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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 June 30, 2004
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:
17,486,384 Shares July 30, 2004
RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2004 (Unaudited) and
September 30, 2003.............................................................. 3
Consolidated Statements of Income (Unaudited)
Three Months and Nine Months Ended June 30, 2004 and 2003....................... 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
Nine Months Ended June 30, 2004................................................. 5
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended June 30, 2004 and 2003........................................ 6
Notes to Consolidated Financial Statements - June 30, 2004 (Unaudited)............... 7 - 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 27 - 45
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................... 46 - 47
Item 4. Controls and Procedures.............................................................. 48
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................................. 49
Item 6. Exhibits and Reports on Form 8-K..................................................... 49 - 50
SIGNATURES.................................................................................................. 51
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESOURCE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, September 30,
2004 2003
----------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 65,514 $ 41,129
Investment in lease receivables................................................. 41,930 6,817
Accounts receivable and prepaid expenses........................................ 20,136 23,599
FIN 46 entities' and other assets held for sale................................. 104,834 222,677
-------- --------
Total current assets.......................................................... 232,414 294,222
Investments in real estate loans and real estate................................... 73,783 68,936
FIN 46 entities' assets............................................................ 61,602 78,247
Investment in RAIT Investment Trust................................................ 7,287 20,511
Property and equipment, net........................................................ 157,516 143,410
Other assets....................................................................... 27,763 19,509
Intangible assets, net............................................................. 7,662 8,476
Goodwill........................................................................... 37,471 37,471
-------- --------
$605,498 $670,782
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................... $ 14,633 $ 59,471
Secured revolving credit facilities - leasing................................... 34,938 7,168
Accounts payable................................................................ 20,664 19,065
FIN 46 entities' and other liabilities associated with assets held for sale..... 66,893 141,473
Accrued liabilities............................................................. 17,607 14,626
Liabilities associated with drilling contracts.................................. 18,011 22,158
-------- --------
Total current liabilities..................................................... 172,746 263,961
Long-term debt..................................................................... 40,505 73,696
Deferred revenue and other liabilities............................................. 4,197 3,633
FIN 46 entities' liabilities....................................................... 29,950 45,184
Deferred income taxes.............................................................. 17,188 12,878
Minority interests................................................................. 84,903 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...................... 256 255
Additional paid-in capital...................................................... 247,456 227,211
Less treasury stock, at cost.................................................... (77,660) (78,860)
Less ESOP loan receivable....................................................... (1,114) (1,137)
Accumulated other comprehensive income.......................................... 2,089 5,611
Retained earnings............................................................... 84,982 74,374
-------- --------
Total stockholders' equity.................................................... 256,009 227,454
-------- --------
$605,498 $670,782
======== ========
See accompanying notes to consolidated financial statements
3
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- -------- -------
(in thousands, except per share data)
REVENUES:
Energy................................................... $32,854 $21,792 $110,527 $76,088
Real estate.............................................. 5,615 4,495 15,405 11,143
Leasing.................................................. 1,631 1,172 5,339 3,041
Equity in earnings of financial services investees....... 968 764 3,848 872
Interest, dividends, gains and other..................... 2,054 2,499 6,932 6,625
------- ------- -------- -------
43,122 30,722 142,051 97,769
COSTS AND EXPENSES:
Energy................................................... 20,768 13,012 73,129 49,828
Real estate.............................................. 3,589 931 11,623 2,714
Leasing.................................................. 2,250 1,468 6,676 3,870
Financial services....................................... 689 - 1,102 -
General and administrative............................... 2,287 2,094 5,853 4,587
Reorganization - Atlas America, Inc. public offering..... 1,549 - 1,549 -
Provision for legal settlement........................... - - - 1,185
Depreciation, depletion and amortization................. 3,811 3,247 11,021 9,333
Interest................................................. 1,020 3,203 4,926 9,612
Provision for possible losses............................ 182 375 582 1,548
Minority interest in Atlas Pipeline Partners, L.P........ 1,593 1,445 4,188 2,974
------- ------- -------- -------
37,738 25,775 120,649 85,651
------- ------- -------- -------
Income from continuing operations before income taxes
and minority interest................................... 5,384 4,947 21,402 12,118
Provision for income taxes.................................. 1,831 1,461 7,277 3,756
------- ------- -------- -------
Income from continuing operations before minority
interest................................................. 3,553 3,486 14,125 8,362
Minority Interest in Atlas America, Inc.,
net of taxes of $268..................................... (497) - (497) -
------- ------- -------- -------
Income from continuing operations........................... 3,056 3,486 13,628 8,362
Loss on discontinued operations, net of taxes of
$113 and $689............................................ (210) - (1,277) -
------- ------- -------- -------
NET INCOME.................................................. $ 2,846 $ 3,486 $ 12,351 $ 8,362
======= ======= ======== =======
NET INCOME (LOSS) PER COMMON SHARE - BASIC:
From continuing operations............................... $ .17 $ .20 $ .78 $ .49
From discontinued operations............................. (.01) - (.07) -
------- ------- -------- -------
Net income per common share - basic......................... $ .16 $ .20 $ .71 $ .49
======= ======= ======== =======
Weighted average common shares outstanding.................. 17,452 17,069 17,393 17,186
======= ======= ======== =======
NET INCOME (LOSS) PER COMMON SHARE - DILUTED:
From continuing operations............................... $ .16 $ .20 $ .75 $ .48
From discontinued operations............................. (.01) - (.07) -
------- ------- -------- -------
Net income per common share - diluted....................... $ .15 $ .20 $ .68 $ .48
======= ======= ======== =======
Weighted average common shares.............................. 18,599 17,365 18,189 17,471
======= ======= ======== =======
See accompanying notes to consolidated financial statements
4
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 2004
(Unaudited)
(in thousands, except share data)
Accumulated
Common stock Additional Treasury Stock ESOP Other
------------------- Paid-In --------------------- Loan Comprehensive Retained
Shares Amount Capital Shares Amount Receivable Income Earnings
----------------------------------------------------------------------------------------------
Balance, October 1, 2003............ 25,463,645 $ 255 $227,211 (8,113,500) $(78,860) $(1,137) $ 5,611 $ 74,374
Common shares issued................ 75,354 1 875 - - - - -
Treasury shares issued.............. - - (984) 57,044 1,200 - - -
Gain on sale of Atlas America, Inc.
shares............................. - - 20,354 - - - - -
Other comprehensive income.......... - - - - - - (3,522) -
Cash dividends ($.099 per share).... - - - - - - - (1,743)
Repayment of ESOP Loan.............. - - - - - 23 - -
Net income.......................... - - - - - - - 12,351
----------------------------------------------------------------------------------------------
Balance, June 30, 2004.............. 25,538,999 $ 256 $247,456 (8,056,456) $(77,660) $(1,114) $ 2,089 $ 84,982
========== ====== ======== ========== ======== ======= ============= ========
[RESTUBBED TABLE]
Totals
Stockholders'
Equity
---------------
Balance, October 1, 2003............ $ 227,454
Common shares issued................ 876
Treasury shares issued.............. 216
Gain on sale of Atlas America, Inc.
shares............................. 20,354
Other comprehensive income.......... (3,522)
Cash dividends ($.099 per share).... (1,743)
Repayment of ESOP Loan.............. 23
Net income.......................... 12,351
---------------
Balance, June 30, 2004.............. $ 256,009
=============
See accompanying notes to consolidated financial statements
5
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
-------------------------
2004 2003
--------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 12,351 $ 8,362
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization....................................... 11,021 9,333
Amortization of discount on senior debt and deferred finance costs............. 834 966
Provision for possible losses.................................................. 582 1,548
Equity in earnings of financial services entities.............................. (3,848) (872)
Equity in earnings of other equity investees................................... (527) -
Minority interest in Atlas Pipeline Partners, L.P.............................. 4,188 2,974
Minority interest in Atlas America, Inc........................................ 497 -
Loss on discontinued operations................................................ 1,277 -
Net loss (gain) on asset dispositions and buyback of senior notes.............. 1,140 (719)
Gain on sale of RAIT Investment Trust shares................................... (7,095) (3,603)
Property impairments and abandonments.......................................... 721 18
Deferred income taxes.......................................................... (3,364) 122
Accretion of discount.......................................................... (1,552) (1,492)
Collection of interest......................................................... - 1,055
Non-cash compensation ......................................................... 215 216
Net change in FIN 46 entities' net assets and other net assets held for sale..... 2,124 -
Net change in investment lease receivables....................................... (35,447) (11,512)
Changes in operating assets and liabilities...................................... 15,054 12,504
--------- --------
Net cash (used in) provided by operating activities.............................. (1,829) 18,900
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................. (23,489) (18,679)
Investments in real estate loans and real estate................................. (5,726) (5,031)
Principal payments on notes receivable and proceeds from sales of assets......... 7,939 8,641
Proceeds from sale of RAIT Investment Trust shares............................... 15,233 10,896
Increase in other assets......................................................... (3,419) (927)
--------- --------
Net cash used in investing activities............................................ (9,462) (5,100)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings....................................................................... 172,978 84,271
Principal payments on borrowings................................................. (225,907) (84,641)
Dividends paid .................................................................. (1,743) (1,727)
Distributions paid to minority interests of Atlas Pipeline Partners, L.P......... (5,088) (2,660)
Proceeds from Atlas Pipeline Partners, L.P. secondary offering, net.............. 25,188 25,255
Proceeds from Atlas America, Inc. initial public offering, net................... 36,999 -
Purchase of treasury stock....................................................... - (3,995)
Repayment of ESOP loan........................................................... 23 24
Increase in other assets......................................................... (1,613) (1,014)
Proceeds from issuance of stock.................................................. 478 25
--------- --------
Net cash provided by financing activities........................................ 1,315 15,538
--------- --------
Net cash provided by (used in) discontinued operations........................... 34,361 (5,624)
--------- --------
Increase in cash and cash equivalents............................................ 24,385 23,714
Cash and cash equivalents at beginning of period................................. 41,129 25,736
--------- --------
Cash and cash equivalents at end of period....................................... $ 65,514 $ 49,450
========= ========
See accompanying notes to consolidated financial statements
6
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(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") and Atlas America, Inc. ("Atlas
America"). In addition, commencing with the adoption of Financial Accounting
Standards Board ("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 June 30,
2004 and for the three and nine months ended June 30, 2004 and 2003 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 and nine
months ended June 30, 2004 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 and nine months
ended June 30, 2003 to conform to the presentation as of and for the three
months and nine months ended June 30, 2004.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPREHENSIVE INCOME
The following table presents comprehensive income for the periods
indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- -------
(in thousands)
Net income.................................................. $ 2,846 $ 3,486 $12,351 $ 8,362
Other comprehensive income (loss):
Unrealized gain (loss) on investment in RAIT
Investment Trust, net of taxes of $(675), $1,313,
$598, and $2,037....................................... (1,448) 2,797 1,161 4,278
Less: reclassification adjustment for gains realized
in net income, net of taxes of $544, $453,
$2,412 and $1,117.................................... (1,057) (1,130) (4,683) (2,486)
------- ------- ------- -------
(2,505) 1,667 (3,522) 1,792
Unrealized loss on natural gas futures and
options contracts, net of taxes of $50 and $145........ - (212) - (740)
Less: reclassification adjustment for losses realized in
net income, net of taxes of $193 and $358.............. - 391 - 726
------- ------- ------- -------
- 179 - (14)
------- ------- ------- -------
(2,505) 1,846 (3,522) 1,778
------- ------- ------- -------
Comprehensive income........................................ $ 341 $ 5,332 $ 8,829 $10,140
======= ======= ======= =======
7
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
COMPREHENSIVE INCOME - (CONTINUED)
Accumulated other comprehensive income is related to the following at:
June 30, September 30,
2004 2003
-------- --------
(in thousands)
Marketable securities - unrealized gains, net of taxes...................... $ 2,089 $ 5,611
======== ========
PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
June 30, September 30,
2004 2003
-------- --------
(in thousands)
Mineral interests in properties:
Proved properties............................................................ $ 844 $ 844
Unproved properties.......................................................... 984 563
Wells and related equipment...................................................... 206,174 184,226
Support equipment................................................................ 2,452 2,189
Other............................................................................ 10,484 9,136
-------- --------
220,938 196,958
Accumulated depreciation, depletion, amortization and valuation allowances:
Oil and gas properties and related equipment................................. (59,262) (50,170)
Other (4,160) (3,378)
-------- --------
(63,422) (53,548)
-------- --------
$157,516 $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 Standard ("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:
June 30, September 30,
2004 2003
-------- --------
(in thousands)
Cost........................................................................... $ 4,122 $ 12,260
Unrealized gains............................................................... 3,165 8,251
-------- --------
Estimated fair value........................................................... $ 7,287 $ 20,511
======== ========
8
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(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, payables and debt 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
at:
June 30, 2004 September 30, 2003
-------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ------- -------- --------
(in thousands)
Energy debt........................................ $ 35,751 $35,751 $ 31,194 $ 31,194
Real estate debt................................... 17,296 17,296 19,469 19,469
Senior debt........................................ - - 54,027 55,648
Other debt......................................... 2,091 2,091 28,477 28,477
-------- ------- -------- --------
$ 55,138 $55,138 $133,167 $134,788
======== ======= ======== ========
EARNINGS PER SHARE
Basic earnings (loss) per share are 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.
