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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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:
17,359,218 Shares at February 1, 2004
RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PART I FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 2003 (Unaudited)
and September 30, 2003.................................................................... 2
Consolidated Statements of Income (Unaudited)
Three Months Ended December 31, 2003 and 2002............................................. 3
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
Three Months Ended December 31, 2003...................................................... 4
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended December 31, 2003 and 2002............................................. 5
Notes to Consolidated Financial Statements - December 31, 2003 (Unaudited)................... 6 - 22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (unaudited)..................................................... 23 - 35
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................... 36 - 37
Item 4. Controls and Procedures...................................................................... 38
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 39
Item 6. Exhibits and Reports on Form 8-K............................................................. 39
SIGNATURES.................................................................................................... 40
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESOURCE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
2003 2003
------------- --------------
(unaudited)
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 30,849 $ 41,129
Accounts receivable and prepaid expenses......................................... 35,509 30,416
FIN 46 entities' and other assets held for sale.................................. 121,149 222,677
------------- --------------
Total current assets........................................................... 187,507 294,222
Investments in real estate loans and real estate.................................... 72,458 68,936
FIN 46 entities' assets............................................................. 67,897 78,247
Investment in RAIT Investment Trust................................................. 17,117 20,511
Property and equipment, net......................................................... 151,483 143,410
Other assets........................................................................ 24,291 19,509
Intangible assets, net.............................................................. 8,199 8,476
Goodwill............................................................................ 37,471 37,471
------------- --------------
$ 566,423 $ 670,782
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................ $ 14,948 $ 59,471
Secured revolving credit facilities - leasing.................................... 14,370 7,168
Accounts payable................................................................. 21,681 19,065
FIN 46 entities' and other liabilities associated with assets held for sale...... 81,129 141,473
Accrued liabilities.............................................................. 15,220 14,626
Liabilities associated with drilling contracts................................... 40,551 22,158
------------- --------------
Total current liabilities...................................................... 187,899 263,961
Long-term debt...................................................................... 53,974 73,696
Deferred revenue and other liabilities.............................................. 3,677 3,633
FIN 46 entities' liabilities........................................................ 33,263 45,184
Deferred income taxes............................................................... 14,218 12,878
Minority interest in Atlas Pipeline Partners, L.P................................... 43,551 43,976
Commitments and contingencies....................................................... -- --
Stockholders' equity:
Preferred stock $1.00 par value: 1,000,000 authorized shares..................... -- --
Common stock, $.01 par value: 49,000,000 authorized shares....................... 255 255
Additional paid-in capital....................................................... 227,201 227,211
Less treasury stock, at cost..................................................... (78,798) (78,860)
Less ESOP loan receivable........................................................ (1,129) (1,137)
Accumulated other comprehensive income........................................... 5,174 5,611
Retained earnings................................................................ 77,138 74,374
------------- --------------
Total stockholders' equity..................................................... 229,841 227,454
------------- --------------
$ 566,423 $ 670,782
============= ==============
See accompanying notes to consolidated financial statements
2
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
December 31,
-------------------------------
2003 2002
----------- -----------
(in thousands)
REVENUES
Energy.......................................................................... $ 35,733 $ 17,960
Real estate..................................................................... 4,383 3,159
Leasing......................................................................... 1,624 1,147
Equity in earnings of Trapeza entities.......................................... 959 122
Interest, dividends, gains and other............................................ 1,829 1,972
----------- -----------
44,528 24,360
COSTS AND EXPENSES
Energy.......................................................................... 23,326 10,986
Real estate finance............................................................. 3,838 846
Leasing......................................................................... 1,546 999
General and administrative...................................................... 2,325 1,572
Depreciation, depletion and amortization........................................ 3,437 2,983
Interest........................................................................ 2,667 3,338
Provision for possible losses................................................... 300 373
Minority interest in Atlas Pipeline Partners, L.P............................... 1,273 645
----------- -----------
38,712 21,742
----------- -----------
Income from continuing operations before income taxes........................... 5,816 2,618
Provision for income taxes...................................................... 2,035 837
----------- -----------
Income from continuing operations............................................... 3,781 1,781
Loss on discontinued operations, net of income tax benefit of $236.............. (438) --
----------- -----------
Net income...................................................................... $ 3,343 $ 1,781
=========== ===========
Net income (loss) per common share - basic:
From continuing operations...................................................... $ .22 $ .10
Discontinued operations......................................................... (.03) --
----------- -----------
Net income per common share - basic............................................. $ .19 $ .10
=========== ===========
Weighted average common shares outstanding...................................... 17,355 17,369
=========== ===========
Net income (loss) per common share - diluted:
From continuing operations...................................................... $ .21 $ .10
Discontinued operations......................................................... (.02) --
----------- -----------
Net income per common share - diluted........................................... $ .19 $ .10
=========== ===========
Weighted average common shares.................................................. 17,953 17,647
=========== ===========
See accompanying notes to consolidated financial statements
3
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 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, 2003.................. 25,463,645 $ 255 $ 227,211 (8,113,500) $ (78,860) $ (1,137)
Common shares issued...................... 2,000 -- 16 -- -- --
Treasury shares issued.................... -- -- (26) 2,930 62 --
Other comprehensive income................ -- -- -- -- -- --
Cash dividends ($.033 per share).......... -- -- -- -- -- --
Repayment of ESOP Loan.................... -- -- -- -- -- 8
Net income................................ -- -- -- -- -- --
------------------------------------------------------------------------------
Balance, December 31, 2003................ 25,465,645 $ 255 $ 227,201 (8,110,570) $ (78,798) $ (1,129)
========== ========= =========== =========== =========== ==========
Accumulated
Other Totals
Comprehensive Retained Stockholders'
Income Earnings Equity
-------------------------------------------
Balance, October 1, 2003.................. $ 5,611 $ 74,374 $ 227,454
Common shares issued...................... -- -- 16
Treasury shares issued.................... -- -- 36
Other comprehensive income................ (437) -- (437)
Cash dividends ($.033 per share).......... -- (579) (579)
Repayment of ESOP Loan.................... -- -- 8
Net income................................ -- 3,343 3,343
------------------------------------------
Balance, December 31, 2003................ $ 5,174 $ 77,138 $ 229,841
============ ========== ===========
See accompanying notes to consolidated financial statements
4
RESOURCE AMERICA, INC.
CONSOLIDATED STATEENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
-----------------------------
2003 2002
--------- ---------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 3,343 $ 1,781
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization....................................... 3,437 2,983
Amortization of discount on senior debt and deferred finance costs............. 398 333
Provision for possible losses.................................................. 300 373
Equity in earnings of Trapeza entities......................................... (959) (122)
Equity in (earnings) losses of other equity investees.......................... (137) 348
Minority interest in Atlas Pipeline Partners, L.P.............................. 1,273 645
Loss on discontinued operations................................................ 438 --
Net loss on asset dispositions and buyback of senior notes..................... 1,442 (818)
Gain on sale of RAIT Investment Trust shares................................... (2,508) (969)
Property impairments and abandonments.......................................... 6 6
Deferred income taxes.......................................................... (605) 1,573
Accretion of discount.......................................................... (557) (695)
Collection of interest......................................................... -- 91
Non-cash compensation ......................................................... 35 36
Net change in FIN 46 entities' net assets and other net assets held for sale..... (1,594) --
Changes in operating assets and liabilities...................................... 19,220 7,076
--------- ---------
Net cash provided by operating activities........................................ 23,532 12,641
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................. (11,156) (4,185)
Payments received on real estate loans and real estate........................... 1,431 3,764
Investments in real estate loans and real estate................................. (255) (1,160)
Proceeds from sale of assets..................................................... 43 6
Proceeds from sale of RAIT Investment Trust shares............................... 5,612 3,401
Net investments in Trapeza entities.............................................. (2,647) (3,025)
(Increase) decrease in other assets.............................................. (658) 162
--------- ---------
Net cash provided by (used in) investing activities.............................. (7,630) (1,037)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings....................................................................... 53,868 42,695
Principal payments on borrowings................................................. (112,322) (26,828)
Dividends paid .................................................................. (579) (582)
Distributions paid to minority interests of Atlas Pipeline Partners, L.P......... (1,683) (875)
Purchase of treasury stock....................................................... -- (1,597)
Repayment of ESOP loan........................................................... 8 8
Increase in other assets......................................................... (31) (496)
Proceeds from issuance of stock.................................................. 16 --
--------- ---------
Net cash (used in) provided by financing activities.............................. (60,723) 12,325
--------- ---------
Net cash provided by (used in) discontinued operations........................... 34,541 (5,624)
--------- ---------
(Decrease) increase in cash and cash equivalents................................. (10,280) 18,305
Cash and cash equivalents at beginning of period................................. 41,129 25,736
--------- ---------
Cash and cash equivalents at end of period....................................... $ 30,849 $ 44,041
========= =========
See accompanying notes to consolidated financial statements
5
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 1 - MANAGEMENT'S OPINION REGARDING INTERIM FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly-owned except for Atlas
Pipeline Partners, L.P. ("Atlas Pipeline"). In addition, commencing with the
adoption of FASB Interpretation 46, "Consolidation of Variable Interest
Entities" ("FIN 46") on July 1, 2003 the Company has consolidated certain
variable interest entities ("VIEs") in which the Company has determined that it
is the primary beneficiary.
The consolidated financial statements and the information and tables
contained in the notes to the consolidated financial statements as of December
31, 2003 and for the three months ended December 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, 2003. The results of operations for the three months ended
December 31, 2003 may not necessarily be indicative of the results of operations
for the full fiscal year ending September 30, 2004.
