated costs
associated with the settlement of an action filed by the former chairman of TRM
Corporation as described in Note 9 of our Annual Report on Form 10-K/A for the
fiscal year ended September 30, 2002. To the extent that our actual cost
(because of insurance recovery) is less than the provision, it will be recorded
as a reduction to our expenses in the period so determined.
22
Our depletion, depreciation and amortization consist 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 22% and 23% in
the three months and six months ended March 31, 2003 compared to 26% in the
three months and six months ended March 31, 2002, respectively. 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.
We own 51% of the partnership interest in Atlas Pipeline Partners, L.P.
through both our general partner's interest and the subordinated units we
received at the closing of Atlas Pipeline Partners' public offering. The
minority interest in Atlas Pipeline Partners is the interest of Atlas Pipeline
Partners' common unit holders. Because we own more than 50% of the partnership
interest and, as general partner, control Atlas Pipeline Partners, we include it
in our consolidated financial statements and show the ownership by the public as
a minority interest. The minority interest in Atlas Pipeline Partners earnings
was $884,000 and $1.5 million in the three months and six months ended March 31,
2003, as compared to $642,000 and $1.4 million in the three months and six
months ended March 31, 2002, an increase of $242,000 (38%) and $134,000 (10%),
respectively. This increase was the result of an increase in Atlas Pipeline
Partners' net income principally caused by increases in transportation fees
received. These fees vary with the price of natural gas, which on average was
higher in fiscal 2003 than 2002.
Our provision for possible losses increased $150,000 and $373,000 to
$800,000 and $1.2 million in the three months and six months ended March 31,
2003, respectively, as compared to $650,000 and $800,000 in the three months and
six months ended March 31, 2002, respectively. These increases resulted
primarily from certain payments for operating expenses of a property underlying
one of our loans that we anticipate making in order to protect our interest in
the underlying property.
Our effective tax rate decreased to 32% in the six months ended March
31, 2003 as compared to 33% in the six months ended March 31, 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 Statement of Financial Accounting Standards No. 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.
We had held a 50% interest in Optiron; as a result of the disposition, we
currently hold a 10% interest in Optiron.
Liquidity and Capital Resources
General. 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 Investment Trust 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:
Six Months Ended
March 31
-----------------------------
2003 2002
--------- ---------
(in thousands)
Provided by operations................... $ 17,410 $ 1,873
Used in investing activities............. (5,949) (2,431)
Used in financing activities............. (3,990) (15,795)
Used in discontinued operations.......... (5,624) (1,165)
--------- ---------
$ 1,847 $ (17,518)
========= =========
23
We had $27.6 million in cash and cash equivalents on hand at March 31,
2003, as compared to $25.7 million at September 30, 2002. Our ratio of earnings
from continuing operations before income taxes, minority interest and interest
expense to fixed charges was 2.4 to 1.0 in the six months ended March 21, 2003
as compared to 2.6 to 1.0 in the six months ended March 31, 2002. Our working
capital at March 31, 2003 was $6.5 million compared to $4.6 million at September
30, 2002. The increase was primarily due to a decrease in net liabilities
associated with assets held for disposal, partially offset by increases in
accounts payable and deferred revenue on drilling contracts as a result of our
sponsored investment drilling programs. Our long-term debt (including current
maturities) to total capital was 67% at March 31, 2003 and 64% at September 30,
2002.
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, interest rates, 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 $15.5 million in the six
months ended March 31, 2003 to $17.4 million from $1.9 million in the six months
ended March 31, 2002, substantially as a result of the following:
o Changes in operating assets and liabilities increased operating cash
flow by $22.4 million in the six months ended March 31, 2003,
compared to the six months ended March 31, 2002, primarily due to
decreases at March 31, 2002 and subsequent increases at March 31,
2003 in the level of accounts payable and accrued liabilities. These
levels of liabilities are dependent upon the remaining amount of our
drilling obligations at any balance sheet date, which is dependent
upon the timing of funds raised through our investment partnerships.
o Collection of interest on our real estate loans decreased $4.9
million due to payment in full of one real estate loan in the six
months ended March 31, 2002.
o A decrease in our deferred tax provision of $1.7 million.