9
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(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 Nine Months Ended
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
(in thousands)
Income from continuing operations............................. $ 3,056 $ 3,486 $13,628 $ 8,362
Loss from discontinued operations, net of taxes of $113
and $689................................................... (210) - (1,277) -
------- ------- ------- -------
Net income................................................. $ 2,846 $ 3,486 $12,351 $ 8,362
======= ======= ======= =======
Weighted average common shares outstanding-basic.............. 17,452 17,069 17,393 17,186
Dilutive effect of stock option and award plans............... 1,147 296 796 285
------- ------- ------- -------
Weighted average common shares-diluted........................ 18,599 17,365 18,189 17,471
======= ======= ======= =======
ASSET RETIREMENT OBLIGATIONS
The Company accounts for the estimated plugging and abandonment costs
of its oil and gas properties in accordance with SFAS No. 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 Nine Months Ended
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
(in thousands)
Asset retirement obligations, beginning of period............. $ 3,371 $ 3,481 $ 3,131 $ -
Liabilities incurred.......................................... 50 - 151 -
Adoption of SFAS 143.......................................... - - - 3,380
Liabilities settled........................................... (3) - (46) -
Revision in estimates......................................... 47 - 130 -
Accretion expense............................................. 50 82 149 183
------- ------- ------- -------
Asset retirement obligations, end of period................... $ 3,515 $ 3,563 $ 3,515 $ 3,563
======= ======= ======= =======
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.
10
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(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:
Nine Months Ended
June 30,
---------------------
2004 2003
------ -------
(in thousands)
Cash paid (received) during the period for:
Interest..................................................................... $5,349 $ 6,821
Income taxes................................................................. $ - $(1,067)
Non-cash activities include the following:
Receipt of a note in connection with the sale of a real estate loan.......... $ - $ 1,350
Leases transferred to LEAF's sponsored investment partnership................ $ - $ 5,366
Receipt of note upon resolution of a real estate loan and a FIN 46 asset..... $8,772 $ -
Real estate received in exchange for notes upon foreclosure on loans......... $ - $ 8,231
Assumption of debt upon foreclosure of loans................................. $ - $ 4,067
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 cost is reflected in net income since each option granted
had an exercise price equal to the market value of the underlying common stock
on the date of grant. The following table provides the pro forma effects of
recognizing compensation expense in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation, as amended by the required disclosures of SFAS No.
148, "Accounting for Stock Based Compensation - Transition and Disclosure."
Three Months Ended Nine Months Ended
June 30, June 30,
----------------- ------------------
2004 2003 2004 2003
------ ------ ------- -------
(in thousands, except per share data)
Net income as reported........................................ $2,846 $3,486 $12,351 $ 8,362
Stock-based employee compensation expense reported
in net income, net of taxes................................ - - - -
Total stock-based employee compensation under fair
value method for all grants, net of taxes.................. (636) (984) (1,921) (1,735)
------ ------ ------- -------
Pro forma net income.......................................... $2,210 $2,502 $10,430 $ 6,627
====== ====== ======= =======
Net income per common share:
Basic - as reported........................................ $ .16 $ .20 $ .71 $ .49
Basic - proforma........................................... $ .13 $ .15 $ .60 $ .39
Diluted - as reported...................................... $ .15 $ .20 $ .68 $ .48
Diluted - pro forma........................................ $ .12 $ .14 $ .57 $ .38
11
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company 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.
At June 30, 2004, 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
nine months ended June 30, 2004. The Company recognized losses of $584,000 and
$1.1 million on settled contracts for the three months and nine months ended
June 30, 2003. The Company recognized no gains or losses during the nine months
ended June 30, 2004 and 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 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 were effective for financial
statements with fiscal years ending after December 15, 2003 and the
interim-period disclosures were effective for interim periods beginning after
December 15, 2003. The adoption of the revised SFAS 132 had no impact on the
Company's results of operations or financial position.
12
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 3 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, FASB issued FIN 46. In December 2003, FASB issued a
revised interpretation of FIN 46 ("FIN 46-R"), which supersedes FIN 46 and
clarifies and expands current accounting guidance for VIEs. We refer to this
interpretation throughout these notes as FIN 46 or FIN 46-R. FIN 46 clarifies
when a company should consolidate in its financial statements the assets,
liabilities and activities of a VIE. FIN 46 provides general guidance as to the
definition of a VIE and requires it to be consolidated if a party with an
ownership, contractual or other financial interest absorbs the majority of the
VIE's expected losses, or is entitled to receive a majority of the residual
returns, or both. A variable interest holder that is such a primary beneficiary
of the VIE is required to consolidate the VIE's assets, liabilities and
non-controlling interests at fair value at the date the interest holder first
becomes the primary beneficiary of the VIE. FIN 46 and FIN 46-R were effective
immediately for all VIEs created after January 31, 2003 and for VIEs created
prior to February 1, 2003, no later than the end of the first reporting period
after March 15, 2004. The Company early-adopted FIN 46 on July 1, 2003.
Certain entities relating to the Company's real estate finance business
have been consolidated in accordance with FIN 46-R. Because of timing of receipt
of financial information, the Company accounts for these FIN 46 entities on a
one quarter lag. The assets, liabilities, revenues and expenses of the
consolidated VIEs are included in the Company's financial statements where
previously the Company's interests in the VIEs had been recorded as investments
in real estate loans.
The assets and liabilities of the VIEs that are now included in the
consolidated financial statements are not the Company's. The liabilities of the
VIEs will be satisfied from the cash flows of the VIEs' 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-R and not classified as held for sale at the dates
indicated:
June 30, September 30,
2004 2003
------- -------
(in thousands)
ASSETS:
Cash........................................................................ $ 664 $ 1,689
Account receivables......................................................... 401 451
Real estate assets, net..................................................... 60,369 76,035
Other....................................................................... 168 72
------- -------
Total FIN 46 entities' assets............................................. $61,602 $78,247
======= =======
LIABILITIES:
Mortgage loans on real estate............................................... $24,376 $37,620
Other....................................................................... 5,574 7,564
------- -------
Total FIN 46 entities' liabilities........................................ $29,950 $45,184
======= =======
13
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 3 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES - (CONTINUED)
Three Months Nine Months
Ended Ended
June 30, June 30,
2004 2004
-------- --------
(in thousands)
OPERATING INFORMATION - INCLUDED IN REAL ESTATE:
Revenues.................................................................... $ 3,021 $ 8,447
Costs and expenses:
Operating expenses........................................................ 1,684 5,139
Depreciation and amortization............................................. 420 1,074
Interest.................................................................. 276 903
-------- --------
Total costs and expenses................................................ 2,380 7,116
-------- --------
Operating income.......................................................... $ 641 $ 1,331
======== ========
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.
During the nine months ended June 30, 2004, the Company liquidated its position
in five entities which were classified as held for sale.
June 30, September 30,
2004 2003
-------- --------
(in thousands)
ASSETS:
Cash........................................................................ $ 3,787 $ 3,960
Accounts receivables........................................................ 786 2,988
Real estate assets, net..................................................... 97,325 213,026
Other....................................................................... 2,936 2,703
-------- --------
Total assets.............................................................. $104,834 $222,677
======== ========
LIABILITIES:
Mortgage loans on real estate............................................... $ 58,408 $130,687
Other....................................................................... 8,485 10,786
-------- --------
Total liabilities......................................................... $ 66,893 $141,473
======== ========
Three Months Nine Months
Ended Ended
June 30, June 30,
2004 2004
-------- --------
(in thousands)
INCOME (LOSS) FROM FIN 46 DISCONTINUED OPERATIONS (SEE NOTE 10):
Revenues.................................................................... $ 3,233 $ 8,539
Expenses.................................................................... 3,531 8,442
-------- --------
Operating (loss) income..................................................... (298) 97
Loss on disposals........................................................... (25) (2,665)
Income tax benefit.......................................................... 113 899
-------- --------
Loss from FIN 46 discontinued operations.................................. $ (210) $ (1,669)
======== ========
14
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 4 - OTHER ASSETS, INTANGIBLE ASSETS AND GOODWILL
OTHER ASSETS
The following table provides information about other assets at the
dates indicated:
June 30, September 30,
2004 2003
------- --------
(in thousands)
Deferred financing costs, net of accumulated amortization of
$6,338 and $5,504......................................................... $ 2,704 $ 2,105
Equity method investments in Trapeza entities................................. 7,968 4,802
Investments at lower of cost or market........................................ 6,727 6,185
Other......................................................................... 10,364 6,417
------- --------
Total other assets........................................................ $27,763 $ 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 accounts for its share of equity
earnings using a one-quarter lag, as permissible by the accounting principles
generally accepted in the United States of America. The Company's combined
general and limited partner interests in these entities range from 13% 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, which owns approximately 33% of
the The Bancorp Bank, a publicly traded company.
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 nine months ended June 30, 2004 and 2003 was $814,000 and $987,000,
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:
June 30, September 30,
2004 2003
------- --------
(in thousands)
Partnership management and operating contracts................................. $14,343 $ 14,343
Leasing platform............................................................... 918 918
------- --------
15,261 15,261
Accumulated amortization....................................................... (7,599) (6,785)
------- --------
Intangible assets, net......................................................... $ 7,662 $ 8,476
======= ========
15
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 4 - OTHER ASSETS, INTANGIBLE ASSETS AND GOODWILL - (CONTINUED)
GOODWILL
The Company accounts for its goodwill in accordance with SFAS No. 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 June
30, 2004 and September 30, 2003, the Company had goodwill of $37.5 million, net
of accumulated amortization of $4.5 million.
NOTE 5 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In June 2004, Atlas Pipeline entered into a definitive agreement to
acquire Spectrum Field Services, Inc. ("Spectrum"), whose principal assets
include 1,900 miles of natural gas pipelines and a natural gas processing
facility in Velma, Oklahoma (see Note 15). In connection with the acquisition of
Spectrum, Atlas Pipeline entered into commitment agreements with the Company and
Atlas America for the purchase of up to $25.0 million of preferred units in an
operating subsidiary of Atlas Pipeline upon the closing of the acquisition. In
consideration for their commitments, upon the closing of the Spectrum
acquisition on July 16, 2004 and the purchase by each of $10.0 million in
preferred units, Atlas Pipeline paid the Company and Atlas America a commitment
fee of $750,000 and $500,000, respectively. On July 20, 2004, Atlas Pipeline
repurchased the preferred units from the Company and Atlas America for $20.4
million.
In March 2004, the Company acquired $3.7 million of leases at book
value from leasing investment partnerships in which it is the general partner.
These partnerships are in the liquidation process.
In December 2003, RAIT provided the Company a standby commitment to
provide $10.0 million in bridge financing in connection with the retirement of
the Company's senior debt. 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 and Mr. Daniel
Cohen transferred 16.3% of his 31.3% interest to such third party. They received
no consideration from the unrelated third party, but in consideration for them
agreeing to the recapitalization of the loan, the Company agreed to reimburse
them 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 entity's asset underlying one of the
Company's loans was sold to an entity of which Daniel Cohen is a shareholder;
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 entity's asset had been owned by a partnership in which Messrs. Edward
Cohen, Daniel Cohen and Adam Kauffman and Ms. Betsy Cohen were limited partners.