Certain reclassifications have been made to the consolidated financial
statements as of September 30, 2003 and for the three months ended December 31,
2002 to conform to the presentation as of and for the three months ended
December 31, 2003.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Comprehensive Income
The following table presents comprehensive income for the periods
indicated:
Three Months Ended
December 31,
---------------------------------
2003 2002
------------- -----------
(in thousands)
Net income......................................................................... $ 3,343 $ 1,781
Other comprehensive income (loss):
Unrealized gain on investment in RAIT Investment Trust, net of taxes of
$643 and $442................................................................. 1,194 858
Less: reclassification adjustment for gain realized in net income, net of taxes
of $887 and $359.............................................................. (1,631) (610)
------------- -----------
(437) 248
Unrealized loss on natural gas futures and options contracts,
net of taxes of $142.......................................................... -- (275)
Less: reclassification adjustment for losses realized in net income, net of
taxes of $33.................................................................. -- 63
------------- -----------
-- (212)
------------- -----------
Comprehensive income............................................................... $ 2,906 $ 1,817
============= ===========
6
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Comprehensive Income - (Continued)
Accumulated other comprehensive income is related to the following:
December 31, September 30,
2003 2003
------------- -----------
(in thousands)
Marketable securities-unrealized gains.......................................... $ 5,174 $ 5,611
============= ===========
Property and Equipment
Property and equipment consists of the following:
December 31, September 30,
2003 2003
------------- -----------
(in thousands)
Mineral interests in properties:
Proved properties........................................................... $ 844 $ 844
Unproved properties......................................................... 943 563
Wells and related equipment..................................................... 194,540 184,226
Support equipment............................................................... 2,240 2,189
Other........................................................................... 9,471 9,136
------------- -----------
208,038 196,958
Accumulated depreciation, depletion, amortization and valuation allowances:
Oil and gas properties...................................................... (52,926) (50,170)
Other (3,629) (3,378)
------------- -----------
(56,555) (53,548)
------------- -----------
$ 151,483 $ 143,410
============= ===========
Investment in RAIT Investment Trust
The Company accounts for its investment in RAIT Investment Trust
("RAIT") in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
This investment is classified as available-for-sale and, as such, is carried at
fair market value based on market quotes. Unrealized gains and losses, net of
taxes, are reported as a separate component of stockholders' equity. The cost of
securities sold is based on the specific identification method.
The following table discloses the pre-tax unrealized gains relating to
the Company's investment in RAIT at the dates indicated:
December 31, September 30,
2003 2003
------------- -----------
(in thousands)
Cost............................................................................ $ 9,157 $ 12,260
Unrealized gains................................................................ 7,960 8,251
------------- -----------
Estimated fair value............................................................ $ 17,117 $ 20,511
============= ===========
7
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Fair Value of Financial Instruments
The Company uses the following methods and assumptions in estimating
the fair value of each class of financial instruments for which it is
practicable to estimate fair value.
For cash and cash equivalents, receivables and payables the carrying
amounts approximate fair value because of the short maturity of these
instruments.
For investments in real estate loans, because each loan is a unique
transaction involving a discrete property, it is impractical to determine their
fair values. However, the Company believes the carrying amounts of the loans are
reasonable estimates of their fair value considering the nature of the loans and
the estimated yield relative to the risks involved.
For secured revolving credit facilities - leasing, the carrying amount
approximates fair value because of the short maturity of these instruments.
The following table provides information on other financial
instruments:
December 31, 2003 September 30, 2003
-------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(in thousands)
Energy non-recourse debt........................... $ 19,180 $ 19,180 $ 31,194 $ 31,194
Real estate finance debt........................... 17,815 17,815 19,469 19,469
Senior debt........................................ 13,027 13,418 54,027 55,648
Other debt......................................... 18,900 18,900 28,477 28,477
---------- ----------- ----------- -----------
$ 68,922 $ 69,313 $ 133,167 $ 134,788
========== =========== =========== ===========
Earnings Per Share
Basic earnings (loss) per share is determined by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Earnings (loss) per share - diluted is computed by dividing
net income (loss) by the sum of the weighted average number of shares of common
stock outstanding and dilutive potential shares issuable during the period.
Dilutive potential shares of common stock consist of the excess of shares
issuable under the terms of various stock option plans over the number of such
shares that could have been reacquired (at the weighted average price of shares
during the period) with the proceeds received from the exercise of the options.
8
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Earnings Per Share - (Continued)
The following table presents a reconciliation of the components used in
the computation of net income (loss) per common share-basic and net income
(loss) per common share-diluted for the periods indicated:
Three Months Ended
December 31,
---------------------------------
2003 2002
------------- -----------
(in thousands)
Income from continuing operations............................................... $ 3,781 $ 1,781
Loss from discontinued operations............................................... (438) --
------------- -----------
Net income...................................................................... $ 3,343 $ 1,781
============= ===========
Basic average shares of common stock outstanding................................ 17,355 17,369
Dilutive effect of stock option and award plans................................. 598 278
------------- -----------
Dilutive average shares of common stock......................................... 17,953 17,647
============= ===========
Asset Retirement Obligations
The Company accounts for its estimated plugging and abandonment of its
oil and gas properties in accordance with SFAS 143, "Accounting for Asset
Retirement Obligations."
A reconciliation of the Company's liability for well plugging and
abandonment costs for the periods indicated follows:
Three Months Ended
December 31,
---------------------------------
2003 2002
------------- -----------
(in thousands)
Asset retirement obligations, beginning of period............................... $ 3,131 $ --
Liabilities incurred............................................................ 30 --
Adoption of SFAS 143............................................................ -- 3,380
Liabilities settled............................................................. (28) --
Accretion expense............................................................... 47 --
------------- -----------
Asset retirement obligations, end of period..................................... $ 3,180 $ 3,380
============= ===========
The above accretion expense is included in depreciation, depletion and
amortization in the Company's consolidated statements of income and the asset
retirement obligation liabilities are included in deferred revenue and other
liabilities in the Company's consolidated balance sheets.
9
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 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:
Three Months Ended
December 31,
----------------------------------
2003 2002
------------- ------------
(in thousands)
Cash paid during the period for:
Interest..................................................................... $ 2,865 $ 1,035
Income taxes................................................................. $ -- $ --
Non-cash activities:
Receipt of notes upon resolution of a real estate loan and a FIN 46 asset.... $ 8,772 $ 1,350
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 substantially all grants of stock options no stock-based
employee compensation expense 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 No. 123, "Accounting
for Stock-Based Compensation, ("SFAS 123") as amended by the required
disclosures of SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure."
Three Months Ended
December 31,
----------------------------------
2003 2002
------------- ------------
(in thousands, except per share data)
Net income as reported........................................................... $ 3,343 $ 1,781
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....................................... (761) (828)
------------- ------------
Pro forma net income............................................................. $ 2,582 $ 953
============= ============
Net income per common share:
Basic - as reported........................................................... $ .19 $ .10
Basic - pro forma............................................................. $ .15 $ .05
Diluted - as reported......................................................... $ .19 $ .10
Diluted - pro forma........................................................... $ .14 $ .05
10
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Derivative Instruments and Hedging Activities
The Company, through its energy subsidiaries from time to time, enters
into natural gas futures and option contracts to hedge its exposure to changes
in natural gas prices. At any point in time, such contracts may include
regulated New York Mercantile Exchange ("NYMEX") futures and options contracts
and non-regulated over-the-counter futures contracts with qualified
counterparties. NYMEX contracts are generally settled with offsetting positions,
but may be settled by the delivery of natural gas.
The Company formally documents all relationships between hedging
instruments and the items being hedged, including the Company's risk management
objectives and strategy for undertaking the hedging transactions. This includes
matching the natural gas futures and options contracts to the hedged asset. The
Company assesses, both at the inception of the hedge and on an ongoing basis,
whether the derivatives are highly effective in offsetting changes in fair value
of hedged items. When it is determined that a derivative is not highly effective
as a hedge or it has ceased to be a highly effective hedge due to the loss of
correlation between changes in gas reference prices under a hedging instrument
and actual gas prices, the Company will discontinue hedge accounting for the
derivative and further changes in fair value for the derivative will be
recognized immediately into earnings. Gains or losses on these instruments are
accumulated in other comprehensive income (loss) to the extent that these hedges
are deemed to be highly effective as hedges, and are recognized in earnings in
the period in which the hedged item is recognized in earnings.
At December 31, 2003, the Company had no open natural gas futures
contracts related to natural gas sales. 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 did not settle any contracts during the
three months ended December 31, 2003. The Company recognized losses of $96,000
on settled contracts during the three months ended December 31, 2002. The
Company recognized no gains or losses during the three months ended December 31,
2003 for hedge ineffectiveness or as a result of the discontinuance of cash flow
hedges.
Although hedging provides the Company some protection against falling
prices, these activities could also reduce the potential benefits of price
increases, depending upon the instrument.
Recently Issued Financial Accounting Standards
In December 2003, the Financial Accounting Standards Board ("FASB")
revised SFAS No. 132, "Employers' Disclosures about Pensions and other
Postretirement Benefits," ("SFAS No. 132") establishing additional annual
disclosures about plan assets, investment strategy, measurement date, plan
obligations and cash flows. In addition, the revised standard established
interim disclosure requirements related to the net periodic benefit cost
recognized and contributions paid or expected to be paid during the current
fiscal year. The new annual disclosures are effective for financial statements
with fiscal years ending after December 15, 2003 and the interim-period
disclosures are effective for interim periods beginning after December 15, 2003.
The adoption of the revised SFAS No. 132 will have no impact on the Company's
results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149 ("SFAS 149") "Amendment of
Statement 133 on Derivative Instruments and Hedging Activates." SFAS 149 is
effective for contracts entered into or modified after December 31, 2003 and
amends and clarifies financial accounting and reporting for derivative
instruments. The Company believes that adoption of SFAS 149 will not have a
material effect on its financial position or results of operations.
11
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 3 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES
Certain entities relating to the Company's real estate finance business
have been consolidated in accordance with Financial Accounting Standards Board's
Interpretation 46, "Consolidation of Variable Interest Entities," ("FIN 46")
"Consolidation of Variable Interest Entities." The assets, liabilities, revenues
and expenses of the consolidated variable interest entities ("VIEs") are
included in the Compnay's financial statements and the investments in real
estate loans, which previously were the Company's variable interests in the VIEs
and related interest income have been removed from the financial statement.
These VIEs are consolidated because the Company has been determined to be the
primary beneficiary of these entities as defined in FIN 46.
The assets and liabilities of the VIE's that are now included in the
consolidated financial statements are not the Company's. The liabilities will be
satisfied from the cash flows of the VIE's consolidated assets, not from the
assets of the Company, which has no legal obligation to satisfy those
liabilities. The following tables provide supplemental information about assets,
liabilities, revenues and expenses associated with entities consolidated in
accordance with FIN 46 and not classified as held for sale at the dates
indicated.
