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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 March 31, 2005
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 [ ]
The number of outstanding shares of the registrant's common stock on April 29,
2005 was 17,671,437.
RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - March 31, 2005 and September 30, 2004............... 3
Consolidated Statements of Income
Three Months and Six Months Ended March 31, 2005 and 2004.................... 4
Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended March 31, 2005.............................................. 5
Consolidated Statements of Cash Flows
Six Months Ended March 31, 2005 and 2004..................................... 6
Notes to Consolidated Financial Statements - March 31, 2005....................... 7 - 31
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 32 - 53
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................ 53 - 55
Item 4. Controls and Procedures........................................................... 56
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................. 57
SIGNATURES......................................................................................... 58
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESOURCE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, SEPTEMBER 30,
2005 2004
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 54,962 $ 69,099
Investments in lease assets................................................. 38,405 24,177
Accounts receivable and prepaid expenses.................................... 46,887 31,634
Assets held for sale........................................................ 103,673 102,963
----------- ------------
Total current assets...................................................... 243,927 227,873
Investments in real estate loans and real estate............................... 48,524 47,119
Property and equipment, net.................................................... 403,012 374,192
Other assets, net.............................................................. 63,898 31,619
Intangible assets, net......................................................... 6,943 7,433
Goodwill....................................................................... 37,470 37,470
----------- ------------
$ 803,774 $ 725,706
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................................... $ 3,449 $ 6,151
Secured revolving credit facilities - equipment leasing..................... 30,978 8,487
Accounts payable............................................................ 27,962 25,413
Liabilities associated with assets held for sale............................ 73,420 65,300
Accrued liabilities......................................................... 56,729 38,679
Liabilities associated with drilling contracts.............................. 23,060 29,375
----------- ------------
Total current liabilities................................................. 215,598 173,405
Long-term debt................................................................. 121,036 114,696
Deferred revenue and other liabilities......................................... 11,514 9,263
Deferred income taxes.......................................................... 22,720 19,677
Minority interests............................................................. 158,599 150,750
Commitments and contingencies.................................................. - -
Stockholders' equity:
Preferred stock $1.00 par value: 1,000,000 authorized shares;
none outstanding.......................................................... - -
Common stock, $.01 par value: 49,000,000 authorized shares.................. 256 255
Additional paid-in capital.................................................. 248,819 247,865
Less treasury stock, at cost................................................ (77,505) (77,667)
Less ESOP loan receivable................................................... (1,104) (1,127)
Accumulated other comprehensive loss........................................ (598) (1,575)
Retained earnings........................................................... 104,439 90,164
----------- ------------
Total stockholders' equity................................................ 274,307 257,915
----------- ------------
$ 803,774 $ 725,706
=========== ============
See accompanying notes to consolidated financial statements
3
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
REVENUES
Energy................................................. $ 101,501 $ 41,749 $ 192,748 $ 77,440
Real estate............................................ 4,981 4,992 9,179 8,936
Equipment leasing...................................... 3,384 2,084 5,975 3,708
Structured finance(1).................................. 4,730 1,921 6,024 2,880
---------- ---------- ---------- ----------
114,596 50,746 213,926 92,964
COSTS AND EXPENSES
Energy................................................. 78,974 29,035 146,093 52,361
Real estate............................................ 3,538 2,873 6,937 5,578
Equipment leasing...................................... 2,496 2,880 4,807 4,426
Structured finance..................................... 1,790 74 2,401 413
General and administrative............................. 2,211 1,580 3,709 3,566
Atlas America, Inc. planned spin-off................... 172 - 378 -
Start-up costs - Resource Capital Corp................. 823 - 823 -