16
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 6 - INVESTMENTS IN LEASE RECEIVABLES
Components of the investment in direct financing leases at the dates
indicated are as follows:
June 30, September 30,
2004 2003
------- -------
(in thousands)
Total future minimum lease payments receivable................................. $49,421 $ 7,982
Initial direct costs, net of amortization...................................... 152 122
Unguaranteed residual.......................................................... 73 51
Unearned lease income.......................................................... (7,689) (1,326)
Unearned residual income....................................................... (27) (12)
------- -------
Investments in lease receivables............................................ $41,930 $ 6,817
======= =======
Although the lease terms extend over many years as indicated in the
table below, 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
June 30 and thereafter, are as follows (in thousands):
2005................... $17,776
2006................... 13,031
2007................... 8,703
2008................... 5,161
2009................... 3,072
Thereafter............. 1,678
-------
$49,421
=======
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 $574,000 and $1.6 million during the three
months and nine months ended June 30, 2004 and $83,000 and $1.5 million for the
three months and nine months ended June 30, 2003, 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.
17
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 7 - INVESTMENTS IN REAL ESTATE LOANS AND REAL ESTATE - (CONTINUED)
At June 30, 2004 and 2003, the Company held real estate loans having an
aggregate face value of $186.9 million and $588.1 million, respectively. The
reduction at June 30, 2004 primarily reflects the reclassification 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.
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 Nine Months Ended
June 30, June 30,
------------------ -------------------
2004 2003 2004 2003
------- -------- ------- --------
(in thousands)
Loan balance, beginning of period........................... $48,535 $187,728 $40,416 $187,542
New loan.................................................... - - 8,772 1,350
Additions to existing loans................................. 955 2,214 3,017 4,635
Accretion of discount (net of collection of interest)....... 574 83 1,552 1,492
Write-downs................................................. - (1,159) - (1,552)
Collection of principal..................................... - (4,941) - (9,542)
Cost of loans resolved...................................... - - (3,693) -
Foreclosures transferred to real estate..................... - (6,842) - (6,842)
------- -------- ------- --------
Loan balance, end of period................................. $50,064 $177,083 $50,064 $177,083
Real estate ventures........................................ $13,415 $ 14,387 $13,415 $ 14,387
Real estate owned, net of accumulated depreciation of
$830, $558, $830 and $558................................ 12,127 12,507 12,127 12,507
Allowance for possible losses............................... (1,823) (1,242) (1,823) (1,242)
------- -------- ------- --------
Balance, loans and real estate, end of period............... $73,783 $202,735 $73,783 $202,735
======= ======== ======= ========
18
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 7 - INVESTMENTS IN REAL ESTATE LOANS AND REAL ESTATE - (CONTINUED)
In determining the Company's allowance for possible losses related to
its real estate loans, 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 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.
The following is a summary of activity in the Company's allowance for
possible losses related to real estate for the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
----------------- -------------------
2004 2003 2004 2003
------ ------- ------ --------
(in thousands)
Balance, beginning of period................................. $1,673 $ 4,260 $1,417 $ 3,480
Provision for possible losses................................ 150 375 550 1,548
Write-downs.................................................. - (1,159) (144) (1,552)
Transfers to real estate upon foreclosure.................... - (2,234) - (2,234)
------ ------- ------ --------
Balance, end of period....................................... $1,823 $ 1,242 $1,823 $ 1,242
====== ======= ====== ========
NOTE 8 - REAL ESTATE LEASING ACTIVITIES
The following table provides information about the Company's
investments in real estate owned at the dates indicated:
June 30, September 30,
2004 2003
------- -------
(in thousands)
Land.......................................................................... $ 280 $ 630
Leasehold interest............................................................ 4,800 4,800
Office building............................................................... - 3,596
Apartment building............................................................ 3,778 3,380
Hotel......................................................................... 4,099 4,040
------- -------
12,957 16,446
Less accumulated depreciation................................................. (830) (640)
------- -------
Total.................................................................... $12,127 $15,806
======= =======
19
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 9 - DEBT
Total debt consists of the following:
June 30, September 30,
2004 2003
-------- --------
(in thousands)
Senior debt................................................................... $ - $ 54,027
Energy debt................................................................... 35,751 31,000
Real estate debt:
Non-recourse revolving credit facility and term notes..................... - 19,663
Other..................................................................... 17,296 19,612
-------- --------
Total real estate debt.................................................. 17,296 39,275
Other debt.................................................................... 2,091 8,865
-------- --------
55,138 133,167
Less current maturities....................................................... (14,633) (59,471)
-------- --------
$ 40,505 $ 73,696
======== ========
During the nine months ended June 30, 2004, the Company retired $54.0
million of its senior debt, resulting in a loss of approximately $2.0 million
which is included in interest, dividends, gains and other in the Company's
consolidated statements of income.
Annual debt principal payments over the next five years ending June 30
are as follows: 2005 - $14.6 million, 2006 - $306,000, 2007 - $40.2 million,
2008 - $0 and thereafter - $12,000.
NOTE 10 - DISCONTINUED OPERATIONS
The assets and liabilities of six 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 of which four were disposed since
adoption on July 1, 2003. In addition, the Company foreclosed on two properties
in which it held loans, these properties were classified as held for sale; one
has since been disposed.
Summarized operating results of the Company's real estate operations
held for sale are as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
----- --------- ------- -----
(in thousands)
Income (loss) from FIN 46 discontinued operations before
income taxes............................................ $(298) $ - $ 97 $ -
Loss on disposal............................................ (25) - (2,665) -
Income tax benefit.......................................... 113 - 899 -
----- --------- ------- -----
Loss from FIN 46 discontinued operations.................... $(210) $ - $(1,669) $ -
===== ========= ======= =====
20
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 10 - DISCONTINUED OPERATIONS - (CONTINUED)
In September 1999, the Company adopted a plan to discontinue its
residential mortgage lending business, Fidelity Mortgage Funding, Inc. ("FMF").
The business was disposed of in November 2000. Accordingly, FMF has been
reported as a discontinued operation.
The estimated loss on the disposal of FMF was originally $275,000 (net
of taxes of $148,000) including anticipated operating losses after the date of
disposal. Upon final resolution of certain lease obligations associated with
FMF, the Company has recognized a gain on disposal in the nine months ended June
30, 2004. Summarized results of FMF are as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- -----------------
2004 2003 2004 2003
---------- ------- ------- -------
(in thousands)
Gain on disposal............................................ $ - $ - $ 602 $ -
Income tax provision........................................ - - (210) -
---------- ------- ------- -------
Gain on discontinued operations............................. $ - $ - $ 392 $ -
========== ======= ======= =======
Summarized results of discontinued real estate and FMF operations are:
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- -----------------
2004 2003 2004 2003
---------- ------- ------- -------
(in thousands)
(Loss) income from discontinued operations, net of
taxes of ($105) and $32................................. $ (193) $ - $ 65 $ -
Loss on disposal, net of taxes of $8 and $721............... (17) - (1,342) -
---------- ------- ------- -------
Loss from discontinued operations........................... $ (210) $ - $(1,277) $ -
========== ======= ======= =======
21
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
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 Company does not allocate income taxes to its operating segments.
Operating segment data for the periods indicated are as follows:
THREE MONTHS ENDED JUNE 30, 2004 (in thousands):
Production
Well and Other Real Financial All
Drilling Exploration Energy (a) Estate Leasing Services Other Eliminations Total
------- --------- --------- -------- ------- ------ ------- ------------ --------
Revenues from
external customers.... $16,370 $ 12,977 $ 3,564 $ 5,643 $ 1,644 $ 968 $ 2,024 $ (68) $ 43,122
Interest income......... - - 69 4 20 - 141 (68) 166
Interest expense........ - - 462 378 231 - 17 (68) 1,020
Depreciation,
depletion and
amortization........ - 2,468 990 123 229 1 - - 3,811
Segment profit (loss)... 1,753 8,024 (3,109) 1,428 (1,100) 278 (1,890) - 5,384
Other significant
items:
Segment assets...... $7,951 $ 156,895 $ 59,907 $242,337 $46,580 $8,482 $83,346 $ - $605,498
THREE MONTHS ENDED JUNE 30, 2003 (in thousands):
Production
Well and Other Real Financial All
Drilling Exploration Energy (a) Estate Leasing Services Other Eliminations Total
------- --------- --------- -------- ------- ------ ------- ------------ --------
Revenues from
external customers.... $ 8,217 $ 10,066 $ 3,584 $ 4,530 $ 1,191 $ 772 $ 2,400 $ (38) $ 30,722
Interest income......... - - 31 30 13 8 260 (38) 304
Interest expense........ - - 450 424 155 - 2,212 (38) 3,203
Depreciation,
depletion and
amortization........ - 2,107 980 68 60 - 32 - 3,247
Segment profit (loss)... 732 5,306 (2,166) 2,700 (491) 465 (1,599) - 4,947
Other significant
items:
Segment assets...... $7,244 $ 136,309 $ 56,638 $204,153 $17,694 $4,926 $84,464 $ - $511,428
22
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 11 - OPERATING SEGMENT AND MAJOR CUSTOMER INFORMATION - (CONTINUED)
NINE MONTHS ENDED JUNE 30, 2004 (in thousands):
Production
Well and Other Real Financial All
Drilling Exploration Energy (a) Estate Leasing Services Other Eliminations Total
------- --------- --------- -------- ------- ------ ------- ------------ --------
Revenues from
external customers.... $64,577 $ 34,972 $ 11,337 $ 15,513 $ 5,385 $3,811 $ 6,631 $ (175) $142,051
Interest income......... - - 128 68 54 - 359 (175) 434
Interest expense........ - - 1,422 1,235 838 - 1,606 (175) 4,926
Depreciation,
depletion and
amortization........ - 7,190 3,047 376 407 1 - - 11,021
Segment profit (loss)... 7,258 20,055 (5,404) 1,754 (2,569) 2,708 (2,400) - 21,402
Other significant
items:
Segment assets...... $ 7,951 $ 156,895 $ 59,907 $242,337 $46,580 $8,482 $83,346 $ - $605,498
NINE MONTHS ENDED JUNE 30, 2003 (in thousands):
Production
Well and Other Real Financial All
Drilling Exploration Energy (a) Estate Leasing Services Other Eliminations Total
------- --------- --------- -------- ------- ------ ------- ------------ --------
Revenues from
external customers.... $38,166 $ 27,551 $ 10,759 $ 11,213 $ 3,092 $ 880 $ 6,265 $ (157) $ 97,769
Interest income......... - - 169 65 52 8 549 (157) 686
Interest expense........ - - 1,509 1,228 349 - 6,683 (157) 9,612
Depreciation,
depletion and
amortization........ - 6,073 2,869 135 157 - 99 - 9,333
Segment profit (loss)... 3,889 13,132 (3,798) 5,490 (1,284) 473 (5,784) - 12,118
Other significant
items:
Segment assets...... $ 7,244 $ 136,309 $ 56,638 $204,153 $17,694 $4,926 $84,464 $ - $511,428
- -----------------------------
(a) Revenues and expenses from segments below the quantitative thresholds are
attributable to two operating segments of the Company: 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 exclude general corporate overhead expenses.
23
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 11 - OPERATING SEGMENT AND MAJOR CUSTOMER INFORMATION - (CONTINUED)
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 FirstEnergy Corporation, a publicly-traded company (NYSE:FE).
Pricing under the contract is tied to index-based formulas which the Company
negotiates annually and payments to the Company under the agreement 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 and FEC in
particular, would not have a material adverse effect as it believes that, under
current market conditions, the Company's production could readily be absorbed by
other purchasers.
NOTE 12 - PUBLIC OFFERINGS
In May 2004, Atlas America completed an initial public offering of
2,645,000 shares of its common stock at a price of $15.50 per common share
including underwriters' over allotment resulting in a $20.4 million credit
reflected as an increase to stockholders' equity based on the excess of proceeds
received over the book value of the interest sold to the public. The net
proceeds of the offering of $37.0 million, after deducting underwriting
discounts and costs, were distributed to the Company in the form of a repayment
of inter-company debt and a non-taxable dividend. Following the offering, the
Company continues to own approximately 80.2% of Atlas America's common stock. In
connection with the offering, Edward Cohen became Chairman, Chief Executive
Officer and President of Atlas America and retired as Chief Executive Officer of
the Company. As a result of his retirement and the commencement of payment of
benefits under his supplemental employment retirement agreement ("SERP"), the
Company recorded a charge of $1.4 million (see Note 13).