Cash flows from investing activities. Net cash used in our investing
activities increased $3.5 million in the six months ended March 31, 2003 as
compared to the six months ended March 31, 2002 as a result of the following:
o Other assets increased $2.4 million due to investments in direct
financing leases that were subsequently transferred to our sponsored
equipment leasing investment partnership.
o Principal payments on notes receivable and proceeds from sales of
assets net of investments in real estate loans and ventures
decreased by $9.3 million in the six months ended March 31, 2003 as
compared to the six months ended March 31, 2002.
o Changes in proceeds and purchases of RAIT Investment Trust shares
increased cash flow by $9.2 million in the six months ended March
31, 2003 as compared to the six months ended March 31, 2002.
Cash flows from financing activities. Net cash used in our financing
activities decreased $11.8 million in the six months ended March 31, 2003 as
compared to the six months ended March 31, 2002, as a result of the following:
o Principal payments on borrowings decreased $15.0 million, reflecting
a pay down of debt in our real estate segment in the prior year as a
result of the payment in full of one real estate loan.
o Purchases of treasury shares increased cash used by $2.7 million.
24
Capital Requirements
During the six months ended March 31, 2003 and 2002, our capital
expenditures related primarily to our investments in our drilling partnerships
and pipeline expansions, in which we invested $12.7 million and $11.5 million,
respectively. For the six months ended March 31, 2003 and the remaining quarters
of fiscal 2003, we funded and expect to continue to fund these capital
expenditures through cash on hand, borrowings under our credit facilities, and
from operations. Through our energy subsidiaries, we have established two credit
facilities to facilitate the funding of our capital expenditures. In July 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 replaced our
$10.0 million PNC Bank credit facility with a new $15.0 million credit facility
with Wachovia Bank.
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. 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 obtain outside capital.
Contractual Obligations and Commercial Commitments
The following tables set forth our obligations and commitments as of
March 31, 2003.
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........................... $ 158,072 $ 3,731 $ 153,183 $ 1,158 $ -
Capital lease obligations................ - - - - -
Operating leases......................... 4,791 1,396 2,295 1,065 35
Unconditional purchase obligations....... - - - - -
Other long-term obligations.............. - - - - -
----------- ----------- ----------- ----------- ---------
Total contractual cash obligations....... $ 162,863 $ 5,127 $ 155,478 $ 2,223 $ 35
=========== =========== ============ ========== ==========
Amount of Commitment Expiration Per Period
(in thousands)
----------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Contractual cash obligations: Total 1 Year Years Years Years
----------- ----------- ----------- ----------- ---------
Standby letters of credit................ $ 275 $ - $ 275 $ - $ -
Guarantees............................... 2,791 1,284 1,507 - -
Standby replacement commitments.......... 10,483 4,899 5,584 - -
Other commercial commitments............. 193,872 2,933 60,894 3,822 126,223
----------- ----------- ----------- ----------- ---------
Total commercial commitments............. $ 207,421 $ 9,116 $ 68,260 $ 3,822 $ 126,223
=========== =========== ============ ========== ==========
25
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of our
assets, liabilities, revenues 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.
For a detailed discussion on the application of policies critical to
our business operations and other accounting policies, see Note 2 of the "Notes
to Consolidated Financial Statements" in our Annual Report on Form 10-K/A.
Recently Issued Financial Accounting Standards
In December 2002, the Financial Accounting Standards Board, which we
refer to as the FASB, issued Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS
148 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 adoption of SFAS 148 did not have a material effect on
our consolidated financial position or results of operations.
In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". FIN 45 clarifies the requirements for a
guarantor's accounting for and disclosure of certain guarantees issued and
outstanding and requires a guarantor to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken. The objective of
the initial measurement of that liability is the fair value of the guarantee at
its inception. The initial recognition and measurement provisions are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
The adoption of FIN 45 did not have a material effect on our financial position
or results of operations.
In January 2003, the FASB issued Interpretation 46, "Consolidation of
Variable Interest Entities", which we are required to adopt on July 1, 2003. FIN
46's consolidation criteria are based on analysis of risks and rewards, not
control, and represent a significant and complex modification of previous
accounting principles. FIN 46 represents an accounting change, not a change in
the underlying economics of the applicable investment. We are assessing the
impact of the adoption of FIN 46. However, based on management's preliminary
assessment, it is reasonably possible that we may be required to consolidate
several entities in which we have an investment. Under FIN 46, certain real
estate loans presently carried on our books could be removed and replaced by
real property and associated third-party debt. In the event we are required to
consolidate any of these entities, we would not acquire any legal ownership of
the property owned by the entity, nor would our legal rights and obligations
change. The complexity of the new consolidation rules and their evolving
clarification make forecasting their effect impracticable.