Depreciation, depletion and amortization............... 5,461 4,141 11,966 7,864
Provision for possible losses.......................... 4 100 161 400
---------- ---------- ---------- ----------
95,469 40,683 177,275 74,608
---------- ---------- ---------- ----------
OPERATING INCOME.......................................... 19,127 10,063 36,651 18,356
OTHER INCOME (EXPENSE)
Interest expense....................................... (2,223) (1,475) (4,586) (4,533)
Minority interest in Atlas Pipeline Partners, L.P...... (2,500) (1,322) (9,720) (2,595)
Minority interest in structured finance entities....... (842) - (743) -
Other income, net...................................... 50 3,240 7,795 5,111
---------- ---------- ---------- ----------
(5,515) 443 (7,254) (2,017)
---------- ---------- ----------- ----------
Income from continuing operations before income tax
and minority interest.................................. 13,612 10,506 29,397 16,339
Provision for income tax.................................. 4,749 3,514 10,274 5,555
---------- ---------- ---------- ----------
Income from continuing operations before minority
interest............................................... 8,863 6,992 19,123 10,784
Minority interest in Atlas America, Inc., net of tax...... (1,686) - (3,447) -
---------- ---------- ----------- ----------
Income from continuing operations......................... 7,177 6,992 15,676 10,784
Income (loss) from discontinued operations, net of tax.... 285 (830) 353 (1,279)
---------- ---------- ---------- ----------
NET INCOME................................................ $ 7,462 $ 6,162 $ 16,029 $ 9,505
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE - BASIC:
From continuing operations............................. $ 0.41 $ 0.40 $ 0.89 $ 0.62
Discontinued operations................................ 0.02 (0.05) 0.03 (0.07)
---------- ---------- ---------- ----------
Net income............................................. $ 0.43 $ 0.35 $ 0.92 $ 0.55
========== ========== ========== ==========
Weighted average shares outstanding.................... 17,526 17,374 17,516 17,364
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED:
From continuing operations............................. $ 0.38 $ 0.39 $ 0.84 $ 0.60
Discontinued operations................................ 0.02 (0.05) 0.01 (0.07)
---------- ---------- ---------- ----------
Net income............................................. $ 0.40 $ 0.34 $ 0.85 $ 0.53
========== ========== ========== ==========
Weighted average shares outstanding.................... 18,829 18,153 18,765 18,052
========== ========== ========== ==========
DIVIDENDS DECLARED PER COMMON SHARE....................... $ 0.05 $ 0.03 $ 0.10 $ 0.07
========== ========== ========== ==========
- -------------
(1) Includes $357 of revenues related to Resource Capital Corp. for the period
from March 8, 2005 (inception) through March 31, 2005.
See accompanying notes to consolidated financial statements
4
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 2005
(in thousands, except share data)
(unaudited)
ACCUMULATED
COMMON STOCK ADDITIONAL TREASURY STOCK ESOP OTHER
--------------------- PAID-IN ------------------- LOAN COMPREHENSIVE
SHARES AMOUNT CAPITAL SHARES AMOUNT RECEIVABLE INCOME (LOSS)
------------------------------------------------------------------------------------------
Balance, October 1, 2004.... 25,547,632 $ 255 $ 247,865 (8,053,062) $ (77,667) $ (1,127) $ (1,575)
Common shares issued........ 64,380 1 867 - - - -
Treasury shares issued...... - - 87 8,188 162 - -
Other comprehensive income.. - - - - - - 977
Cash dividends.............. - - - - - - -
Repayment of ESOP loan...... - - - - - 23 -
Net income.................. - - - - - - -
------------------------------------------------------------------------------------------
Balance, March 31, 2005..... 25,612,012 $ 256 $ 248,819 (8,044,874) $ (77,505) $ (1,104) $ (598)
========== ====== ========= ========== ========= ======== ========
TOTALS
RETAINED STOCKHOLDERS'
EARNINGS EQUITY
------------------------
Balance, October 1, 2004.... $ 90,164 $ 257,915
Common shares issued........ - 868
Treasury shares issued...... - 249
Other comprehensive income.. - 977
Cash dividends.............. (1,754) (1,754)
Repayment of ESOP loan...... - 23
Net income.................. 16,029 16,029
-----------------------
Balance, March 31, 2005..... $ 104,439 $ 274,307
========= =========
See accompanying notes to consolidated financial statements
5
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED
MARCH 31,
---------------------------
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................... $ 16,029 $ 9,505
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization......................................... 11,966 7,864
Amortization of discount on senior debt and deferred finance costs............... 644 648
Provision for possible losses.................................................... 161 400
Equity in earnings of equity investees........................................... (5,069) (3,257)
Minority interests............................................................... 13,910 2,595
(Gain) loss on discontinued operations........................................... (353) 1,279
Net (gain) loss on asset dispositions and buyback of senior notes................ (119) 1,133
Gain on sale of RAIT Investment Trust shares..................................... (1,459) (5,494)
Property impairments and abandonments............................................ - 1,679