In April 2004, Atlas Pipeline completed a public offering of 750,000
common units. The net proceeds after underwriting discounts, commissions and
costs were approximately $25.2 million. Following this offering, the
publicly-owned common units represented 67.9% of the limited partnership
interest in Atlas Pipeline. The Company, as general partner, simultaneously
contributed $512,700 in cash to Atlas Pipeline as required by Atlas Pipeline's
partnership agreement. As a result of SEMCO Energy, Inc.'s ("SEMCO") purported
termination of Atlas Pipeline's acquisition of Alaska Pipeline Company on July
1, 2004, Atlas Pipeline used the offering proceeds, which had originally been
raised in contemplation of acquiring Alaska Pipeline, for the acquisition of
Spectrum in July 2004 (see Note 15).
24
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 13 - BENEFIT PLANS
Atlas Pipeline has a Long-Term Incentive Plan for officers and
non-employee managing board members of its general partner and its affiliates,
consultants and joint venture partners who perform services for Atlas Pipeline.
During the nine months ended June 30, 2004, 61,098 phantom units were granted.
Grants for 846 units were forfeited during the three months ended June 30, 2004,
leaving 60,252 phantom units outstanding as of June 30, 2004. Atlas Pipeline
recognized $69,800 and $72,300 in compensation expense related to these grants
and their associated distributions in the three months and nine months ended
June 30, 2004. The fair market value associated with these grants was $2.2
million which will be charged to operations over the vesting period of the
units.
Atlas America has a Stock Incentive Plan for employees, consultants and
directors of Atlas America and its affiliates, with a maximum of 1,333,333
shares reserved for issuance. In May 2004, 4,835 deferred units representing a
right to receive a share of common stock over a 3-year vesting period (at an
average price of $15.50 per unit) were issued to non-employee directors of Atlas
America under this plan. Units will vest sooner upon a change of control of
Atlas America or death or disability of a grantee, provided the grantee has
completed at least six months of service. Upon termination of service by a
grantee, all unvested units are forfeited. The fair value of the grants awarded
($75,000 in total) will be charged to operations over the vesting period of the
units.
In May 2004, Atlas America entered into an employment agreement with
its Chief Executive Officer and President, Edward E. Cohen, pursuant to which
Atlas America has agreed to provide him with a supplemental employment
retirement plan ("SERP") and with certain financial benefits upon termination of
his employment. Under the SERP, he will be paid an annual benefit equal to the
product of (a) 6.5% multiplied by (b) his base salary at the time of his
retirement, death or other termination of employment with Atlas America,
multiplied by, (c) the number of years of employment commencing upon the
effective date of the SERP agreement, limited to an annual maximum benefit of
65% of his final base salary and an annual minimum benefit of 26% of his final
base salary. During the three months ended June 30, 2004, operations were
charged $20,000 with respect to this commitment.
NOTE 14 - LEAF ACQUISITION
On June 30, 2004 LEAF Financial Corporation ("LEAF"), our wholly owned
subsidiary expanded its lease origination capability and assets under management
with the acquisition of certain assets of Premier Lease Services, L.C. of West
Des Moines, IA. The acquisition includes both a portfolio of small ticket leases
with a value of $35.0 million bought on behalf of its investment partners and
numerous vendor finance relationships as well as the right to utilize certain of
their origination personnel.
25
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 15 - SUBSEQUENT EVENTS
CREDIT FACILITY
On July 16, 2004, Atlas Pipeline entered into a new $135.0 million
credit facility which replaces its existing $20.0 million facility. The loan
arrangement, for which Wachovia Bank, National Association will serve as
administrative agent, includes eleven additional lenders. The facility is
comprised of a five-year $100.0 million term loan and a four-year $35.0 million
revolving line of credit which can be increased by an additional $40.0 million
under certain circumstances.
ACQUISITION
On July 16, 2004, Atlas Pipeline acquired Spectrum for approximately
$145.3 million, including the payment of anticipated taxes due as a result of
the transaction.
Atlas Pipeline financed the Spectrum acquisition, including
approximately $2.1 million of transaction costs, as follows:
o borrowing $100.0 million under the term loan portion and $2.2 million
under the revolving credit portion of its $135.0 million senior
secured term loan and revolving credit facility administered by
Wachovia Bank, National Association;
o using the $20.0 million of proceeds received from the sale to the
Company and Atlas America of preferred units in Atlas Pipeline
Operating Partnership; and
o using $25.2 million of net proceeds from its April 2004 common unit
offering.
PUBLIC OFFERING OF UNITS
On July 20, 2004, Atlas Pipeline closed an offering of 2,100,000 of its
common units through underwriters led by Lehman Brothers and including A.G.
Edwards & Sons, Inc., Friedman Billings Ramsey, KeyBanc Capital Markets and
Sanders Morris Harris, which was priced at $34.76 per common unit. After
underwriting discounts and commissions, Atlas Pipeline received net proceeds of
$69.5 million.
Atlas Pipeline has granted the underwriters an over-allotment option
for an additional 315,000 common units exercisable within thirty days. The
over-allotment option, if fully exercised, would generate an additional $10.4
million in net proceeds for Atlas Pipeline.
Atlas Pipeline used a portion of the net proceeds of the offering to
repay $40.0 million of the borrowings under its new credit facility and to
repurchase the preferred units from the Company and Atlas America for $20.4
million. The balance of approximately $8.9 million will be used for working
capital.
ALASKA PIPELINE COMPANY ACQUISITION
In September 2003, Atlas Pipeline entered into an agreement with SEMCO
to purchase all of the stock of Alaska Pipeline Company. In order to complete
the acquisition, Atlas Pipeline needed the approval of the Regulatory Commission
of Alaska. The Regulatory Commission initially approved the transaction, but on
June 4, 2004 it vacated its order of approval based upon a motion for
clarification or reconsideration filed by SEMCO. On July 1, 2004, SEMCO sent
Atlas Pipeline a notice purporting to terminate the transaction. Atlas Pipeline
believes SEMCO caused the delay in closing the transaction and breached its
obligations under the acquisition agreement. Atlas Pipeline intends to
vigorously pursue its remedies under the acquisition agreement. In connection
with the acquisition, Atlas Pipeline incurred $2.2 million of costs, which are
included in other assets on the Company's balance sheet.
26
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 AND NINE MONTHS ENDED JUNE 30, 2004 AND 2003
Our results of operations for the three and nine months ended June 30,
2004 reflected the continued predominance of our energy operations. Our
financial condition and results of operations were also affected during these
periods by the following:
o we took the first steps in the process of spinning off our energy
operations when Atlas America, Inc. completed its initial public
offering of common stock, reducing our ownership interest to 80.2%;
and
o we continued to build our financial services, equipment leasing and
real estate segments which will be the core of our business following
the spin-off.
Our energy revenues were $32.9 million and $110.5 million for the three
and nine months ended June 30, 2004, respectively, as compared to $21.8 million
and $76.1 million for the three and nine months ended June 30, 2003,
respectively. This growth in energy revenues was driven by well drilling
revenues which were $16.4 million and $64.6 million in the three and nine months
ended June 30, 2004, respectively, as compared to $8.2 million and $38.2 million
in the three and nine months ended June 30, 2003, respectively. In addition,
production revenues increased to $13.0 million and $35.0 million in the three
and nine months ended June 30, 2004, respectively, as compared to $10.1 million
and $27.6 million in the three and nine months ended June 30, 2003,
respectively.
We took the first steps toward our goal of spinning off our energy
operations in May 2004 when Atlas America completed its initial public offering.
Because we retained an 80.2% interest (10.7 million shares) in Atlas America,
Atlas America's assets, liabilities and operations continue to be consolidated
in our financial statements and the public's ownership is reflected as a
minority interest. We received $37.0 million from the proceeds of the public
offering in the form of a repayment of intercompany indebtedness and a tax free
dividend and recorded a credit of $20.4 million on the sale as an increase to
stockholders' equity. We expect to complete the spin-off in fiscal 2005 by
distributing our remaining shares in Atlas America to our stockholders.
Completion of the spin-off is subject, however, to the satisfaction of specified
conditions, principally the receipt of a ruling from the Internal Revenue
Service that the distribution will be free from federal income tax to us and our
stockholders.
27
Our financial condition and results of operations during the three and
nine months ended June 30, 2004 was affected and, until we spin off Atlas
America, will continue to be affected by initiatives taken by Atlas Pipeline
Partners, L.P. In April 2004, Atlas Pipeline completed a public offering of
750,000 of its common units, realizing net offering proceeds, after expenses, of
$25.2 million. The principal financial effect of the offering was to increase
the minority interest in our financial statements for the public ownership
interest. After the end of the reporting periods for this report, on July 16,
2004 Atlas Pipeline acquired Spectrum Financial Services, Inc. at a cost of
$145.3 million, including transaction costs and anticipated taxes due as a
result of the transaction. The acquisition was funded partially by debt
financing and partially by the proceeds of the April 2004 offering together with
a further offering completed on July 20, 2004. The Spectrum acquisition will
increase Atlas Pipeline's assets, liabilities, revenues and expenses and,
because we consolidate with Atlas Pipeline, increase ours as well.
During the three and nine-month periods, we also continued our program
of building the businesses that we will retain following the spin-off. This
program resulted in a substantial increase in the assets we manage. Through our
operating subsidiaries, Resource Financial Fund Management, Inc., LEAF Financial
Corp. and Resource Real Estate, Inc. we use industry specific expertise to
generate and administer investment opportunities for our account and for outside
investors in the financial services, equipment leasing and real estate sectors.
As a specialized asset manager, we anticipate receiving structuring fees,
acquisition fees, debt placement fees (real estate) and reimbursements of
expenses for the establishment of new products or programs. For our continuing
role in the management of our programs, we anticipate the receipt of
administrative fees for managing investor's funds, a carried interest in the
profits of the programs and asset management fees for managing the underlying
assets.
In financial services, the amount of assets we managed for issuers of
collateralized debt obligations, or CDOs, increased to $2.1 billion at June 30,
2004 from $1.0 billion at June 30, 2003 through our sponsorship of three
additional CDO issuers in the Trapeza series. We have formed a new subsidiary,
Ischus Capital Management LLC, to develop and sponsor CDO issuers holding
asset-backed securities. We anticipate that this will positively impact the
amount of assets we manage and our net income in succeeding periods.
In equipment leasing, the amount of assets we managed for investors in
the investment partnership we sponsored and on behalf of Merrill Lynch through a
multi-year alliance increased to $138.9 million at June 30, 2004 from $29.1
million at June 30, 2003. The growth was principally due to increased sales of
units in our sponsored public investment partnership and the expansion of our
alliance with Merrill Lynch. On June 30, 2004, we expanded our lease origination
capability and assets under management with the acquisition of certain assets
from Premier Lease Services, L.C., which included a portfolio of small ticket
leases with a value of $35.0 million bought on behalf of our investment partners
along with numerous vendor finance relationships as well as the right to utilize
certain of their experienced origination personnel.
28
In real estate, the amount of assets we managed on behalf of the
investment limited partnerships we sponsored increased to $106.7 million at June
30, 2004 from $67.3 million at June 30, 2003. Our real estate operations were
also impacted by our continuing program of resolving our real estate loan
portfolio through sales and loan restructurings. The loans and real estate
assets in our loan acquisition portfolio decreased from $615.0 million
(principally outstanding loan receivables) at June 30, 2003 to $331.9 million
(principally outstanding loan receivables) at June 30, 2004.
The following tables reflect changes to our revenues and assets for the
periods indicated:
REVENUES AS A PERCENT OF TOTAL REVENUES
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
---- ---- ---- ----
Energy...................................................... 76% 71% 78% 78%
Real estate................................................. 13% 15% 11% 11%
Leasing..................................................... 4% 4% 4% 3%
Equity in earnings of financial services entities........... 2% 2% 3% 1%
All other (1)............................................... 5% 8% 4% 7%
ASSETS AS A PERCENT OF TOTAL ASSETS
June 30, September 30,
2004 2003
---- ----
Energy........................................................................ 37% 35%
Real estate................................................................... 40% 55%
Leasing....................................................................... 8% 2%
Financial services............................................................ 1% 1%
All other (2)................................................................. 14% 7%
- ---------------------------
(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 Investment Trust
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.