26
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 March 31, 2003. Only the potential impacts of hypothetical
assumptions are analyzed. The analysis does not consider other possible effects
that could impact our business.
Energy
Interest Rate Risk. At March 31, 2003, the amount outstanding under a
revolving loan attributable to our energy operations had decreased to $39.0
million from $43.7 million at September 30, 2002. The weighted average interest
rate for this facility decreased from 3.9% at September 30, 2002 to 3.7% at
March 31, 2003 due to a decrease in interest rates. Holding all other variables
constant, if interest rates hypothetically increased or decreased by 10%, our
net annual income would change by approximately $98,000.
We have a $15.0 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 six months ended March 31, 2003, we drew
$2.9 million under this facility. The balance outstanding as of March 31, 2003
was $8.5 million. The weighted average interest rate was 2.9% and 3.27% at March
31, 2003 and September 30, 2002, respectively. 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 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 a portion of expected production volumes, allowing us to
forecast future earnings within a more predictable range.
Our contract with an affiliate of First Energy Corporation allows us
from time to time to "lock in" the sales price for some of our natural gas
production volumes to be delivered in either the current month or in future
months, rather than selling those same production volumes at contract prices in
the month produced. Annually, we negotiate with certain other 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 fiscal year ended
September 30, 2002, approximately 38% of produced volumes were sold in this
manner. For the fiscal year ending September 30, 2003, we estimate in excess of
64% of our produced natural gas volumes will be sold in this manner, leaving the
remaining 36% 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 2% change in our natural gas revenues.
27
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 March 31, 2003, we had gas hedges in place covering 516,000
dekatherms or dths, maturing through September 30, 2003. We include an
adjustment of $2.6 million 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 production sold is included in
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 three and six months ended March 31, 2003 were $448,000 and
$544,000, respectively.
We set forth in the following table our natural gas hedge transactions
in place as of March 31, 2003. A 10% variation in the market price of natural
gas from its levels at March 31, 2003 would not have a material impact on our
net assets, net earnings or cash flows.
Volumes of Settlement Date Weighted Average Unrealized
Open Contracts Natural Gas (Dth) Quarter Ended Price Per Dth Losses
- -------------- ----------------- --------------- ---------------- -----------
105 315,000 June 2003 $ 3.57 $ 480,000
67 201,000 September 2003 3.63 300,000
--- ------- ------- -----------
172 516,000 $ 3.59 $ 780,000
=== ======= ======= ===========
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 six months
ended March 31, 2003, our outstanding loans receivable (to our interest)
increased $8.2 million (3%) to $305.5 million in the aggregate and the carried
cost of our loans decreased $328,000 (.2%) to $148.2 million in the aggregate.
The principal balance of related senior lien interests decreased $2.4 million
(1%) to $19.9 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 six months ended March
31, 2003 because the defined prime rate decreased. This defined rate was the
"prime rate" as reported in The Wall Street Journal (4.25% at March 31, 2003). A
hypothetical 10% change in the average interest rate applicable to these lines
of credit would change our net income by approximately $80,000.
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 March 31, 2003, $7.0 million was
outstanding on this loan at an interest rate of 4.9%. A hypothetical 10% change
in the average interest rate applicable to this loan would change our net income
by approximately $23,000.
28
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:
the lender's prime rate plus 200 basis points, or LIBOR plus 300 basis points.
As of March 31, 2003, the balance outstanding was $298,000 at an average
interest rate of 4.3%. 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
We have 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; the prime rate, or LIBOR plus 250 basis points. Each
rate is subject to a floor of 5.5% and a ceiling of 9.0%. As of March 31, 2003,
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
change our net income by approximately $19,000.
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.
29
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation of Resource America. (1)