December 31, September 30,
2003 2003
----------- ------------
(in thousands)
Assets:
Cash......................................................................... $ 3,504 $ 1,689
Accounts receivables......................................................... 253 451
Real estate assets, net...................................................... 64,140 76,035
Other........................................................................ -- 72
----------- ------------
Total FIN 46 entities' assets.............................................. $ 67,897 $ 78,247
=========== ============
Liabilities:
Mortgage loans on real estate................................................ $ 24,505 $ 37,620
Other........................................................................ 8,758 7,564
----------- ------------
Total FIN 46 entities' liabilities......................................... $ 33,263 $ 45,184
=========== ============
Three Months Ended
December 31,
2003
-----------
(in thousands)
Operating Information - included in real estate finance:
Revenues..................................................................... $ 2,364
Costs and expenses:
Operating expenses......................................................... 1,668
Depreciation and amortization.............................................. 286
Interest................................................................... 391
-----------
Total costs and expenses................................................. 2,345
-----------
Operating income........................................................... $ 19
===========
12
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 3 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES - (Continued)
The following tables provide supplemental information about assets,
liabilities, revenues and expenses associated with entities that are held for
sale, substantially all of which are consolidated in accordance with FIN 46 (See
Note 10). During the three months ended December 31, 2003, the Company
liquidated its position in two entities which were classified as held for sale
at September 30, 2003.
December 31, September 30,
2003 2003
------------- -------------
(in thousands)
Assets:
Cash......................................................................... $ 2,300 $ 3,960
Accounts receivables......................................................... 3,670 2,988
Real estate assets, net...................................................... 115,172 213,026
Other........................................................................ 7 2,703
------------- -------------
Total assets held for sale................................................. $ 121,149 $ 222,677
============= =============
Liabilities:
Mortgage loans on real estate................................................ $ 72,277 $ 130,687
Other........................................................................ 8,852 10,786
------------- -------------
Total liabilities held for sale............................................ $ 81,129 $ 141,473
============= =============
Three Months Ended
December 31,
2003
-------------
(in thousands)
Loss from Discontinued Operations:
Revenues..................................................................... $ 1,914
Expenses..................................................................... 2,588
-------------
Operating loss............................................................... (674)
Income tax benefit........................................................... 236
-------------
Loss from discontinued operations.......................................... $ (438)
=============
13
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 4 - OTHER ASSETS, INTANGIBLE ASSETS AND GOODWILL
Other Assets
The following table provides information about other assets at the
dates indicated.
December 31, September 30,
2003 2003
------------- -------------
(in thousands)
Deferred financing costs, net of accumulated amortization of
$5,902 and $5,504............................................................ $ 1,615 $ 2,105
Equity method investments in Trapeza entities.................................... 8,408 4,802
Investments at lower of cost or market........................................... 6,162 6,185
Other............................................................................ 8,106 6,417
------------- -------------
Total other assets........................................................... $ 24,291 $ 19,509
============= =============
Deferred financing costs are amortized over the terms of the related
loans (two to seven years)
Investments in Trapeza entities are accounted for using the equity
method of accounting because the Company, as a 50% owner of the general partner
of these entities, has the ability to exercise significant influence over their
operating and financial decisions. The Company's combined general and limited
partner interests in these entities range from 15% to 18%.
Investments at the lower of cost or market include non-marketable
investments in entities in which the Company has less than a 20% ownership
interest, and in which it does not have the ability to exercise significant
influence. These investments include approximately 10% of the outstanding shares
of The Bancorp, Inc. ("TBI"), a related party.
Intangible Assets
Partnership management and operating contracts and the Company's
equipment leasing operating system, or leasing platform, were acquired through
acquisitions recorded at fair value on their acquisition dates. The Company
amortizes contracts acquired on a declining balance method over their respective
estimated lives, ranging from five to thirteen years. The leasing platform is
amortized on the straight-line method over seven years. Amortization expense for
the three months ended December 31, 2003 and 2002 was $277,000 and $317,000,
respectively. The aggregate estimated annual amortization expense is
approximately $1.1 million for each of the succeeding five years.
The following table provides information about intangible assets at the
dates indicated:
December 31, September 30,
2003 2003
------------- -------------
(in thousands)
Partnership management and operating contracts................................... $ 14,343 $ 14,343
Leasing platform................................................................. 918 918
------------- -------------
15,261 15,261
Accumulated amortization......................................................... (7,062) (6,785)
------------- -------------
Intangible assets, net........................................................... $ 8,199 $ 8,476
============= =============
14
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 4 - OTHER ASSETS, INTANGIBLE ASSETS AND GOODWILL - (Continued)
Goodwill
The Company accounts for its goodwill in accordance with SFAS 142
"Goodwill and Other Intangible Assets." The Company evaluates its goodwill at
least annually as of the last day of the fiscal year and will reflect the
impairment of goodwill, if any, in operating income in the statement of income
in the period in which the impairment is indicated. All goodwill recorded on the
Company's balance sheets is related to the Company's energy segments. At
December 31, 2003 and 2002 the Company had goodwill of $37.5 million, net of
accumulated amortization of $4.2 million.
NOTE 5 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In December 2003, RAIT provided the Company a standby commitment to
provide bridge financing in the amount of $10.0 million. RAIT received a
$100,000 facilitation fee from the Company in connection with providing this
standby commitment. On January 15, 2004, the Company borrowed the $10.0 million
from RAIT, and on January 21, 2004, the Company repaid RAIT in full.
In October 2003, the Company recapitalized a loan it acquired in 1998
under a plan of reorganization in bankruptcy for a cost of $95.6 million. At the
time of such acquisition, an order of the bankruptcy court required that legal
title to the property underlying the loan be transferred. To comply with that
order, to maintain control of the property and to protect the Company's
interest, an entity whose general partner is a subsidiary of the Company and
whose limited partners are Messrs. Scott Schaeffer, Daniel Cohen and Edward.
Cohen (with a 94% aggregate beneficial interest) assumed title to the property.
As part of the recapitalization, Messrs. Edward Cohen and Scott Schaeffer
transferred all of their interests to an unrelated third party for no
consideration and Mr. Daniel Cohen reduced his interest from 31.3% to 15%
interest to such third party for no consideration. In consideration for the
limited partners' agreeing to the recapitalization of the loan, the Company
agreed to reimburse the limited partners the amount that they had paid to the
Company in 1998 for the interests transferred. Such payment was $200,000 in the
aggregate.
In October 2003, a FIN 46 entities asset underlying one of the
Company's loans was sold to an entity of which Daniel Cohen is an affiliate of
the general partner; such entity was the highest bidder for the property and the
Company received $6.6 million in cash and recognized a gain of $77,000. Prior to
such sale, the FIN 46 entities asset had been owned by a partnership in which
Messrs. Edward Cohen, Daniel Cohen and Adam Kauffman and Ms. Betsy Cohen were
limited partners. (See Note 3).
15
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 6 - INVESTMENTS IN LEASE RECEIVABLES
Components of the investment in direct financing leases at the dates
indicated are as follows:
December 31, September 30,
2003 2003
---------- ----------
(in thousands)
Total future minimum lease payments receivable................................... $ 20,041 $ 7,982
Initial direct costs, net of amortization........................................ 286 122
Unguaranteed residual............................................................ 140 51
Unearned lease income............................................................ (3,353) (1,326)
Unearned residual income......................................................... (23) (12)
---------- ----------
Investments in lease receivables.............................................. $ 17,091 $ 6,817
========== ==========
Although the lease terms extend over many years as indicated in the
table below, the investments in lease receivables are included in accounts
receivable and prepaid expenses in the Company's consolidated balance sheets
since the Company routinely sells the leases to Lease Equity Appreciation Fund I
or Merrill Lynch Equipment Finance, LLC shortly after their origination in
accordance with agreements with each party. The contractual future minimum lease
payments receivable for each of the five succeeding annual periods ending
December 31 and thereafter, are as follows (in thousands):
2004................... $ 5,048
2005................... 5,237
2006................... 4,168
2007................... 2,719
2008................... 2,148
Thereafter............. 721
-----------
$ 20,041
===========
NOTE 7 - INVESTMENTS IN REAL ESTATE LOANS AND REAL ESTATE
In real estate, the Company focuses on the sponsorship and management
of real estate investment programs and the management and resolution of its
investments in income-producing real estate loans. In the management of real
estate investment programs, the Company receives fees for the acquisition, debt
placement and management related to properties acquired by these programs. In
the management and resolution of real estate loans, the Company records as
income the accretion of a portion of the difference between its cost basis in a
loan and the sum of projected cash flows therefrom. Cash received by the Company
for payment on each loan is allocated between principal and interest. This
accretion of discount amounted to $557,000 and $695,000 during the three months
ended December 31, 2003 and 2002, respectively. As the Company receives funds
from refinancing of its loans by the borrower, a portion of the cash received is
employed to reduce the cumulative accretion of discount included in the carrying
value of the Company's investments in real estate loans.
16
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 7 - INVESTMENTS IN REAL ESTATE LOANS AND REAL ESTATE - (Continued)
At December 31, 2003 and 2002, the Company held real estate loans
having aggregate face values of $193.8 million and $616.6 million, respectively.
The reduction at December 31, 2003 reflects the removal of loans having $393.6
million of aggregate face value ($132.7 million of carrying value) upon the
adoption of FIN 46 on July 1, 2003 as discussed in Note 1 and Note 3. Amounts
receivable, net of senior lien interests were $105.3 million and $186.4 million
at December 31, 2003 and 2002, respectively.
The following is a summary of the changes in the carrying value of the
Company's investments in real estate loans and real estate for the periods
indicated.
Three Months Ended
December 31,
---------------------------------
2003 2002
----------- -----------
(in thousands)
Loan balance, beginning of period............................................... $ 40,416 $ 187,542
New loans....................................................................... 8,772 1,350
Additions to existing loans..................................................... 237 1,160
Accretion of discount (net of collection of interest)........................... 557 695
Collection of principal......................................................... -- (4,393)
Cost of loans resolved.......................................................... (1,371) --
----------- -----------
Loan balance, end of period..................................................... 48,611 186,354
Real estate ventures............................................................ 13,770 13,647
Real estate owned, net of accumulated depreciation of $679 and $462............. 11,794 4,302
Allowance for possible losses................................................... (1,717) (3,853)
----------- -----------
Balance, loans and real estate, end of period................................... $ 72,458 $ 200,450
=========== ===========
In determining the Company's allowance for possible losses related to
its real estate loans and real estate ventures, the Company considers general
and local economic conditions, neighborhood values, competitive overbuilding,
casualty losses and other factors which may affect the value of loans and real
estate. The value of loans and real estate may also be affected by factors such
as the cost of compliance with regulations and liability under applicable
environment laws, changes in interest rates and the availability of financing.