A detailed analysis and discussion of the results of operations of
energy, real estate, leasing, financial services and other revenues, and cost
and expenses follows:
29
RESULTS OF OPERATIONS: ENERGY
The following tables set forth information relating to production
revenues, costs and expenses, daily production volumes, average sales prices,
production costs as a percentage of natural gas and oil revenues and depletion
for our energy operations during the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- -------- -------
Revenues (in thousands):
Production.............................................. $12,977 $10,066 $ 34,972 $27,551
Well drilling........................................... 16,370 8,217 64,577 38,166
Well services........................................... 2,146 1,921 6,206 5,789
Transportation.......................................... 1,344 1,500 4,522 4,310
Other................................................... 17 88 250 272
------- ------- -------- -------
$32,854 $21,792 $110,527 $76,088
======= ======= ======== =======
Costs and expenses (in thousands):
Production.............................................. $ 1,784 $ 1,700 $ 5,216 $ 4,879
Exploration............................................. 585 306 2,161 1,315
Well drilling........................................... 14,235 7,146 56,154 33,189
Well services........................................... 1,009 903 3,071 2,843
Transportation.......................................... 551 629 1,767 1,832
Non-direct.............................................. 2,604 2,328 4,760 5,770
------- ------- -------- -------
$20,768 $13,012 $ 73,129 $49,828
======= ======= ======== =======
Production revenues (in thousands):
Gas (1)................................................. $11,607 $ 9,027 $ 30,789 $24,308
Oil..................................................... $ 1,395 $ 1,021 $ 4,183 $ 3,224
Production volume:
Gas (mcf/day) (1) (2)................................... 20,710 18,118 19,485 18,471
Oil (bbls/day) (2)...................................... 452 427 494 428
Total (mcfe/day) (2).................................... 23,422 20,680 22,449 21,039
Average sales prices:
Gas (per mcf)........................................... $ 6.16 $ 5.47 $ 5.77 $ 4.82
Oil (per bbl)........................................... $ 33.87 $ 26.25 $ 30.93 $ 27.58
Production costs (3):
As a percent of production revenues..................... 14% 17% 15% 18%
Per mcf equivalent unit................................. $ .84 $ .90 $ .84 $ .85
Depletion per equivalent mcfe............................... $ 1.13 $ 1.12 $ 1.17 $ 1.06
- ---------------------------
(1) Excludes sales of residual gas and sales to landowners.
(2) As used in this discussion, "mcf" and "mmcf" mean thousand cubic feet and
million cubic feet, respectively; "mcfe" and "mmcfe" means thousand cubic
feet equivalent and million cubic feet equivalent, respectively; and "bbls"
means barrels. Bbls are converted to mcfe using the ratio of six mcfs to
one bbl.
(3) Production costs include labor to operate the wells and related equipment,
repairs and maintenance, materials and supplies, property taxes, severance
taxes, insurance, gathering charges and production overhead.
30
Our well drilling revenues and costs and expenses incurred represent
the billings and costs associated with the completion of 68 and 29 net wells in
the three months ended June 30, 2004 and 2003, respectively, for partnerships we
sponsored and 336 and 189 net wells in the nine months ended June 30, 2004 and
2003, respectively. The following table sets forth information relating to these
revenues and costs during the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------ ------
(dollars in thousands)
Average drilling revenue per well................... $ 241 $ 283 $ 192 $ 202
Average drilling cost per well (1).................. 209 246 167 176
------ ------ ------ ------
Average drilling gross profit per well.............. $ 32 $ 37 $ 25 $ 26
====== ====== ====== ======
Gross profit margin................................. $2,135 $1,072 $8,423 $4,978
====== ====== ====== ======
Gross margin percent................................ 13% 13% 13% 13%
====== ====== ====== ======
Net wells drilled................................... 68 29 336 189
====== ====== ====== ======
- ---------------------------
(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 $11.6 million and $30.8 million in the
three months and nine months ended June 30, 2004, an increase of $2.6 million
(29%) and $6.5 million (27%) from $9.0 million and $24.3 million in the three
months and nine months ended June 30, 2003, respectively. The increases were due
to increases in the average sales price of natural gas of 13% and 20% for the
three months and nine months ended June 30, 2004 and increases of 14% and 5% in
the volume of natural gas we produced in the three months and nine months ended
June 30, 2004, respectively. The $2.6 million increase in gas revenues in the
three months ended June 30, 2004 as compared to the prior year period consisted
of a $1.1 million increase attributable to increases in natural gas sales prices
and a $1.5 million increase attributable to increased production volumes. The
$6.5 million increase in natural gas revenues in the nine months ended June 30,
2004 as compared to the prior period consisted of a $4.8 million increase
attributable to an increase in natural gas sales prices and a $1.7 million
increase attributable to increased production volumes.
Our oil revenues were $1.4 million and $4.2 million in the three months
and nine months ended June 30, 2004, an increase of $374,000 (37%) and $959,000
(30%) from $1.0 million and $3.2 million in the three months and nine months
ended June 30, 2003, primarily due to increases in oil production volumes of 6%
and 15% and increases in oil prices of 29% and 12% during the three months and
nine months ended June 30, 2004 and 2003, respectively. The $374,000 increase in
oil revenues in the three months ended June 30, 2004 as compared to the prior
period consisted of $296,000 attributable to increases in oil sales prices, and
a $78,000 increase in production volumes. The $959,000 increase in oil revenues
for the nine months ended June 30, 2004 as compared to the prior period
consisted of $392,000 attributable to increases in oil sales prices, and a
$567,000 increase in production volumes.
Our well drilling gross margin was $2.1 million and $8.4 million in the
three months and nine months ended June 30, 2004, an increase of $1.1 million
and $3.4 million from $1.1 million and $5.0 million in the three months and nine
months ended June 30, 2003, respectively. In the three months ended June 30,
2004, the increase of $1.1 million was attributable to an increase in the number
of wells drilled ($1.2 million) offset by a decrease in the gross margin per
well ($161,000). In the nine months ended June 30, 2004, the increase of $3.4
million was attributable to an increase in the number of wells drilled ($3.7
million) offset by a decrease in the gross margin per well ($240,000).
31
Our gross profit per well decreased as a result of a decrease 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
decrease in our average cost per well in the three months and nine months ended
June 30, 2004 resulted from a decrease in the cost of tangible equipment used in
the wells because a portion of the wells we drilled targeted shallower
formations and required less equipment. In addition, it should be noted that
"Liabilities associated with drilling contracts" on our balance sheet represents
funds raised in our drilling investment program in the first nine months of
fiscal 2004 that had not been applied to drill wells as of June 30, 2004 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.
Our production costs were $1.8 million and $5.2 million in the three
months and nine months ended June 30, 2004, an increase of $84,000 (5%) and
$337,000 (7%) from the three months and nine months ended June 30, 2003,
respectively. These increases include normal operating expenses and coincide
with our increased production revenues. Production costs per equivalent unit
produced remains consistent at $.84 per mcfe for the three months and nine
months ended June 30, 2004, a decrease of $.06 (7%) and $.01 (1%) per mcfe
compared to the prior year periods.
Our exploration costs were $585,000 and $2.2 million in the three
months and nine months ended June 30, 2004, an increase of $279,000 and $846,000
from the three months and nine months ended June 30, 2003, respectively. These
increases were principally attributable to expenditures for dry hole costs of
$116,000 and $703,000 in the three months and nine months ended June 30, 2004
which were charged to operations upon our decision that a well drilled in an
exploratory area of our operations was not capable of economic production.
Our non-direct expenses were $2.6 million and $4.8 million in the three
months and nine months ended June 30, 2004, an increase of $276,000 (12%) and
decrease of $1.0 million (18%), respectively. The increase in the three months
ended June 30, 2004 was a result of increases in salaries and wages and outside
services due to the growth of our energy operations, these increases were
partially offset by reimbursements we received for costs incurred in our
partnership management and drilling activities resulting from an increase in the
number of wells drilled and managed compared to the prior year period. The
decrease in the nine months ended June 30, 2004 was attributable to
reimbursements we received for costs we incurred in our partnership management
and drilling activities, partially offset by increases in the cost of running
our energy corporate office as a result of continued growth in our energy
operations.
RESULTS OF OPERATIONS: REAL ESTATE
During the three months and nine months ended June 30, 2004, our real
estate 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 The adoption of FIN 46.
o We sought growth in our real estate business through the sponsorship
of real estate investment partnerships in which we are also an
investor.
The principal effect of the first factor has been to reduce the number
of our real estate loans 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 were $166.4 million and $300.9 million
at June 30, 2004 and September 30, 2003, respectively. Our FIN 46 liabilities
were $96.8 million and $186.7 million at June 30, 2004 and September 30, 2003,
respectively. The principal effect of the third factor has been to increase our
interest in real property through the sponsorship of real estate investment
partnerships.
32
The following table sets forth certain information relating to the
revenues recognized and costs and expenses incurred in our real estate finance
operations during the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------- -------
(in thousands)
Revenues:
Interest................................................ $ 225 $2,044 $ 792 $ 5,774
Accreted discount....................................... 574 83 1,552 1,492
Gains (losses) on resolution of loans................... - (106) 732 707
Fee income.............................................. 641 2,020 1,371 2,575
FIN 46 properties....................................... 3,021 - 8,447 -
Equity in earnings of equity investees.................. 96 154 473 193
Rental properties....................................... 1,058 300 2,038 402
------ ------ ------- -------
$5,615 $4,495 $15,405 $11,143
====== ====== ======= =======
Costs and expenses:
Real estate general and administrative.................. $ 764 $ 905 $ 3,117 $ 2,688
FIN 46 properties....................................... 2,380 - 7,116 -
Rental properties....................................... 445 26 1,390 26
------ ------ ------- -------
$3,589 $ 931 $11,623 $ 2,714
====== ====== ======= =======
Three Months Ended June 30, 2004 as Compared to the Three Months Ended June 30,
2003
Revenues increased $1.1 million (25%) from $4.5 million to $5.6 million
in the three months ended June 30, 2004. We attribute the increase to the
following:
o In the three months ended June 30, 2003, we resolved one loan with a
book value of $5.0 million for $4.9 million recognizing a loss of
$106,000 as compared to no loans resolved in the three months ended
June 30, 2004.
o An increase of $3.0 million in FIN 46 revenues in the three months
ended June 30, 2004, as compared to the three months ended June 30,
2003. We early adopted FIN 46 on July 1, 2003 which resulted in our
consolidating seven entities as of June 30, 2004 and recording their
operations as FIN 46 revenues and expenses.
o An increase of $758,000 in rental income in the three months ended
June 30, 2004 as compared to the three months ended June 30, 2003.
The increase was the result of recording rental income from
properties underlying two loans upon which we foreclosed subsequent
to the prior year period.
The increases were partially offset by the following:
o A decrease in interest and accreted discount of $1.3 million (62%)
resulting from the following:
- The transfer of fourteen loans to FIN 46 accounting treatment as of
July 1, 2003, which decreased interest income by $1.1 million in
the three months ended June 30, 2004 as compared to the three
months ended June 30, 2003.
- The resolution of eleven loans since April 1, 2003, which decreased
interest income by $177,000 in the three months ended June 30, 2004
as compared to the three months ended June 30, 2003.
- The completion of accretion of discount on one loan, which
decreased interest income by $36,000 in the three months ended June
30, 2004 as compared to the three months ended June 30, 2003.
- The foreclosure of three loans subsequent to the prior year period,
which decreased interest income by $81,000 in the three months
ended June 30, 2004 as compared to the three months ended June 30,
2003.
33
- An increase in our average rate of accretion, which increased
interest income by $20,000 in the three months ended June 30, 2004
as compared to the three months ended June 30, 2003.
o A decrease of $1.4 million in fee income in the three months ended
June 30, 2004, as compared to the three months ended June 30, 2003.
We earned fees for services provided to the real estate investment
partnerships which we sponsored relating to the purchase and third
party financing of two properties in the three months ended June 30,
2003. During the three months ended June 30, 2004 we earned
management fees from the existing properties; we also earned fees
relating to the purchase and third party financing of one new
acquisition. We anticipate earning additional fees from our two
partnerships and any future real estate investment partnerships which
we may sponsor.
o A decrease of $58,000 in our share of the operating results of our
unconsolidated real estate investments accounted for on the equity
method in the three months ended June 30, 2004 as compared to the
three months ended June 30, 2003. The decrease was the result of
lower earnings from two of our three investments.