3.2 Amended and Restated Bylaws of Resource America. (1)
10.1 Employment Agreement between Edward E. Cohen and Resource America, dated March 11, 1997.(2)
10.2 Indenture, dated as of July 22, 1997, between Resource America and The Bank of New York.(3)
10.3 Revolving Credit Loan Agreement dated July 27, 1999 by and between Resource America, Inc.
and Sovereign Bank. (4)
10.4 Revolving Credit Loan and Security Agreement, dated July 27, 1999, among Resource
Properties, Inc., Resource Properties 53, Inc., Resource Properties XXIV, Inc. Resource
Properties, XL, Inc. and Sovereign Bank. (4) 10.4(a) Modification of Revolving Credit Loan
and Security Agreement dated March 30, 2000. (4) 10.5 Employment Agreement between Steven
J. Kessler and Resource America, dated October 5, 1999. (1)
10.6 Employment Agreement between Nancy J. McGurk and Resource America, dated October 5, 1999.(1)
10.7 Employment Agreement between Jonathan Z. Cohen and Resource America, dated October 5, 1999. (4)
Amended and Restated Loan Agreement, dated December 14, 1999, among Resource Properties
10.8 XXXII, Inc., Resource Properties XXXVIII, Inc., Resource Properties II, Inc., Resource
Properties 51, Inc., Resource Properties, Inc., Resource America and Jefferson Bank (now
known as Hudson United Bank). (4)
10.9 Term Loan Agreement between Resource Properties, Inc. and Miller & Schroeder Investments
Corporation, dated November 15, 2000. (4)
10.10 Revolving Credit Agreement and Assignment between LEAF Financial Corporation and National
City Bank, and related guaranty from Resource America, Inc., dated June 11, 2002.(4)
10.11 Credit Agreement among Atlas America, Inc., Resource America, Inc., Wachovia Bank, National
Association, and other banks party thereto, dated July 31, 2002. (5)
10.12 Agreement between Resource Financial Fund Management, Inc. and 9 Henmar LLC, dated October
23, 2002. (5)
10.13 Credit Agreement among Atlas Pipeline Partners, L.P., Wachovia Bank, National Association,
and the other parties thereto, dated December 27, 2002.(7)
10.13(a) Second Amendment to Credit Agreement, dated March 28, 2003.
10.14 Settlement Agreement between Resource America, Inc., FLI Holdings, Inc., AEL Leasing Co.,
Inc. and Citibank, N.A., dated December 31, 2002.(7)
10.15 Agreement between Resource Financial Fund Management, Inc. and 9 Henmar LLC, dated January
30, 2003.
10.16 1997 Key Employee Stock Option Plan.(8)
10.17 1997 Non-Employee Director Deferred Stock and Deferred Compensation Plan.(8)
10.17(a) Amendment to Plan.(9)
10.18 1999 Key Employee Stock Option Plan.(10)
10.19 2002 Non-Employee Director Deferred Stock and Deferred Compensation Plan.(11)
10.19(a) Amendment to Plan.(9)
10.20 2002 Key Employee Stock Option Plan.(12)
10.21 Agreement between Resource Financial Fund Management, Inc. and 9 Henmar LLC, dated April 15, 2003.
30
99.1 Certification Pursuant to 302 of the Sarbannes Oxley Act of 2002.
99.2 Certification Pursuant to 302 of the Sarbannes Oxley Act of 2002.
99.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
99.4 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
- -------------------
(1) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for
the quarter ended December 31, 1999 and by this reference incorporated
herein.
(2) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997 and by this reference incorporated
herein.
(3) Filed previously as an exhibit to our Registration Statement on Form
S-4 (File No. 333-40231) and by this reference incorporated herein.
(4) Filed previously as an exhibit to our Annual Report on Form 10-K for
the year ended September 30, 2000 and by this reference incorporated
herein.
(5) Filed previously as an exhibit to our Annual Report on Form 10-K for
the year ended September 30, 2002 and by this reference incorporated
here.
(6) 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.
(7) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for
the quarter ended December 31, 2002 and by this reference incorporated
herein.
(8) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 and by this reference incorporated
herein.
(9) Filed previously as an exhibit to our Definitive Proxy Statement on
Schedule 14A for the 2003 annual meeting of stockholders and by this
reference incorporated herein.
(10) Files previously as an exhibit to our Definitive Proxy Statement on
Schedule 14A for the 1999 annual meeting of stockholders and by this
reference incorporated herein.
(11) Filed previously as an exhibit to our Registration Statement on Form
S-8 (File No. 333-98507) and by this reference incorporated herein.
(12) Filed previously as an exhibit to our Registration Statement on Form
S-8 (File No. 333-98505) and by this reference incorporated herein.
31
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: May 14, 2003 By: Steven J. Kessler
--------------------------
STEVEN J. KESSLER
Senior Vice President and
Chief Financial Officer
Date: May 14, 2003 By: Nancy J. McGurk
--------------------------
NANCY J. McGURK
Vice President-Finance and
Chief Accounting Officer
32