Income from a property will be reduced if a significant number of tenants are
unable to pay rent or if available space cannot be rented on favorable terms. In
addition, the Company continuously monitors collections and payments from its
borrowers and maintains an allowance for estimated losses based upon its
historical experience and its knowledge of specific borrower collection issues
identified. The Company reduces its investments in real estate loans and real
estate ventures by an allowance for amounts that may become unrealizable in the
future. Such allowance can be either specific to a particular loan or property
or general to all loans and real estate ventures.
The following is a summary of activity in the Company's allowance for
possible losses related to real estate loans for the periods indicated:
December 31,
---------------------------------
2003 2002
----------- -----------
(in thousands)
Balance, beginning of period......................................... $ 1,417 $ 3,480
Provision for possible losses........................................ 300 373
----------- -----------
Balance, end of period............................................... $ 1,717 $ 3,853
=========== ===========
17
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 8 - REAL ESTATE LEASING ACTIVITIES
The following table provides information about the Company's
investments in real estate owned at the dates indicated:
December 31, September 30,
2003 2003
----------- -----------
(in thousands)
Land............................................................................. $ 280 $ 630
Leasehold interest............................................................... 4,800 4,800
Office building.................................................................. -- 3,596
Apartment building............................................................... 3,380 3,380
Hotel............................................................................ 4,040 4,040
----------- -----------
12,500 16,446
Less accumulated depreciation.................................................... (706) (640)
----------- -----------
Total....................................................................... $ 11,794 $ 15,806
=========== ===========
NOTE 9 - DEBT
Total debt consists of the following at the dates indicated:
December 31, September 30,
2003 2003
----------- -----------
(in thousands)
Senior debt...................................................................... $ 13,027 $ 54,027
Non-recourse debt:
Energy:
Revolving and term bank loans.............................................. 19,000 31,000
Real estate finance:
Revolving credit facilities................................................ 17,995 18,000
Other...................................................................... -- 1,663
----------- -----------
Total non-recourse debt................................................. 36,995 50,663
Other debt....................................................................... 18,900 28,477
----------- -----------
68,922 133,167
Less current maturities.......................................................... (14,948) (59,471)
----------- -----------
$ 53,974 $ 73,696
=========== ===========
During the three months ended December 31, 2003, the Company retired
$41.0 million of its senior debt at a 3% premium which amounted to approximately
$1.2 million. The remaining $13.0 million at December 31, 2003 was retired in
January 2004, resulting in a loss of approximately $428,000.
18
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 10 - DISCONTINUED OPERATIONS
The assets and liabilities of four of the entities that are
consolidated under the provisions of FIN 46 have been classified as held for
sale in accordance with the Company's intent to sell its interest in the real
estate loans underlying those assets and liabilities. In addition, the Company
foreclosed on two properties in which it held loans and has classified these
properties as held for sale.
Summarized operating results of the Company's real estate operations
held for sale are as follows:
Three Months Ended
December 31,
---------------------------
2003 2002
---------- ----------
(in thousands)
Loss from discontinued operations before income taxes........................... $ (674) $ --
Income tax benefit.............................................................. 236 --
---------- ----------
Loss from discontinued operations............................................... $ (438) $ --
========== ==========
NOTE 11 - OPERATING SEGMENT AND MAJOR CUSTOMER INFORMATION
The Company's operations include five reportable operating segments. In
addition to the five reportable operating segments, certain other activities are
reported in the "Other energy" and "All other" categories. These operating
segments reflect the way the Company manages its operations and makes business
decisions. The leasing segment first met the criteria for reportable operating
segments in the three months ended June 30, 2003 and, accordingly, the prior
period have been restated to reflect this new segment. The Company does not
allocate income taxes to its operating segments. Operating segment data for the
periods indicated are as follows:
Three Months Ended December 31, 2003 (in thousands):
Production Real
Well and Other Estate All
Drilling Exploration Energy (a) Finance Leasing Trapeza Other Eliminations Total
-------- ----------- --------- -------- --------- -------- -------- ------------ --------
Revenues from
external customers.. $21,959 $ 10,196 $ 3,704 $ 4,411 $ 1,649 $ 1,085 $ 1,569 $ (45) $ 44,528
Interest income....... -- -- 39 33 26 -- 118 (45) 171
Interest expense...... -- -- 487 492 332 -- 1,401 (45) 2,667
Depreciation,
depletion and
amortization...... -- 2,210 1,035 123 69 -- -- -- 3,437
Segment profit (loss). 2,498 6,184 (1,154) (342) (298) 746 (1,818) -- 5,816
Other significant
items:
Segment assets.... $ 7,715 $ 149,924 $ 73,134 $263,481 $ 22,136 $ 8,408 $ 41,625 $ -- $566,423
19
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 11 - OPERATING SEGMENT AND MAJOR CUSTOMER INFORMATION - (Continued)
Three months Ended December 31, 2002 (in thousands):
Production Real
Well and Other Estate All
Drilling Exploration Energy (a) Finance Leasing Trapeza Other Eliminations Total
-------- ----------- --------- -------- --------- -------- -------- ------------ --------
Revenues from
external customers.. $ 6,583 $ 8,069 $ 3,483 $ 3,177 $ 1,191 $ 130 $ 1,814 $ (87) $ 24,360
Interest income....... -- -- 91 18 44 8 177 (87) 251
Interest expense...... -- -- 630 418 75 -- 2,302 (87) 3,338
Depreciation,
depletion and
amortization...... -- 1,932 940 66 45 -- -- -- 2,983
Segment profit (loss). (127) 3,620 (529) 1,474 72 130 (2,022) -- 2,618
Other significant
items:
Segment assets.... $ 6,884 $ 137,117 $ 84,485 $201,637 $ 8,792 $ 6,111 $ 53,483 $ -- $498,509
- ------------------
(a) Revenues and expenses from segments below the quantitative thresholds are
attributable to two operating segments of the Company. Those segments
include well services and natural gas transportation. These segments have
never met any of the quantitative thresholds for determining reportable
segments.
Operating profit (loss) per segment represents total revenues less
costs and expenses attributable thereto. Costs and expenses allocated to
segments include interest, provision for possible losses and depreciation,
depletion and amortization, but excludes general corporate overhead expenses.
The Company markets its gas and oil 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
in March 2009 to sell the majority of its existing and future production to an
affiliate of First Energy Corporation, ("FEC") a publicly-traded company
(NYSE:FE). Pricing under the contract is tied to index-based formulas which the
Company negotiates annually. Approximately 57% of the Company's current
production was dedicated to the performance of this agreement for the three
months ended December 31, 2003. Payments to the Company by the affiliate are
guaranteed by FEC,
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.
20
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 12 - PENDING ACQUISITION
In September 2003, Atlas Pipeline entered into a purchase and sale
agreement with SEMCO Energy, Inc. ("SEMCO") pursuant to which Atlas Pipeline or
its designee will purchase all of the outstanding equity of SEMCO's wholly-owned
subsidiary, Alaska Pipeline Company, which owns an intrastate natural gas
transmission pipeline that delivers gas to metropolitan Anchorage (the
"Acquisition"). The total consideration, payable in cash at closing, will be
approximately $95.0 million, subject to an adjustment based on the amount of
working capital that Alaska Pipeline has at closing.
Consummation of the Acquisition is subject to a number of conditions,
including receipt of governmental and non-governmental consents and approvals
and the absence of a material adverse change in Alaska Pipeline's business.
Among the required governmental authorizations are approval of the Regulatory
Commission of Alaska and expiration of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act (which has passed). The purchase
and sale agreement may be terminated by either Atlas Pipeline or SEMCO if the
transaction is not consummated by June 16, 2004. The purchase and sale agreement
contains customary representations, warranties and indemnifications.
As part of the Acquisition, at closing, Alaska Pipeline and ENSTAR
Natural Gas Company ("ENSTAR"), a division of SEMCO which conducts its gas
distribution business in Alaska, will enter into a Special Contract for Gas
Transportation pursuant to which ENSTAR will pay a reservation fee of $943,000
per month for the use of all of the pipeline's transportation capacity plus
$.075 per thousand cubic feet, or mcf, of gas transported, for 10 years. During
2002, total gas volumes transported on the Alaska Pipeline system averaged
130,000 mcf per day. SEMCO will execute a gas transmission agreement with Alaska
Pipeline pursuant to which SEMCO will be obligated to make up any difference if
the Regulatory Commission of Alaska reduces the transportation rates payable by
ENSTAR pursuant to the Special Contract.
Additionally, Alaska Pipeline will enter into an Operation and
Maintenance and Administrative Services Agreement with ENSTAR under which ENSTAR
will continue to operate and maintain the pipeline for at least 5 years for a
fee of $334,000 per month for the first three years. Thereafter, ENSTAR's fee
will be adjusted for inflation.
Atlas Pipeline has received a commitment from Friedman, Billings,
Ramsey Group, Inc. ("FBR") to make a $25.0 million preferred equity investment
in a special purpose vehicle (the "SPV"), to be jointly owned and controlled by
FBR and Atlas Pipeline, the SPV will be the acquirer of Alaska Pipeline. Under
the terms of the FBR commitment, Atlas Pipeline will have the right, during the
18 months following the closing of the Acquisition, to purchase FBR's preferred
equity interest in the SPV at FBR's original cost plus accrued and unpaid
preferred distributions and a specified premium. If Atlas Pipeline does not
purchase FBR's interest, FBR has the right to require the Company to purchase
this interest. The Company will then have the right to require Atlas Pipeline to
purchase the equity interest from it. The Company, through Atlas Pipeline
intends to make a $24.0 million common equity investment in the SPV which Atlas
Pipeline will fund in part through its existing $20.0 million credit facility.