Gains on resolutions of loans, ventures and FIN 46 assets (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 $3.6
million in the three months ended June 30, 2004, an increase of $2.7 million
(285%) from $931,000 in the three months ended June 30, 2003. We attribute the
increase to the following:
o A decrease of $141,000 in real estate general and administrative
expenses in the three months ended June 30, 2004, as compared to the
three months ended June 30, 2003. The decrease resulted primarily
from decreases in corporate travel ($33,000), office expenses
($25,000), legal fees ($30,000) and audit fees ($24,000).
o An increase of $2.4 million in FIN 46 expenses in the three months
ended June 30, 2004, as compared to the three months ended June 30,
2003. We early adopted FIN 46 on July 1, 2003, which resulted in our
consolidating seven entities as of June 30, 2004 and recording their
operations as FIN 46 revenues and expenses. These expenses include
such non-cash items as depreciation and amortization.
o An increase of $419,000 in rental properties expenses in the three
months ended June 30, 2004, as compared to the three months ended
June 30, 2003. These expenses are primarily related to two properties
upon which we foreclosed subsequent to the prior year period.
34
Nine Months Ended June 30, 2004 as Compared to the Nine Months Ended
June 30, 2003
Revenues increased $4.3 million (38%) to $15.4 million in the nine
months ended June 30, 2003 from $11.1 million in the nine months ended June 30,
2004. We attribute the increase to the following:
o An increase of $8.4 million in FIN 46 revenues in the nine months
ended June 30, 2004, as compared to the nine months ended June 30,
2003. We early adopted FIN 46 on July 1, 2003 which resulted in our
consolidating seven entities as of June 30, 2004 and recording their
operations as FIN 46 revenue and expenses.
o An increase of $280,000 in our share of the operating results of our
unconsolidated real estate investments accounted for on the equity
method in the nine months ended June 30, 2004 as compared to the nine
months ended June 30, 2003. The increase was the result of higher
earnings from two of our three investments.
o An increase of $1.6 million in rental income in the nine months ended
June 30, 2004 as compared to the nine months ended June 30, 2003. The
increase was the result of recording rental income from properties
underlying two loans upon which we foreclosed subsequent to the prior
year period.
o An increase of $25,000 in gains on resolutions of loans and ventures.
In the nine months ended June 30, 2004 we resolved four loans having
an aggregate book value of $4.0 million for $3.9 million, recognizing
losses of $109,000. We also received $3.4 million for the sale of our
investment in one venture resulting in a gain of $841,000. In the
nine months ended June 30, 2003, we resolved two loans having a book
value of $9.2 million for $9.9 million, recognizing a gain of
$707,000.
The increases were partially offset by the following:
o A decrease in interest and accreted discount income of $4.9 million
(68%) resulting from the following:
- The transfer of fourteen loans to FIN 46 accounting treatment as of
July 1, 2003, which decreased interest income by $3.3 million in
the nine months ended June 30, 2004 as compared to the nine months
ended June 30, 2003.
- The resolution of eleven loans since April 1, 2003 which decreased
interest income by $1.2 million in the nine months ended June 30,
2004 as compared to the nine months ended June 30, 2003.
- The completion of accretion of discount on one loan, which
decreased interest income by $102,000 in the nine months ended June
30, 2004 as compared to the nine months ended June 30, 2003.
- The foreclosure of three loans after June 30, 2003, which decreased
interest income by $243,000 in the nine months ended June 30, 2004
as compared to the nine months ended June 30, 2003.
- A decrease of our average rate of accretion, resulting in a
decrease in interest income of $62,000 in the nine months ended
June 30, 2004 as compared to the nine months ended June 30, 2003.
35
o A decrease of $1.2 million in fee income in the nine months ended
June 30, 2004, as compared to the nine months ended June 30, 2003. We
earned fees for services provided to the real estate investment
partnerships which we sponsored relating to the purchase and third
party financing of two properties in the nine months ended June 30,
2004 and three properties in the nine months ended June 30, 2003.
Additionally, we earned management fees for the properties owned by
real estate investment partnerships which we sponsored during the
nine months ended June 30, 2004. We anticipate earning additional
fees from our two partnerships and any future real estate investment
partnerships which we may sponsor.
Gains on resolutions of loans, ventures and FIN 46 assets (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 $11.6
million in the nine months ended June 30, 2004, an increase of $8.9 million
(328%) from $2.7 million in the nine months ended June 30, 2003.
We attribute the increase to the following:
o An increase of $429,000 in real estate general and administrative
expenses in the nine months ended June 30, 2004, as compared to the
nine months ended June 30, 2003. The increase resulted primarily from
the following:
- An increase in insurance of $190,000 reflecting an increase in
insurance rates in general.
- An increase in wages and benefits of $76,000 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 $51,000 due to the increased
acquisition activity associated with the management of our real
estate investment programs.
- An increase in office rent expense of $32,000 due to additional
space required for additional personnel.
- An increase in audit expense of $37,000 reflecting the additional
fees incurred in adopting FIN 46.
- An increase in legal fees of $32,000 reflecting the efforts to
monetize the real estate loan portfolio.
o An increase of $7.1 million in FIN 46 expenses for the nine months
ended June 30, 2004, as compared to the nine months ended June 30,
2003. We early adopted FIN 46 on July 1, 2003, which resulted in our
consolidating seven entities as of June 30, 2004 and recording their
operations as FIN 46 revenues and expenses. These expenses include
such non-cash items as depreciation and amortization.
o An increase of $1.4 million in rental properties expenses in the nine
months ended June 30, 2004, as compared to the nine months ended June
30, 2003. These expenses are primarily related to two properties upon
which we foreclosed subsequent to the prior year period.
36
RESULTS OF OPERATIONS: LEASING
The following table sets forth certain information relating to the
revenue, and costs and expenses incurred in our equipment leasing operations
during the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------ ------
(in thousands)
Revenues:
Management............................................ $ 101 $ 899 $1,200 $2,251
Leasing............................................... 487 60 1,566 239
Fees.................................................. 1,065 185 2,155 462
Gains on lease terminations........................... 2 - 340 -
Other................................................. (24) 28 78 89
------ ------ ------ ------
$1,631 $1,172 $5,339 $3,041
====== ====== ====== ======
Costs and expenses........................................ $2,250 $1,468 $6,676 $3,870
====== ====== ====== ======
The following table sets forth certain information related to the types
of businesses in which our equipment lessees engage and the concentration of
equipment types under leases under management as of June 30, 2004, as a
percentage of our total managed portfolio:
LESSEE BUSINESS EQUIPMENT UNDER LEASE
--------------- ---------------------
Health Services 21% Medical Equipment 18%
Auto Dealers//Repair 8% Computer / Office Equipment 25%
Garment Care 5% Automotive Care 5%
Personal Services 5% Amusement / Vending Equipment 3%
Business Services 10% Software 7%
Car Washes 4% Industrial Equipment 11%
Wholesale Trade 4% Garment Care Equipment 9%
Other Categories 43% Other Equipment Types 22%
--- ---
100% 100%
=== ===
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.
On June 30, 2004, we acquired a portfolio of small ticket leases with a
value of $35.0 million along with numerous vendor finance relationships as well
as experienced origination personnel from Premier Lease Service L.C. of West Des
Moines Iowa. It is expected that we will sell the leases we acquired in the
transaction to one of our lease programs and that we will continue to pursue
additional lease portfolio purchases.
Our lease originations were $61.6 million and $108.6 million for the
three and nine months ended June 30, 2004, an increase of $48.0 million (353%)
and $57.0 million (110%) from the three and nine months ended June 30, 2003,
respectively. Our assets under management at June 30, 2004 were $138.9 million,
an increase of $109.8 million (377%) over June 30, 2003. These increases reflect
the growth of our leasing business facilitated by our relationships with Merrill
Lynch, our investment partnership and the Premier lease acquisition.
37
Our leasing revenues were $1.6 million and $5.3 million in the three
and nine months ended June 30, 2004, an increase of $459,000 (39%) and $2.3
million (76%) from $1.2 million and $3.0 million in the three and nine months
ended June 30, 2003, respectively. The increases are primarily due to growth
lease originations resulting in increases in lease income, lease termination
activity and fees associated with our new leasing programs, offset by a decrease
in our management fees of $798,000 and $1.1 million in the three and nine months
ended June 30, 2003, respectively. At the time we acquired LEAF Financial in
1995, it acted as the general partner of a series of public equipment leasing
partnerships. We liquidated the last three of these in the quarter ended March
31, 2004, which resulted in the decrease in management fees.
Gains on lease terminations, if any, vary from transaction to
transaction, and there may be significant variances from period to period.
Our leasing expenses were $2.3 million and $6.7 million in the three
and nine months ended June 30, 2004, an increase of $782,000 (53%) and $2.8
million (73%) from $1.5 million and $3.9 million in the three and nine months
ended June 30, 2003, respectively. Due to the expansion of our leasing
operations, wages and benefits increased by $230,000 and $695,000, while
overhead operational expenses increased by $552,000 and $811,000, for the three
and nine months ended June 30, 2004, respectively. In addition, we previously
deferred organization and offering costs in connection with the fund raising
activities of our equipment leasing investment partnership. The investment
partnership reimburses us for these costs as it sells partnership interests in
connection with its public offering. From time to time we adjust the amount of
these costs based on the reimbursements we expect to receive. The offering
period for the current equipment leasing investment partnership terminates
August 15, 2004. During the three and nine month period ended June 30, 2004,
based on market conditions affecting the sale of investment units, we have
reduced the remaining offering costs to be reimbursed by $0 and $1.3 million,
respectively, by a charge to earnings.
RESULTS OF OPERATIONS: FINANCIAL SERVICES
As part of our financial services business segment, we sponsor and have
50% interests in entities that manage pools of trust preferred securities for
issuers of collateralized debt obligations or CDO. We refer to the sponsored
entities as the Trapeza entities and the issuers of collateralized debt
obligations as the CDO issuers. The Trapeza entities act as the general partners
of the limited partnerships that own the equity interest in the CDO issuers and,
together with a third party, manage the securities held by the CDO issuers. At
June 30, 2004, we co-managed over $2.1 billion of CDO issuer assets. We
typically make a direct investment as a limited partner in these limited
partnerships as well. The Trapeza entities receive management fees from the CDO
issuers, general partner distributions from the limited partnerships and
partnership administration fees. We receive limited partner distributions with
respect to our limited partner interests.
In June 2004, we formed Ischus Capital Management, to leverage our
expertise in sponsoring and managing CDO issuers by sponsoring entities that
will acquire asset backed securities, or ABS, and repackage them into CDOs.
Ischus will act as collateral manager for those CDO issuers.
Our equity in the earnings of the Trapeza entities was $968,000 and
$3.8 million in the three and nine months ended June 30, 2004, respectively, an
increase of $204,000 and $3.0 million from $764,000 and $872,000 in the three
and nine months ended June 30, 2003, respectively. The increase reflects our
equity earnings subsequent to completion of offerings by six Trapeza CDO issuers
which we had sponsored as of June 30, 2004 as compared to three Trapeza CDO
issuers which we had sponsored as of June 30, 2003.
38
We also own a 50% interest in Trapeza TPS, LLC, formerly 1845
Warehouse, LLC, an entity originally created to support a warehouse line of
credit to be used to provide financing to CDO issuers we sponsor in the future.
We originally invested $2.5 million in this entity in November 2003 along with a
like amount by the other owner of Trapeza TPS. Trapeza TPS obtained a warehouse
line of credit for its own account from an unaffiliated third party and used the
facility to acquire trust preferred securities for resale to CDO issuers. In May
2004, Trapeza TPS sold all securities it had acquired through the warehouse line
to another unaffiliated third party, receiving net proceeds equal to the par
value of the securities sold plus the portion of the positive spread earned
between its warehouse financing costs and the interest received on the trust
preferred securities it had. The unaffiliated third party lender to Trapeza TPS
received the balance of such positive spread. In addition, we and the other
owner of Trapeza TPS received back our original $2.5 million investment.
Our financial services expenses were $689,000 and $1.1 million in the
three months and nine months ended June 30, 2004. These expenses represent costs
associated with our sponsorship and management of investment partnerships in the
trust preferred and ABS areas. These expenses include primarily salaries and
benefits and legal and professional fees. These expenses were partially offset
by reimbursements of $204,000 and $847,000 from our investment partnerships in
the three months and nine months ended June 30, 2004.
RESULTS OF OPERATIONS: OTHER REVENUES, COSTS AND EXPENSES
Our interest, dividends, gains and other income were $2.1 million and
$6.9 million in the three months and nine months ended June 30, 2004,
respectively, a decrease of $445,000 (18%) and increase of $307,000 (5%) as
compared to $2.5 million and $6.6 million in the three months and nine months
ended June 30, 2003, respectively. The following table sets forth information
relating to other income during the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(in thousands)
Gains on sales of RAIT shares............................... $ 1,601 $ 1,467 $ 7,095 $ 3,586
Write-off of deferred finance costs and premium paid
on redemption of senior notes........................... - (303) (1,955) (303)
Dividend income............................................. 177 585 848 2,046
Interest income............................................. 166 304 434 686
Other....................................................... 110 446 510 610
---------- ---------- ---------- ----------
$ 2,054 $ 2,499 $ 6,932 $ 6,625
========== ========== ========== ==========
Gains on sales of RAIT shares increased $134,000 and $3.5 million, to
$1.6 million and $7.1 million in the three months and nine months ended June 30,
2004 from $1.5 million and $3.6 million in the three months and nine months
ended June 30, 2003. In the three months and nine months ended June 30, 2004, we
sold 150,000 and 597,700 shares realizing proceeds of $3.7 million and $15.2
million, respectively. In the three months and nine months ended June 30, 2003
we sold 140,000 and 492,600 shares realizing proceeds of $3.5 million and $10.9
million, respectively. In the nine months ended June 30, 2004, we redeemed $13.0
million of our senior notes and paid a 3% premium which resulted in a loss of
$2.0 million. Dividend income decreased $408,000 (70%) and $1.2 million (59%)
from $585,000 and $2.0 million in the three months and nine months ended June
30, 2003. The decrease was due to the sale of RAIT shares during the twelve
months ended June 30, 2004, thus lowering dividends received. Interest income
decreased $138,000 (45%) and $252,000 (37%) in three months and nine months
ended June 30, 2004 from $304,000 and $686,000 in the three months and nine
months ended June 30, 2003. These decreases were the result of a decrease in
funds invested as well as in interest rates earned on those funds, reflecting
generally lower market interest rate levels.
Our general and administrative expenses increased $193,000 (9%) and
$1.3 million (28%) in the three months and nine months ended June 30, 2004 to
$2.3 million and $5.9 million from $2.1 million and $4.6 million in the three
months and nine months ended June 30, 2003, respectively. These increases were
the result of increases in legal and professional fees and insurance costs.
39
Our reorganization expenses--Atlas America Inc. public offering were
$1.5 million for the three and nine months ended June 30, 2004. As previously
discussed, in May 2004 Atlas America completed an initial public offering of
2,645,000 shares of its common stock, leaving us with an 80.2% ownership of
Atlas America. In connection with the offering, Edward Cohen became Chairman,
Chief Executive Officer and President of Atlas America and retired as our Chief
Executive Officer. As a result of his retirement we commenced payments required
by the supplemental employment retirement plan established under his employment
arrangements with us and recorded a change of $1.4 million. The balance of the
reorganization expenses consisted of $177,000 of legal fees incurred in
connection with our proposed spin off of Atlas America.
Our provision for legal settlement in the nine months ended June 30,
2003, represents the estimated costs associated with the settlement of an action
filed by the former chairman of TRM Corporation. To the extent that our actual
cost (because of insurance recovery) is less than the provision, it will be
recorded as a reduction to our expenses in the period so determined.
Our depreciation, depletion, 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 21% in the
three and nine months ended June 30, 2004 compared to 19% and 21% in the three
and nine months ended June 30, 2003. The variance from period to period is
directly attributable to changes in our product prices and fluctuations in the
depletable cost basis of oil and gas properties.
Our interest expense was $1.0 million and $4.9 million in the three
months and nine months ended June 30, 2004, a decrease of $2.2 million (68%) and
$4.7 million (49%) from $3.2 million and $9.6 million in the three and nine
months ended June 30, 2003, respectively. This decrease was primarily a result
of our redemption of $65.3 million of our senior notes during the twelve months
ended June 30, 2004, partially offset by an increase in our leasing segment
interest expense as a result of the expansion of our leasing business.
Our provision for possible losses decreased $193,000 and $966,000 to
$182,000 and $582,000 in the three months and nine months ended June 30, 2004,
respectively, as compared to $375,000 and $1.5 million in the three months and
nine months ended June 30, 2003, respectively. These decreases resulted
primarily from a decrease in our real estate investments as we continued our
program of resolving our real estate loans, thereby realizing their value.
At June 30, 2004, we owned 34% of Atlas Pipeline through both our
general partner interest and our subordinated limited partner units. As general
partner, we control Atlas Pipeline; 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 earnings was $1.6 million and
$4.2 million in the three months and nine months ended June 30, 2004, as
compared to $1.4 million and $3.0 million in the three months and nine months
ended June 30, 2003, an increase of $148,000 (10%) and $1.2 million (41%),
respectively. These increases were the result of an increase in Atlas Pipeline's
net income principally caused by increases in transportation fees received and
an increase in the amount of Atlas Pipeline's earnings attributable to minority
interests as a result of its May 2003 and April 2004 public offerings.
Our effective tax rate increased to 34% in the three months and nine
months ended June 30, 2004 as compared to 30% and 31% in the three months and
nine months ended June 30, 2003, respectively, as a result of a decrease in tax
exempt interest relative to net income and an increase in state income taxes.
DISCONTINUED OPERATIONS
In accordance with Statement of Financial Accounting Standards, or
SFAS, No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets,"
our decision in fiscal 2003 and 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 and nine months ended
June 30, 2004. We classified three FIN 46 entities' assets and liabilities and
one real estate rental property as held for sale at June 30, 2004 and their
operations as discontinued. Included in discontinued operations (loss on
disposal) is an impairment charge of $2.6 million for one such investment caused
by a change in market conditions. During the nine months ended June 30, 2004 we
disposed of five FIN 46 entities. In addition, we recognized a gain on disposal
as a result of a final resolution of a lease obligation associated with our
discontinued residential lending business (See Note 10 to the consolidated
financial statements).
40
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 the 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:
Nine Months Ended
June 30,
----------------------------
2004 2003
----------- ---------
(in thousands)
(Used in) provided by operations............................................. $ (1,829) $ 18,900
Used in investing activities................................................. (9,462) (5,100)
Provided by financing activities............................................. 1,315 15,538
Provided by (used in) discontinued operations................................ 34,361 (5,624)
----------- ---------
$ 24,385 $ 23,714
=========== =========
We had $65.5 million in cash and cash equivalents on hand at June 30,
2004, 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 7.7 to 1.0 in the nine months ended June 30, 2004
as compared to 2.6 to 1.0 in the nine months ended June 30, 2003. Working
capital at June 30, 2004 was $59.7 million as compared to $30.3 million at
September 30, 2003. The increase was primarily due to proceeds received from
public offerings by our subsidiaries Atlas America and Atlas Pipeline, partially
offset by the repayment of long term debt and investments in our drilling
partnerships. Our ratio of debt (including current maturities) to equity was 35%
and 62% at June 30, 2004 and September 30, 2003, respectively.
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.
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 decreased $20.7
million in the nine months ended June 30, 2004 to $(1.8) million from $18.9
million in the nine months ended June 30, 2003, substantially as a result of the
following:
o Our acquisition of leases on June 30, 2004, and related leasing
activities decreased cash flows by $23.9 million in the nine months
ended June 30, 2004 as compared to the nine months ended June 30,
2003. The level of direct financing leases related to our lease
originations and acquisitions at any balance sheet date will be
dependent upon the timing of fundings from these investment programs.
o An increase in cash flow before depreciation and amortization of $5.7
million, most of which was due to increases in our drilling
activities and the prices we received for our natural gas and oil
production.
41
Cash Flows from Investing Activities. Net cash used in our investing
activities increased $4.4 million in the nine months ended June 30, 2004 as
compared to the nine months ended June 30, 2003 as a result of the following:
o Capital expenditures increased $4.8 million in the nine months ended
June 30, 2004, compared to the nine months ended June 30, 2003,
substantially all of which was related to funding our share of
drilling costs associated with our sponsorship of investment drilling
programs and costs related to the expansion of our gathering systems.
o Proceeds from sales of RAIT shares increased cash flow by $4.3
million in the nine months ended June 30, 2004 as compared to the
nine months ended June 30, 2003.
o Payments on notes receivable and proceeds from sale of assets
decreased by $702,000 in the nine months ended June 30, 2004 as
compared to the nine months ended June 30, 2003. These payments vary
from transaction to transaction and are normally discretionary on the
borrower's part.
o Payments for other assets increased by $2.5 million in the nine
months ended June 30, 2004 as compared to the prior year period
primarily due to costs associated with our acquisition of Spectrum
and the then-pending acquisition of Alaska Pipeline Company.
Cash Flows from Financing Activities. Net cash provided by our
financing activities decreased $14.2 million in the nine months ended June 30,
2004 as compared to the nine months ended June 30, 2003, as a result of the
following:
o Net debt payments increased $52.6 million, primarily as a result of
the redemption of $54.0 million of our senior notes which would have
matured in August 2004.
o Our receipt of proceeds of $37.0 million from Atlas America's public
offering.
Net Cash Provided By (Used In) Discontinued Operations. Net cash
provided by discontinued operations increased by $40.0 million in the nine
months ended June 30, 2004 as compared to the nine months ended June 30, 2003,
primarily due to our receipt of $34.5 million from to the sale of two FIN 46
assets, offset by cash outlays for certain other discontinued assets. In the
nine months ended June 30, 2003, we used cash of $5.6 million to partially
settle of claims associated with the sale of our leasing subsidiaries in August
2000.
Capital Requirements
During the nine months ended June 30, 2004 and 2003, our capital
expenditures related primarily to investments in our drilling partnerships and
pipeline expansions, in which we invested $22.2 million and $17.3 million,
respectively. For the nine months ended June 30, 2004 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. We have established two credit facilities to facilitate the
funding of our capital expenditures. In March 2004, Atlas America obtained an
increase in the borrowing base on its credit facility administered by Wachovia
Bank to $65.0 million from $54.2 million. In addition, in July 2004, Atlas
Pipeline replaced its $15.0 million credit facility with a new $135.0 million
credit facility with Wachovia Bank.
The level of capital expenditures we must devote to our exploration and
production operations depends 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 partnerships. Through the nine months ended June
30, 2004; we had raised $68.0 million. We believe cash flow from operations and
amounts available under our credit facility 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.
42
We continuously evaluate acquisitions of gas and oil and pipeline
assets. In order to make any acquisition, we believe we will be required to
access outside capital either through debt or equity placements or through joint
venture operations with other energy companies. There can be no assurance that
we will be successful in our efforts to obtain outside capital. In addition,
because we must maintain an interest in Atlas America greater than 80% until it
is spun off in order preserve the tax-free nature of the transaction, we cannot
raise equity funds through Atlas America nor can Atlas America use its equity
securities to complete acquisitions.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables summarize our contractual obligations at June 30,
2004:
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
------------------------------------------------------------------
LESS THAN 1 - 3 4 - 5 AFTER 5
CONTRACTUAL CASH OBLIGATIONS: TOTAL 1 YEAR YEARS YEARS YEARS
-------------- -------------- --------------- ------------ -------------
Long-term debt........................... $ 55,138 $ 14,633 $ 40,493 $ - $ 12
Secured revolving credit facilities...... 34,938 34,938 - - -
Operating lease obligations.............. 3,166 1,229 1,929 6 2
Capital lease obligation................. - - - - -
Unconditional purchase obligations....... - - - - -
Other long-term obligations.............. - - - - -
----------- ----------- ----------- ----------- ---------
Total contractual cash obligations....... $ 93,242 $ 50,800 $ 42,422 $ 6 $ 14
=========== =========== =========== =========== =========
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
(IN THOUSANDS)
------------------------------------------------------------------
LESS THAN 1 - 3 4 - 5 AFTER 5
OTHER COMMERCIAL COMMITMENTS: TOTAL 1 YEAR YEARS YEARS YEARS
-------------- -------------- --------------- ------------ -------------
Standby letters of credit................ $ 1,945 $ 1,695 $ - $ 250 $ -
Guarantees............................... 1,418 1,418 - - -
Standby replacement commitments.......... 4,540 2,413 2,127 - -
Other commercial commitments............. 282,755 6,253 62,178 129,974 84,350
----------- ----------- ------------ ----------- -----------
Total commercial commitments............. $ 290,658 $ 11,779 $ 64,305 $ 130,224 $ 84,350
=========== =========== ============ =========== ===========
A real estate investment partnership in which we have a general partner
interest has obtained senior lien financing with respect to six 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 five of our real estate investments. 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 five years.