The SPV has received a commitment from Wachovia Bank, National Association and
Wachovia Capital Markets, LLC for a $50 million credit facility to partially
finance the Acquisition. Up to $25 million of borrowings under the facility will
be secured by a lien on and security interest in all of the SPV's property. In
addition, upon the earlier to occur of the termination of Atlas Pipeline's
subordination period or the amendment of the restrictions in the partnership
agreement on Atlas Pipeline's incurrence of debt, Atlas Pipeline will guarantee
all borrowings under the facility, securing the guarantee with a pledge of its
interest in the SPV.
21
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2003
(Unaudited)
NOTE 13 - SUBSEQUENT EVENTS
On February 10, 2004, the Company's wholly-owned subsidiary Atlas
America, Inc. filed a registration statement on Form S-1 with respect to a
proposed public offering of up to 19.8% of its common stock.
On February 5, 2004, The Bancorp Bank, a subsidiary of The Bancorp Inc.
completed an initial public offering of 7,187,500 shares of its common stock and
raised $83.2 million in net proceeds, including the underwriters over allotment.
The Company owns approximately 7% on a fully diluted basis of the Bancorp Inc.,
which owns approximately 33% of The Bancorp Bank.
22
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 2003. 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 Ended December 31, 2003 and 2002
During three months ended December 31, 2003, our operations reflected
the continuing dominant position of our energy business and the increase of its
share of our operations as the result of higher prices for our natural gas and
oil. While our energy operations remain the single largest contributor to our
revenues, our strategic initiatives in financial services and equipment leasing
will increase in importance to us in the remainder of fiscal 2004. In addition,
we have begun to seek new growth from our real estate operations through the
sponsorship of real estate investment programs and expect that our revenues from
this initiative will increase in fiscal 2004.
These changes are reflected in the following tables:
Revenues as a Percent of Total Revenues
Three Months Ended
December 31,
----------------------------
2003 2002
-------- -------
Energy........................................................................... 80% 74%
Real estate finance.............................................................. 10 13
Leasing.......................................................................... 4 5
Equity in earnings of Trapeza entities........................................... 2 --
All other (1).................................................................... 4 8
------ -----
100% 100%
Assets as a Percent of Total Assets
December 31, September 30,
2003 2003
-------- -------
Energy........................................................................... 41% 35%
Real estate finance.............................................................. 47 55
Leasing.......................................................................... 4 2
Investments in Trapeza entities at equity........................................ 1 1
All other (2).................................................................... 7 7
------ -----
100% 100%
- -------------
(1) We attribute the balance 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 and other
corporate investments.
(2) We attribute the balance to assets related to operations which do not meet
the definition of a business segment, as referred to in footnote (1) above.
23
Results of Operations: Energy
The following tables set forth information relating to revenues
recognized, costs and expenses incurred, daily production volumes, average sales
prices, production costs as a percentage of natural gas and oil revenues and
depletion per Mcfe (2) for our energy operations during the periods indicated:
Three Months Ended
December 31,
-------------------------------
2003 2002
----------- -----------
(in thousands, except production
volumes, average sales prices,
production costs, and depletion per
equivalent Mcfe (2))
Revenues:
Production................................................................... $ 10,196 $ 8,069
Well drilling................................................................ 21,959 6,583
Well services................................................................ 1,937 1,854
Transportation............................................................... 1,599 1,408
Other........................................................................ 42 46
----------- -----------
$ 35,733 $ 17,960
=========== ===========
Costs and expenses:
Production................................................................... $ 1,637 $ 1,535
Exploration.................................................................. 48 51
Well drilling................................................................ 19,095 5,725
Well services................................................................ 1,041 825
Transportation............................................................... 596 591
Non-direct................................................................... 909 2,259
----------- -----------
$ 23,326 $ 10,986
=========== ===========
Revenues:
Gas (1)...................................................................... $ 9,066 $ 7,050
Oil.......................................................................... $ 1,123 $ 1,016
Production volumes:
Gas (Mcf/day) (1)(2)......................................................... 19,479 19,346
Oil (Bbls/day) (2)........................................................... 453 447
Average sales prices:
Gas (per Mmcf) (2)(3)........................................................ $ 5.06 $ 3.96
Oil (per Bbl)................................................................ $ 26.94 $ 24.71
Production costs: (4)
As a percent of production revenues.......................................... 16% 19%
Per equivalent Mcfe.......................................................... $ .80 $ .76
Depletion per equivalent Mcfe.................................................... $ 1.08 $ .95
- --------------
(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 Mcfe using the ratio of six Bbls to one Mcf.
(3) Our average sales price before the effects of hedging was $4.01 for the
three months ended December 31, 2002.
(4) Production costs include labor to operate the wells and related equipment,
repairs and maintenance, materials and supplies, property taxes, insurance,
gathering charges and production overhead.
24
Our well drilling revenues and expenses represent the billings and
costs associated with the completion of 111 and 37 net wells for partnerships
sponsored by Atlas America in the three months ended December 31, 2003 and 2002,
respectively. The following table sets forth information relating to these
revenues and costs during the periods indicated:
Three Months Ended
December 31,
-------------------------------
2003 2002
------------ -----------
(dollars in thousands)
Average drilling revenue per well................................................ $ 198 $ 178
Average drilling cost per well (1)............................................... 172 155
------------ -----------
Average drilling gross profit per well........................................... $ 26 $ 23
============ ===========
Gross profit margin.............................................................. $ 2,864 $ 858
============ ===========
Gross margin percent............................................................. 13% 13%
============ ===========
Net wells drilled................................................................ 111 37
============ ===========
- ---------------
(1) The amounts shown do not reflect the total cost of a well. The drilling
revenue and associated drilling cost reflect that portion of the total well
cost that is attributable to our investor partners in each investment
drilling program as specified in the relevant drilling contracts.
Our natural gas revenues were $9.1 million in the three months ended
December 31, 2003, an increase of $2.0 million (29%) from $7.1 million in the
three months ended December 31, 2002. The increase in the three months ended
December 31, 2003 was attributable to an increase in the average sales price of
natural gas of 28%, and an increase in the volume of natural gas produced of 1%.
The $2.0 million increase in gas revenues in the three months ended December 31,
2003 as compared to the prior period consisted of a $1.9 million increase
attributable to increases in natural gas sales prices and $62,000 attributable
to increased production volumes.
Our oil revenues were $1.1 million in the three months ended December
31, 2003, an increase of $107,000 (11%) from $1.0 million in the three months
ended December 31, 2002, which is primarily due to an increase in the average
sales price of oil of 9% for the three months ended December 31, 2003. Oil
production volumes increased 1% during the three months ended December 31, 2003
as compared to the three months ended December 31, 2002. The $107,000 increase
in oil revenues in the three months ended December 31, 2003 as compared to the
prior period consisted of increases of $92,000 attributable to increases in oil
sales prices and $15,000 attributable to increased production volumes.
Our well drilling gross margin was $2.9 million in the three months
ended December 31, 2003, an increase of $2.0 million (234%) from $858,000 in the
three months ended December 31, 2002. In the three months ended December 31,
2003, the increase of $2.0 million was attributable to an increase in the number
of wells drilled ($1.9 million) and an increase in the gross profit per well
($96,000). Our gross profit per well increased as a result of an increase in our
average cost per well which, because our drilling contracts are on a "cost plus"
basis (typically cost plus 15%), determines our average revenue per well. The
increase in our average cost per well in the three months ended December 31,
2003 resulted from an increase in the cost of tangible equipment used in the
wells as a result of economic conditions. In addition, it should be noted that
"Liabilities associated with drilling contracts" on our balance sheet includes
$32.3 million of funds raised in our drilling investment programs in late fiscal
2003 and the first three months of fiscal 2004 that had not been applied to
drill wells as of December 31, 2003 due to the timing of drilling operations,
and thus had not been recognized as well drilling revenue. We expect to
recognize this amount as revenue in the remainder of fiscal 2004. Because we
raised $40.2 million in the first quarter of fiscal 2004 alone, we anticipate
drilling revenues and related costs to be substantially higher than in fiscal
2003.
Our transportation revenues increased 14% in the three months ended
December 31, 2003 as compared to the similar prior year period. This increase
resulted from higher gross volumes transported due to the additional volumes
associated with new partnership wells drilled by us and connected to our
gathering system and an increase in the average prices received for the natural
gas transported, upon which the fees chargeable under a portion of our
transportation arrangements are based.
25
Our well services expenses were $1.0 million in the three months ended
December 31, 2003, an increase of $216,000 (26%) from $825,000 in the three
months ended December 31, 2002. The increase was attributable to an increase in
wages and benefits associated with the increase in the number of wells we
operate for our investment partnerships.
Our non-direct expenses were $909,000 in the three months ended
December 31, 2003, a decrease of $1.4 million (60%) from $2.3 million the three
months ended December 31, 2002. The decrease was attributable to reimbursements
we received for costs we incurred in our partnership management and drilling
activities, resulting from an increase in the number of wells we drilled and
managed during the three months ended December 31, 2003 as compared to the three
months ended December 31, 2002.
Results of Operations: Real Estate Finance
During the three months ended December 31, 2003, our real estate
finance operations continued to be affected by three principal trends or events:
o We continued to selectively resolve the loans in our existing
portfolio through repayments, sales, refinancings, restructurings
and foreclosures.
o We sought growth in our real estate business through the
sponsorship of real estate investment partnerships in which we are
also an investor.
o The adoption of FIN 46.
The principal effects of the first two factors has been to reduce the
number of our real estate loans, while increasing our interests in real property
and, as a result of repayments, sales, refinancings and restructurings,
increasing our cash flow from loan resolutions. The principal effect of the
adoption of FIN 46 has been to consolidate in our financial statements the
assets, liabilities, revenues and expenses of a number of borrowers, although
not affecting our creditor-debtor legal relationship with these borrowers and
not causing these assets and obligations to become our legal assets or
obligations. Our FIN 46 assets and liabilities were $183.6 million and $111.2
million, respectively, at December 31, 2003.
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
December 31,
-------------------------------
2003 2002
----------- -----------
(in thousands)
Revenues:
Interest..................................................................... $ 178 $ 1,931
Accreted discount............................................................ 557 695
Gains on resolutions of loans and FIN 46 assets.............................. 73 813
Fee income................................................................... 534 --
Fin 46 properties............................................................ 2,364 --
Equity in earnings (losses) of equity investees.............................. 137 (348)
Rental....................................................................... 540 68
----------- -----------
$ 4,383 $ 3,159
=========== ===========
Cost and expenses:
Real estate general and administrative....................................... $ 1,051 $ 846
Rental properties............................................................ 442 --
FIN 46 properties............................................................ 2,345 --
----------- -----------
$ 3,838 $ 846
=========== ===========
26
Revenues increased $1.2 million (39%) from $3.2 million in the three
months ended December 31, 2002 to $4.4 million in the three months ended
December 31, 2003. We attribute the increase to the following:
o An increase of $534,000 in fee income in the three months ended
December 31, 2003, as compared to the three months ended December
31, 2002. We earned fees for services provided to the real estate
investment partnerships which we sponsored relating to the
purchase and third party financing of one property in the three
months ended December 31, 2003. We anticipate earning additional
fees from our two partnerships and any future real estate
investment partnerships which we may sponsor.
o An increase of $2.4 million in FIN 46 revenues in the three months
ended December 31, 2003, as compared to the three months ended
December 31, 2002. We early adopted FIN 46 on July 1, 2003 which
resulted in our consolidating twelve entities at December 31, 2003
and recording their operations as FIN 46 revenues and expenses.
o An increase of $485,000 in our share of the operating results of
our unconsolidated real estate investments accounted for on the
equity method in the three months ended December 31, 2003 as
compared to the three months ended December 31, 2002. The increase
was the result of higher earnings from two of our three
investments.
o An increase of $472,000 in rental income in the three months ended
December 31, 2003 as compared to the three months ended December
31, 2002. The increase was the result of recording rental income
from properties underlying two loans upon which we foreclosed
during fiscal year 2003.
The increases were partially offset by the following:
o A decrease in interest and accreted discount income of $1.9
million (72%) resulting from the following:
- The transfer of fourteen loans to FIN 46 accounting treatment
as of July 1, 2003, which decreased interest income by $1.3
million in the three months ended December 31, 2003 as
compared to the three months ended December 31, 2002.
- The resolution of five loans which decreased interest income
by $321,000 in the three months ended December 31, 2003 as
compared to the three months ended December 31, 2002.
- The completion of accretion of discount on one loan, which
decreased interest income by $33,000 in the three months ended
December 31, 2003 as compared to the three months ended
December 31, 2002.
- The foreclosure of two loans in fiscal 2003, which decreased
interest income by $81,000 in the three months ended December
31, 2003 as compared to the three months ended December 31,
2002.
- A decrease in our average rate of accretion, resulting in a
decrease in interest income of $55,000 in the three months
ended December 31, 2003 as compared to the three months ended
December 31, 2002.
27
o A decrease of $740,000 in gains on resolutions of loans and FIN 46
assets in the three months ended December 31, 2003 compared to the
three months ended December 31, 2002. In the three months ended
December 31, 2003, we resolved two loans with book values totaling
$1.4 million for $1.4 million recognizing an aggregate gain of
$37,000 as compared to one loan in the three months ended December
31, 2002 having a book value of $4.2 million for $5.0 million,
recognizing a gain of $813,000. In addition, in the three months
ended December 31, 2003 we recovered an additional $36,000 related
to a loan resolved in the three months ended December 31, 2002.
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.
Costs and expenses of our real estate finance operations were $3.8
million in the three months ended December 31, 2003, an increase of $3.0 million
from $846,000 in the same period of the prior fiscal year. We attribute the
increase to the following:
o An increase of $205,000 in real estate general and administrative
expenses in the three months ended December 31, 2003, as compared
to the three months ended December 31, 2002. The increase resulted
primarily from the following:
- An increase in insurance of $77,000 reflecting an increase in
insurance rates in general.
- An increase in wages and benefits of $78,000 as a result of
the addition of personnel in our real estate subsidiary to
manage our existing portfolio of commercial loans and real
estate and to expand our real estate operations through the
sponsorship of real estate investment partnerships.
- An increase in travel costs of $ 54,000 due to the increased
acquisition activity associated with our management of our
real estate investment programs.
o An increase of $442,000 in rental properties expenses in the three
months ended December 31, 2003, as compared to the three months
ended December 31, 2002. These expenses are primarily related to
two properties upon which we foreclosed during fiscal year 2003.
o An increase of $2.3 million in FIN 46 expenses in the three months
ended December 31, 2003, as compared to the three months ended
December 31, 2002. We early adopted FIN 46 on July 1, 2003, which
resulted in our consolidating twelve entities as of December 31,
2003 and recording their operations as FIN 46 revenues and
expenses. These expenses include such non-cash items as
depreciation and amortization.
Results of Operations: Leasing
In fiscal 2002, we began to pursue expansion of our equipment leasing
operations through the sponsorship of equipment leasing programs. Our first such
program commenced operations in March 2003. We intend to further develop our
equipment leasing operations through the sponsorship of other equipment leasing
programs. In addition, in April 2003, we entered into a multi-year agreement to
originate and service leases on behalf of Merrill Lynch Equipment Finance LLC.
28
The following table sets forth certain information relating to the
revenue recognized and costs and expenses incurred in our equipment leasing
operations during the periods indicated:
Three Months Ended
December 31,
-------------------------------
2003 2002
----------- -----------
(in thousands)
Revenues:
Management................................................................... $ 673 $ 985
Leasing...................................................................... 461 118
Fees......................................................................... 442 11
Other........................................................................ 48 33
----------- -----------
$ 1,624 $ 1,147
=========== ===========
Costs and expenses............................................................... $ 1,546 $ 999
=========== ===========
Our lease originations for the three months ended December 31, 2003
were $26.8 million, an increase of $22.6 million (535%) from the three months
ended December 31, 2002, while our assets under management at December 31, 2003
were $88.5 million, an increase of $66.1 million (295%) over December 31, 2002.
These increases reflect the growth of our leasing business due to our
relationships with Merrill Lynch and our investment partnership.
Our leasing revenues were $1.6 million in the three months ended
December 31, 2003, an increase of $477,000 (42%) from $1.2 million in the three
months ended December 31, 2002, primarily due to lease income and fees
associated with our new leasing investment program.
Our leasing expenses were $1.5 million in the three months ended
December 31, 2003, an increase of $547,000 (55%) from $999,000 in the three
months ended December 31, 2002, primarily due to an increase in allocations of
management time of $200,000 an increase in our wages and benefits of $243,000
and an increase in professional fees of $89,000 all due to the expansion of our
leasing operations.
Results of Operations: Trapeza Entities
Our equity in the earnings of the Trapeza entities was $959,000 in the three
months ended December 31, 2003, an increase of $837,000 (686%) from $122,000 in
the three months ended December 31, 2002. The increase in the three months ended
December 31, 2003 reflects our equity earnings subsequent to completion of the
funding and investment stages of three of the Trapeza CDO issuers we sponsored.
We own a 50% interest in the entities that act as the general partners of the
limited partnerships that own the equity interest in the CDO issuers. We also
invest in the partnerships, for which we receive partnership interests. We also
own a 50% interest in Trapeza Capital Management, LLC which acts as collateral
manager of the trust preferred securities pools. Through Trapeza Capital
Management the Trapeza Funding entities and the Trapeza partnerships, we receive
collateral management fees from the CDO issuers, as well as general partner and
limited partner distributions and partnership administration fees.
29
Results of Operations: Other Revenues, Costs and Expenses
Our interest, dividends, gains and other income was $1.8 million in the
three months ended December 31, 2003, a decrease of $143,000 (7%) as compared to
$2.0 million in the three months ended December 31, 2002. The following table
sets forth information relating to interest and other income during the periods
indicated:
Three Months Ended
December 31,
-------------------------------
2003 2002
----------- -----------
(in thousands)
Gains on sales of RAIT shares.................................................... $ 2,508 $ 969
Write-off of deferred finance costs and premium paid on redemption of senior
notes......................................................................... (1,527) --
Dividend income.................................................................. 404 789
Interest income.................................................................. 171 251
Other............................................................................ 273 (37)
----------- -----------
$ 1,829 $ 1,972
=========== ===========
Gains on sales of RAIT shares increased $1.5 million, to $2.5 million
in the three months ended December 31, 2003 from $969,000 in the three months
ended December 31, 2002. In the three months ended December 31, 2003, we sold
224,700 shares realizing proceeds of $5.6 million as compared to 163,500 shares
realizing proceeds of $3.4 million in the three months ended December 31, 2002.
In the three months ended December 31, 2003, we redeemed $41.0 million of our
senior notes and paid a 3% premium which resulted in a loss of $1.5 million. We
redeemed the remaining $13.0 million of our senior notes in the second quarter
of fiscal 2004 and incurred a loss of $428,000, which will be reflected in the
second quarter of fiscal 2004. Dividend income decreased $385,000 (49%) to
$404,000 in the three months ended December 31, 2003 from $789,000 in the three
months ended December 31, 2002. The decrease was due to the sale of RAIT shares
during the twelve months ended December 31, 2003, thus lowering dividends
received. Interest income decreased $80,000 (32%) to $171,000 in three months
ended December 31, 2003 from $251,000 in the three months ended December 31,
2002. This decrease was the result of a decrease in funds invested as well as
interest rates earned on those funds.
Our general and administrative expenses increased $753,000 to $2.3
million in the three months ended December 31, 2003 from $1.6 million in the
three months ended December 31, 2002. This increase was due to a $456,000
increase in salaries and benefits, an increase or $182,000 in legal,
professional and director's fees due primarily to the requirements of the
Sarbanes-Oxley Act and an increase in insurance of $89,000 due to increases in
insurance rates in general.
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% in the
three months ended December 31, 2003 compared to 24% in the three months ended
December 31, 2002. The variance from period to period is directly attributable
to changes in our oil and gas reserve quantities, product prices, and
fluctuations in the depletable cost basis of oil and gas properties.
Our interest expense decreased $671,000 to $2.7 million in the three
months ended December 31, 2003 from $3.3 million in the three months ended
December 31, 2002. This decrease was a result of our redemption of $52.3 million
of our senior notes during the twelve months ended December 31, 2003.