43
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 costs 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 FASB revised SFAS 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 had no impact on our results of
operations or our financial position.
In January 2003, FASB issued FIN 46 which was revised and superseded by
FIN 46-R in March 2003. FIN 46 clarifies when a company should consolidate in
its financial statements the assets, liabilities and activities of a variable
interest entity, or VIE. FIN 46 provides general guidance as to the definition
of a VIE and requires it to be consolidated if a party with an ownership,
contractual or other financial interest absorbs the majority of the VIE's
expected losses, or is entitled to receive a majority of the residual returns,
or both. A variable interest holder that consolidated the VIE is the primary
beneficiary, and is required to consolidate the VIE's assets, liabilities and
non-controlling interests at fair value at the date the interest holder first
becomes the primary beneficiary of the VIE. FIN 46 and FIN 46-R are effective
immediately for all VIEs created after January 31, 2003 and for VIEs created
prior to February 1, 2003, no later than the end of the first reporting period
after March 15, 2004. We early adopted FIN 46 on July 1, 2003.
44
LONG-TERM DEBT
Atlas Pipeline Credit Facility
On July 16, 2004 Atlas Pipeline closed a loan with Wachovia Bank for a
$135.0 million credit facility that replaced its existing $20.0 million facility
concurrently with the completion of the Spectrum acquisition. The facility
includes a $35.0 million four year revolving line of credit which can be
increased by an additional $40.0 million under certain circumstances and a
$100.0 million five year term loan. Up to $5.0 million of the facility may be
used for standby letters of credit. Borrowings under the facility will be
secured by a lien on and security interest in all of Atlas Pipeline's property
and that of its subsidiaries and by the guaranty of each of its subsidiaries.
The credit facility bears interest at one of two rates, elected at its option:
o the base rate plus the applicable margin; or
o the adjusted London Interbank Offered Rate, or LIBOR, plus the
applicable margin.
The base rate for any day equals the higher of the federal funds rate
plus 1/2 of 1% or the Wachovia Bank prime rate. Adjusted LIBOR is LIBOR divided
by 1.00 minus the percentage prescribed by the Board of Governors of the Federal
Reserve System for determining the reserve requirement for euro currency
funding. The applicable margin for the revolving line of credit is as follows:
o where Atlas Pipeline's leverage ratio, that is, the ratio of our debt
to earnings before income, taxes, depreciation or amortization or
EBITDA, is less than or equal to 2.5, the applicable margin is 1.00%
for base rate loans and 2.00% for LIBOR loans;
o where its leverage ratio is greater than 2.5 but less than or equal
to 3.0, the applicable margin is 1.25% for base rate loans and 2.25%
for LIBOR loans;
o where its leverage ratio is greater than 3.0 but less than or equal
to 3.5, the applicable margin is 1.75% for base rate loans and 2.75%
for LIBOR loans; and
o where its leverage ratio is greater than 3.5, the applicable margin
is 2.25% for base rate loans and 3.25% for LIBOR loans.
The applicable margin for the term loan is .75% higher for both base
rate loans and LIBOR loans.
The credit facility requires Atlas Pipeline to maintain a ratio of
funded debt to EBITDA of not more than 4.25 to 1.0, reducing to 4.0 to 1.0 on
December 31, 2004 and 3.5 to 1.0 on June 30, 2005 and an interest coverage ratio
of not less than 3.0 to 1.0. In addition, it will be required to prepay the term
loan with the net proceeds of any asset sales or issuances of debt. With respect
to any issuances of equity, it will be required to repay the term loan from the
proceeds of such issuances to the extent its ratio of funded debt to EBITDA
exceeds 3.5 to 1.0. On July 20, 2004, Atlas Pipeline prepaid $40.0 million of
the $100.0 million it had borrowed under the term loan in connection with its
acquisition of Spectrum. Atlas Pipeline will be required to pay down $1.25
million in principal on the outstanding balance of the term loan quarterly, but
any prepayments of principal that it make will be credited pro rata against this
repayment obligation.
The credit agreement contains covenants customary for loans of this
size, including restrictions on incurring additional debt and making material
acquisitions, and a prohibition on paying distributions to Atlas Pipeline's
unitholders if an event of default occurs. The events which constitute an event
of default will also be customary for loans of this size, including payment
defaults, breaches of Atlas Pipeline's representations or covenants contained in
the credit agreement, adverse judgments against it in excess of a specified
amount, and a change of control of its general partner.
45
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of the following information is to provide
forward-looking quantitative and qualitative information about our potential
exposure to market risks. The term "market risk" refers to the risk of loss
arising from adverse changes in interest rates and oil and gas prices. The
disclosures are not meant to be precise indicators of expected future losses,
but rather indicators of reasonable possible losses. This forward-looking
information provides indicators of how we view and manage our ongoing market
risk exposures. All of our market risk sensitive instruments were entered into
for purposes other than trading.
GENERAL
We are exposed to various market risks, principally fluctuating
interest rates and changes in commodity prices. These risks can impact our
results of operations, cash flows and financial position. We manage these risks
through regular operating and financing activities and periodically use
derivative financial instruments.
The following analysis presents the effects on our earnings, cash flows
and financial position as if the hypothetical changes in market risk factors
occurred on June 30, 2004. 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 June 30, 2004, the amount outstanding under a
revolving loan attributable to our energy operations had increased to $35.8
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 3.5% at June
30, 2004 due to a larger portion of our borrowings being at the bank's prime
rate at June 30, 2004. Holding all other variables constant, if interest rates
hypothetically increased or decreased by 10%, our net annual income would change
by approximately $81,000.
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. In the nine months ended June 30, 2004, we had no
borrowings 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
limit our exposure to changing natural gas prices, we use hedges. Through our
hedges, we seek to provide a measure of stability in the volatile environment of
natural gas prices. Our risk management objective is to lock in a range of
pricing for expected production volumes.
We do not hold or issue derivative instruments for trading purposes.
Historically, we have entered into financial hedging activities for 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
NYMEX. We did not settle any contracts during the nine months ended June 30,
2004. We recognized losses of $1.1 million on settled contracts during the nine
months ended June 30, 2003. We recognized no gains or losses during the nine
months ended June 30, 2004 or 2003 for hedge ineffectiveness or as a result of
the discontinuance of cash flow hedges.
46
In addition, FirstEnergy Solutions and other third party marketers to
which we sell gas, also use financial hedges to hedge their pricing exposure and
make price hedging opportunities available to us. These transactions are similar
to NYMEX-based futures contracts, swaps and options, but also require firm
delivery of the hedged quantity. Thus, we limit these arrangements to much
smaller quantities than those projected to be available at any delivery point.
For the fiscal year ending September 30, 2004, we estimate in excess of 50% of
our produced natural gas volumes will be sold in this manner, leaving our
remaining production to be sold at contract prices in the month produced or at
spot market prices. We also negotiate with certain purchasers for delivery of a
portion of natural gas we will produce for the upcoming twelve months. The
prices under most of our gas sales contracts are negotiated on an annual basis
and are index-based. 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 1%
change in our projected natural gas revenues.
REAL ESTATE
Portfolio Loans and Related Senior Liens. We believe that none of the
loans held in our portfolio as of June 30, 2004 (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 $5.0 million outstanding under our line
at Hudson United Bank and at the prime rate for our line at Sovereign Bank for
which there were no amounts outstanding at June 30, 2004. We have $10.0 million
outstanding on our line of credit at Commerce Bank which bears interest at one
of two rates, elected at our option; (i) the lender's prime rate, or (ii) London
Inter-Bank Offered Rate, or LIBOR, plus 250 basis points subject to a floor of
5% and ceiling of 8 1/2%. The lender's prime rate is defined as the "prime rate"
as reported in The Wall Street Journal (4.25% at June 30, 2004). A hypothetical
10% change in the average interest rate applicable to these lines of credit
would change our net income by approximately $43,500.
LEASING
LEAF Financial Corporation, our equipment-leasing subsidiary, entered
into a $20.0 million secured revolving credit facility with National City Bank
which terminates in November 2004. 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 LIBOR plus 300 basis points. As of June
30, 2004, the balance outstanding was $15.0 million at an average interest rate
of 4.1%. LEAF Financial Corporation also has a $20.0 million secured credit
facility with Commerce Bank. The facility has the same interest rate structure
as the National City Bank facility and expires in November 2004. As of June 30,
2004, the balance outstanding was $20.0 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 $95,000.
47
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Securities Exchange Act
of 1934 reports is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
Under the supervision of our Chief Executive Officer and Chief
Financial Officer and with the participation of our disclosure committee
appointed by such officers, we have carried out an evaluation of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective.
There have been no significant changes in our internal controls over
financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting during our most
recent fiscal quarter.
48
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 11, 2004, the Company held its annual meeting of stockholders at
which the following matters were voted on:
1. Election of directors:
a) Andrew M. Lubin
FOR: 16,300,954
WITHHELD: 302,604
b) P. Sherrill Neff
FOR: 16,341,502
WITHHELD: 262,056
49
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 Master Separation and Distribution Agreement
between Atlas America, Inc. and Resource
America, Inc. dated May 14, 2004
10.2 Registration Rights Agreement between Atlas
America, Inc. and Resource America, Inc. dated
May 14, 2004.
10.3 Tax Matters Agreement between Atlas America,
Inc. and Resource America, Inc. dated May 14,
2004.
10.4 Transition Services Agreement between Atlas
America, Inc. and Resource America, Inc. dated
May 14, 2004.
10.5 Employment Agreement for Edward E. Cohen dated
May 14, 2004.
10.6 Revolving Credit Agreement and Assignment dated
as of May 27, 2004 among Lease Equity
Appreciation Fund I, L.P., LEAF Financial
Corporation and Sovereign Bank.
10.7 Securities Purchase Agreement dated June 10,
2004 among Atlas Pipeline Operating Partnership,
L.P., Spectrum Field Services, Inc. et al. (1)
10.8 Third Amendment to Revolving Credit Agreement
and Assignment dated June 18, 2004 among LEAF
Financial Corporation, LEAF Funding, Inc. and
Commerce Bank, National Association.
10.8(a) First Amendment to Guaranty of Payment dated
June 18, 2004 between Resource America, Inc.
and Commerce Bank, National Association.
10.9 Sixth Amendment to Revolving Credit Agreement
and Assignment dated 20, 2004 among LEAF
Financial Corporation, LEAF Funding, Inc. and
National City Bank.
10.9(a) First Amendment to Guaranty of Payment dated
June 20, 2004 between Resource America, Inc. and
National City Bank.
10.10 Credit Agreement dated July 16, 2004 among Atlas
Pipeline Partners, L.P., Wachovia Bank, National
Association et al.
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
During the quarter ended June 30, 2004, we filed two
current reports on Form 8-K as follows:
o We filed a Form 8-K on June 9, 2004 regarding SEMCO
Energy, Inc.'s petition with the Regulatory Commission of
Alaska seeking clarification of their order issued on
April 20, 2004 in connection with approvals sought by
Atlas Pipeline and SEMCO Energy, Inc. in connection with
the proposed sale of Alaska Pipeline Company to Atlas
Pipeline.
o We filed a Form 8-K on June 15, 2004 regarding Atlas
Pipeline's belief that SEMCO Energy, Inc. had breached
its obligations under the Purchase and Sale Agreement
with respect to the sale of Alaska Pipeline Company.
------------------------------------
(1) Filed previously as an exhibit to our Quarterly Report
on Form 10-Q for the quarter ended December 31, 1999 and
by this reference incorporated herein.
(2) Filed previously as an exhibit to our Quarterly Report
on Form 10-Q for the quarter ended December 31, 2003 and
by this reference incorporated herein.
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RESOURCE AMERICA, INC.
(REGISTRANT)
Date: August 16, 2004 By: /s/ Steven J. Kessler
---------------------
STEVEN J. KESSLER
Senior Vice President and Chief Financial Officer
51