As a result of the secondary public offering by Atlas Pipeline Partners
in May 2003, we now own 39% of this partnership through both our general partner
interest and our subordinated units. The minority interest in Atlas Pipeline
Partners is the interest of Atlas Pipeline Partners' common unit holders. As
general partner, we control Atlas Pipeline Partners; therefore 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
$1.3 million in the three months ended December 31, 2003, as compared to
$645,000 in the three months ended December 31, 2002, an increase of $628,000
(97%). This increase was the result of an increase in Atlas Pipeline Partners'
net income principally caused by increases in transportation fees received and
an increase in the amount of Atlas Pipeline Partners' earnings attributable to
minority interests as a result of its public offering.
30
Our provision for possible losses decreased $73,000 to $300,000 in the
three months ended December 31, 2003 as compared to $373,000 in the three months
ended December 31, 2002. This decrease reflects a decrease in the book value of
real estate loans as a result of our adoption of FIN 46 on July 1, 2003.
Our effective tax rate increased to 35% in the first quarter of fiscal
2004 as compared to 32% in the first quarter of fiscal 2003 as a result of a
decrease in tax exempt interest and an increase in state income taxes in the
first quarter of fiscal 2004 as compared to the first quarter of fiscal 2003.
Discontinued Operations
In accordance with SFAS 144, "Accounting for the Impairment or Disposal
of Long Lived Assets," our decision in fiscal 2003 and the first quarter of
fiscal 2004 to dispose of certain real estate properties resulted in the
presentation of these assets, liabilities and operations as discontinued
operations for the three months ended December 31, 2003. We classified three FIN
46 entities' assets and liabilities and two real estate rental properties as
held for sale at December 31, 2003 and their operations as discontinued.
Liquidity and Capital Resources
General. Our major sources of liquidity have been funds generated by
operations, funds raised and fees earned from investment partnerships,
resolutions of real estate loans, borrowings under our existing energy, real
estate finance, leasing and corporate credit facilities and sale of our RAIT
shares. We have employed these funds principally in the expansion of our energy
operations, the redemption of our senior notes and the acquisition of senior
lien interests relating to our real estate loans. The following table sets forth
our sources and uses of cash for the periods indicated:
Three Months Ended
December 31,
-------------------------------
2003 2002
----------- -----------
(in thousands)
Provided by operations........................................................... $ 23,532 $ 12,641
Provided by (used in) investing activities....................................... (7,630) (1,037)
(Used in) provided by financing activities....................................... (60,723) 12,325
Provided by (used in) discontinued operations.................................... 34,541 (5,624)
----------- -----------
$ (10,280) $ 18,305
=========== ===========
We had $30.8 million in cash and cash equivalents on hand at December
31, 2003, as compared to $41.1 million at September 30, 2003. Our ratio of
earnings from continuing operations before income taxes, minority interest and
interest expense to fixed charges was 4.4 to 1.0 in the three months ended
December 31, 2003 as compared to 1.9 to 1.0 in the three months ended December
31, 2002. We had a working capital deficit at December 31, 2003 of $392,000 as
compared to $30.3 million in working capital at September 30, 2003. The decrease
was primarily due to of the repayment of long term debt and investment in our
drilling partnerships and Trapeza. Our ratio of debt (including current
maturities) to equity was 36% and 62% at December 31, 2003 and September
30, 2003.
Our liquidity is affected by national, regional and local economic
trends and uncertainties as well as trends and uncertainties more particular to
us, including natural gas prices, interest rates, and our ability to raise funds
through our sponsorship of investment partnerships. While the current favorable
natural gas pricing and interest rate environment have been positive
contributors to our liquidity and lead us to believe that we will be able to
refinance, repay, or renew, our indebtedness as it matures, there are numerous
risks and uncertainties involved. Factors affecting our liquidity, as well as
the risks and uncertainties relating to our ability to generate this liquidity,
are described in "-Results of Operations," and "-Contractual Obligations and
Commercial Commitments," as well as in Item 1, "Business-Risk Factors" in our
Annual Report on Form 10K/A for fiscal 2003.
31
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 prices 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
and real estate. Net cash provided by operating activities increased $10.9
million in the three months ended December 31, 2003 to $23.5 million from $12.6
million in the three months ended December 31, 2002, substantially as a result
of the following:
o An increase in the level of accounts payable and accrued
liabilities associated with our sponsorship of investment
drilling programs increased cash flow by $14.3 million in the
three months ended December 31, 2003 as compared to the three
months ended December 31, 2002. The level of these liabilities is
dependent on the timing of funds raised and subsequently used in
our drilling programs.
o Net fundings of direct financing leases associated with our
sponsorship of one investment leasing program and Merrill Lynch
Equipment Finance, LLC decreased cash flow by $8.1 million in the
three months ended December 31, 2003 as compared to the three
months ended December 31, 2002. The level of assets and
liabilities of our lease originations at any balance sheet date
is dependent upon the timing of fundings from these investment
programs.
Cash Flows from Investing Activities. Net cash provided by our
investing activities decreased $6.6 million in the three months ended December
31, 2003 as compared to the three months ended December 31, 2002 as a result of
the following:
o Capital expenditures increased $7.0 million in the three months
ended December 31, 2003, compared to the three months ended
December 31, 2002, substantially all of which was related to
funding our share of drilling costs associated with our
sponsorship of investment drilling programs.
o Net payments received on real estate loans and real estate
decreased by $2.3 million in the three months ended December 31,
2003 as compared to the three months ended December 31, 2002.
These payments vary from transaction to transaction and are
normally discretionary on the borrower's part.
o Proceeds from sales of RAIT Investment Trust shares increased cash
flow by $2.2 million in the three months ended December 31, 2003
as compared to the three months ended December 31, 2002.
Cash Flows from Financing Activities. Net cash used by our financing
activities increased $73.0 million in the three months ended December 31, 2003
as compared to the three months ended December 31, 2002, as a result of the
following:
o Net debt payments increased $74.3 million, primarily as a result
of the redemption of $41.0 million of our senior notes which
mature in August 2004, the repayment of $5.8 million of a real
estate term loan and repayment of $12.0 million on our energy
line of credit.
Net cash Provided By (Used In) Discountinued Operations. In the three
months ended December 31, 2003 we received porceeds of $34.5 million related to
the sale of two FIN 46 assets. In the three months ended December 31, 2002 we
used $5.6 million in partial settlement of claims associated with the sale of
our leasing subsidiaries in August 2000.
Capital Requirements
During the three months ended December 31, 2003 and 2002, our capital
expenditures related primarily to our investments in our drilling programs and
pipeline expansions, in which we invested $10.8 million and $4.0 million,
respectively. For the three months ended December 31, 2003 and the remaining
quarters of fiscal 2004, 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 October
2003, we obtained an increase in the borrowing base on our energy credit
facility administered by Wachovia Bank to $54.2 million. In addition, we
replaced our $15.0 million credit facility with a new $20.0 million credit
facility with Wachovia Bank.
The level of capital expenditures we must devote to our energy
operations is dependent upon the level of funds raised through our drilling
investment partnerships. We have budgeted to raise up to $90.0 million in fiscal
2004 through drilling investment programs. Through the three months ended
December 31, 2003 we have raised $40.2 million. 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.
32
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 partners. There can be no assurance that we will be successful in our
efforts to obtain outside capital.
Our senior notes mature in August 2004; we redeemed the remaining $13.0
million of these notes outstanding at December 31, 2003 in the second quarter of
fiscal 2004.
Contractual Obligations and Commercial Commitments
The following tables set forth our obligations and commitments as of
December 31, 2003.
Payments Due By Period
(in thousands)
---------------------------------------------------------------
Contractual cash obligations: Less than 1 - 3 4 - 5 After 5
Total 1 Year Years Years Years
----------- ----------- ----------- ----------- ---------
Long-term debt........................... $ 68,922 $ 14,948 $ 47,508 $ 6,466 $ --
Secured revolving credit facilities...... 14,370 14,370 -- -- --
Operating lease obligations.............. 4,185 1,307 1,992 886 --
Capital lease obligations................ -- -- -- -- --
Unconditional purchase obligations....... -- -- -- -- --
Other long-term obligations.............. -- -- -- -- --
----------- ----------- ----------- ----------- ---------
Total contractual cash obligations....... $ 87,477 $ 30,625 $ 49,500 $ 7,352 $ --
=========== =========== =========== =========== =========
Amount of Commitment Expiration Per Period
(in thousands)
---------------------------------------------------------------
Other commercial commitments: Less than 1 - 3 4 - 5 After 5
Total 1 Year Years Years Years
----------- ----------- ----------- ----------- ---------
Standby letters of credit................ $ 1,945 $ 1,275 $ 420 $ 250 $ --
Guarantees............................... 1,044 1,044 -- -- --
Standby replacement commitments.......... 6,328 5,443 885 -- --
Other commercial commitments............. 267,829 5,692 62,217 125,302 74,618
----------- ----------- ----------- ----------- ---------
Total commercial commitments............. $ 277,146 $ 13,454 $ 63,522 $ 125,552 $ 74,618
=========== =========== =========== =========== =========
A real estate investment partnership in which we have a general partner
interest, has obtained senior lien financing with respect to five properties it
acquired. The senior liens are with recourse only to the properties securing
them subject to certain standard exceptions, which we have guaranteed. These
guarantees expire as the related indebtedness is paid down over the next ten
years. In addition, property owners have obtained senior lien financing with
respect to six of our loans. The senior liens are with recourse only to the
properties securing them subject to certain standard exceptions, which we have
guaranteed. These guarantees expire as the related indebtedness is paid down
over the next six years.
33
We believe that the likelihood of our being required to pay any claims
under any of them is remote under the facts and circumstances pertaining to each
of them. An adverse change in these facts and circumstances could cause us to
determine that the likelihood that a particular contingency may occur is no
longer remote. In that event, we may be required to include all or a portion of
the contingency as a liability in our financial statements, which could result
in:
o violations of restrictions on incurring debt contained in our
senior notes or in agreements governing our other outstanding
debt; and
o prohibitions on additional borrowings under our credit lines.
In addition, if one or more of these contingencies were to occur, we
may not have sufficient funds to pay them and, in order to meet our obligations,
may have to sell assets at times and for prices that are disadvantageous to us.
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 the 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 2003, the Financial Accounting Standards Board ("FASB")
revised SFAS No. 132, "Employers' Disclosures about Pensions and other
Postretirement Benefits," establishing additional annual disclosures about plan
assets, investment strategy, measurement date, plan obligations and cash flows.
In addition, the revised standard established interim disclosure requirements
related to the net periodic benefit cost recognized and contributions paid or
expected to be paid during the current fiscal year. The new annual disclosures
are effective for financial statements with fiscal years ending after December
15, 2003 and the interim-period disclosures are effective for interim periods
beginning after December 15, 2003. The adoption of the revised SFAS No. 132 will
have no impact on our results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activates." SFAS 149 is effective for
contracts entered into or modified after December 31, 2003 and amends and
clarifies financial accounting and reporting for derivative instruments. We
believe that adoption of SFAS 149 will not have a material effect on our
financial position or results of operations.
Pending Acquisition
In September 2003, we entered into a purchase and sale agreement with
SEMCO Energy, Inc. ("SEMCO") pursuant to which we or our designee will purchase
all of the outstanding equity of SEMCO's wholly-owned subsidiary, Alaska
Pipeline Company, which owns an intrastate natural gas transmission pipeline
that delivers gas to metropolitan Anchorage (the "Acquisition"). The total
consideration, payable in cash at closing, will be approximately $95.0 million,
subject to an adjustment based on the amount of working capital that Alaska
Pipeline has at closing.
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Consummation of the Acquisition is subject to a number of conditions,
including receipt of governmental and non-governmental consents and approvals
and the absence of a material adverse change in Alaska Pipeline's business.
Among the required governmental authorizations are approval of the Regulatory
Commission of Alaska and expiration, without adverse action, of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act (which has
passed). The purchase and sale agreement may be terminated by either us or SEMCO
if the transaction is not consummated by June 16, 2004. The purchase and sale
agreement contains customary representations, warranties and indemnifications.
As part of the Acquisition, at closing, Alaska Pipeline and ENSTAR
Natural Gas Company ("ENSTAR"), a division of SEMCO which conducts its gas
distribution business in Alaska, will enter into a Special Contract for Gas
Transportation pursuant to which ENSTAR will pay a reservation fee for use of
all of the pipeline's transportation capacity of $943,000 per month, plus $.075
per thousand cubic feet, or mcf, of gas transported, for 10 years. During 2002,
total gas volumes transported on the Alaska Pipeline system averaged 130,000 mcf
per day. SEMCO will execute a gas transmission agreement with Alaska Pipeline
pursuant to which SEMCO will be obligated to make up any difference if the
Regulatory Commission of Alaska reduces the transportation rates payable by
ENSTAR pursuant to the Special Contract.
Further, Alaska Pipeline will enter into an Operation and Maintenance
and Administrative Services Agreement with ENSTAR under which ENSTAR will
continue to operate and maintain the pipeline for at least 5 years for a fee of
$334,000 per month for the first three years. Thereafter, ENSTAR's fee will be
adjusted for inflation.
We have received a commitment from Friedman, Billings, Ramsey Group,
Inc. ("FBR") to make a $25 million preferred equity investment in a special
purpose vehicle (the "SPV"), to be jointly owned and controlled by FBR and us,
which entity will be the acquirer of Alaska Pipeline. Under the terms of the FBR
commitment, Atlas Pipeline will have the right, during the 18 months following
the closing of the Acquisition, to purchase FBR's preferred equity interest in
the SPV at FBR's original cost plus accrued and unpaid preferred distributions
and a premium. If Atlas Pipeline does not purchase FBR's interest, FBR has the
right to require us to purchase this interest. We will then have the right to
require Atlas Pipeline to purchase the equity interest from us. We intend to
make a $24.0 million common equity investment in the SPV which we will fund in
part through its existing $20.0 million credit facility. The SPV has received a
commitment from Wachovia Bank, National Association and Wachovia Capital
Markets, LLC for a $50 million credit facility to partially finance the
Acquisition. Up to $25.0 million of borrowings under the facility will be
secured by a lien on and security interest in all of the SPV's property. In
addition, upon the earlier to occur of the termination of Atlas Pipeline's
subordination period or the amendment of the restrictions in the partnership
agreement on Atlas Pipeline's incurrence of debt, Atlas Pipeline will guarantee
all borrowings under the facility, securing the guarantee with a pledge of its
interest in the SPV.
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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 natural gas and oil prices.
The disclosures are not meant to be precise indicators of expected future
losses, but rather indicators of reasonable possible losses. This
forward-looking information provides indicators of how we view and manage our
ongoing market risk exposures. All of our market risk-sensitive instruments were
entered into for purposes other than trading.
General
We are exposed to various market risks, principally fluctuating
interest rates and changes in commodity prices. These risks can impact our
results of operations, cash flows and financial position. We manage these risks
through regular operating and financing activities and periodically use
derivative financial instruments.
The following analysis presents the effect on our earnings, cash flows
and financial position as if the hypothetical changes in market risk factors
occurred on December 31, 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 December 31, 2003, the amount outstanding under
a revolving loan attributable to our energy operations had decreased to $19.0
million from $31.0 million at September 30, 2003. The weighted average interest
rate for this facility increased from 2.9% at September 30, 2003 to 2.98% at
December 31, 2003. Holding all other variables constant, if interest rates
hypothetically increased or decreased by 10%, our net annual income would change
by approximately $37,000.
We have a $20.0 million revolving credit facility to fund the expansion
of Atlas Pipeline Partners' existing gathering systems and the acquisitions of
other gas gathering systems. At December 31, 2003 we had no borrowings
outstanding under this facility.
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 three months ended
December 31, 2003, approximately 57% of produced volumes were sold in this
manner. For the three months ended December 31, 2002, approximately 56% of
produced volumes were sold in this manner. Considering those volumes already
designated for the fiscal year ending September 30, 2004 and current indices, a
theoretical 10% upward or downward change in the price of natural gas would
result in approximately a 5% change in our natural gas revenues.
36
We periodically enter into financial hedging activities with respect to
a portion of our projected natural gas production. We recognize gains and losses
from the settlement of these hedges in gas revenues when the associated
production occurs. The gains and losses realized as a result of hedging are
substantially offset in the market when we deliver the associated natural gas.
We 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 the New York Mercantile Exchange. Net losses relating to these
hedging contracts in the three months ended December 31, 2003 and 2002 were
$242,000 and $96,000, respectively.
Real Estate Finance
Portfolio Loans and Related Senior Liens. We believe that none of the
loans held in our portfolio as of December 31, 2003 (including loans treated in
our consolidated financial statements as FIN 46 assets and liabilities) are
sensitive to changes in interest rates since:
o the loans are subject to forbearance or other agreements that
require all of the operating cash flow from the properties
underlying the loans, after debt service on senior lien interests,
to be paid to us and thus are not currently being paid based on
the stated interest rates of the loans;
o the senior lien interests are at fixed rates and are thus not
subject to interest rate fluctuation that would affect payments to
us; and
o each loan has significant accrued and unpaid interest and other
charges outstanding to which cash flow from the underlying
property would be applied even if cash flow were to exceed the
interest due, as originally underwritten.
Debt. The interest rates on our real estate revolving lines of credit
are at the prime rate minus 1% for the outstanding $6.4 million under our line
at Hudson United Bank and at the prime rate for the outstanding $18.0 million
and $5.0 million lines of credit at Sovereign Bank. This defined prime rate was
the "prime rate" as reported in The Wall Street Journal (4.00% at December 31,
2003). A hypothetical 10% change in the average interest rate applicable to
these lines of credit would change our net income by approximately $72,000.
Financial Services
LEAF Financial Corporation, our equipment-leasing subsidiary, entered
into a $10.0 million secured revolving credit facility with National City Bank
which terminates January 31, 2005. We guarantee this facility; outstanding loans
bear interest at one of two rates, elected at our option; (i) the lender's prime
rate plus 200 basis points, or (ii) the London Inter-Bank Offered Rate, or
LIBOR, plus 300 basis points. As of December 31, 2003, the balance outstanding
was $7.9 million at an average interest rate of 4.1%. LEAF Financial Corporation
also has a $10.0 million secured credit facility with Commerce Bank. The
facility has the same interest rate structure as the National City Bank facility
and expires June 30, 2004. As of December 31, 2003, the balance outstanding was
$6.5 million at an average interest rate of 4.1%. A hypothetical 10% change in
the average interest rate on these facilities would change our net income by
approximately $38,000.
Other
In June 2002, we established a $5.0 million revolving line of credit
with Commerce Bank. The facility expires in May 2005 and bears interest at one
of two rates, elected at the borrower's option; (i) the prime rate, or (ii)
LIBOR plus 250 basis points; both of which are subject to a floor of 5.5% and a
ceiling of 9.0%. As of December 31, 2003, $3.0 million was outstanding under
this facility. A hypothetical 10% change in the average interest rate on this
facility would not materially affect our net income.
37
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-15(e) and
15d-15(e) under the Securities Exchange Act) 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.
38
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
quarter ended December 31, 2003.
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 Second Amendment to Credit Agreement among Atlas America,
Inc., Resource America, Inc., Wachovia Bank, National
Association, and other banks party thereto, dated October
30, 2003.
10.2 First Amendment to Revolving Credit Agreement and
Assignment among LEAF Financial Corporation, Lease Equity
Appreciation Fund I, L.P., LEAF Funding, Inc. and Commerce
Bank, National Association dated December 19, 2003
10.3 Third Amendment to Revolving Credit Agreement and
Assignment among LEAF Financial Corporation, Lease Equity
Appreciation Fund I, L.P., LEAF Funding, Inc. and National
City Bank dated September 29, 2003.
10.4 Fourth Amendment to Revolving Credit Agreement and
Assignment among LEAF Financial Corporation, Lease Equity
Appreciation Fund I, L.P., LEAF Funding, Inc. and National
City Bank dated December 19, 2003
31.1 Certification Pursuant to Rule 13a-15(e)/15(d) - 15 (e).
31.2 Certification Pursuant to Rule 13a-15(e)/15(d) - 15 (e).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of
2002.
32.2 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RESOURCE AMERICA, INC.
(Registrant)
Date: February 17, 2004 By: /s/ Steven J. Kessler
---------------------
STEVEN J. KESSLER
Senior Vice President and
Chief Financial Officer
Date: February 17, 2004 By: /s/ Nancy J. McGurk
-------------------
NANCY J. McGURK
Vice President-Finance and
Chief Accounting Officer
40