Deferred income tax provision.................................................... 3,043 (1,011)
Accretion of discount............................................................ (878) (978)
Collection of interest........................................................... 401 -
Non-cash compensation............................................................ 967 145
Tax benefit from the exercise of stock options................................... (138) -
Non-cash loss on derivative value................................................ 720 -
Net change in FIN 46 entities' net assets held for sale............................. (155) (274)
Changes in operating assets and liabilities......................................... (23,365) (6,868)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS.................. 16,305 7,366
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................... (41,465) (18,493)
Payments received on real estate loans and real estate............................. 3,272 -
Distributions from investment funds................................................ 4,232 3,067
Investments in real estate loans and real estate................................... (3,336) (2,185)
Investment in affiliate - Resource Capital Corp.................................... (15,000) -
Proceeds from sale of assets....................................................... 66 8,047
Proceeds from sale of RAIT Investment Trust shares................................. 2,924 11,545
Structured finance investments..................................................... (8,300) (4,030)
Increase in other assets........................................................... (1,647) (2,087)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS..................... (59,254) (4,136)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings......................................................................... 209,621 122,539
Principal payments on borrowings................................................... (180,573) (168,750)
Distributions paid to minority interests of Atlas Pipeline Partners, L.P........... (8,522) (3,379)
Investor contributions to SFF entities............................................. 3,650 -
Dividends paid..................................................................... (1,754) (1,158)
Other.............................................................................. (1,373) (1,059)
Proceeds from issuance of stock.................................................... 868 261
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES OF CONTINUING
OPERATIONS....................................................................... 21,917 (51,546)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS....................................... 6,895 34,276
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS.............................................. (14,137) (14,040)
Cash and cash equivalents at beginning of period................................... 69,099 41,129
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................... $ 54,962 $ 27,089
========= =========
See accompanying notes to consolidated financial statements
6
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1 - MANAGEMENT'S OPINION REGARDING INTERIM FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the
Company and its subsidiaries, including certain variable interest entities
("VIEs") in which the Company has determined that it is the primary beneficiary
(see Note 5).
The consolidated financial statements and the information and tables
contained in the notes to the consolidated financial statements as of March 31,
2005 and for the three and six months ended March 31, 2005 and 2004 are
unaudited. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted in this
Form 10-Q pursuant to the rules and regulations of the Securities and Exchange
Commission. However, in the opinion of management, these interim financial
statements include all the necessary adjustments to fairly present the results
of the interim periods presented. The unaudited interim consolidated financial
statements should be read in conjunction with the audited financial statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2004 ("fiscal 2004"). The results of operations for the three
months and six months ended March 31, 2005 may not necessarily be indicative of
the results of operations for the full fiscal year ending September 30, 2005
("fiscal 2005").
Certain reclassifications have been made to the fiscal 2004
consolidated financial statements to conform to the fiscal 2005 presentation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 (in thousands):
SIX MONTHS ENDED
MARCH 31,
--------------------------
2005 2004
-------- --------
Cash paid during the period for:
Interest........................................................................ $ 3,370 $ 4,517
Income taxes.................................................................... $ 5,217 $ -
Non-cash activities include the following:
Receipt of note upon resolution of a real estate loan and a FIN 46 asset........ $ - $ 8,772
7
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In April 2005, the Financial Accounting Standards Board ("FASB") issued
Staff Position No. FAS 19-1 ("FSP FAS 19-1"), which addressed a discussion that
was ongoing within the oil and gas industry regarding capitalization of costs of
drilling exploratory wells. Paragraph 19 of Statement of Financial Accounting
Standards ("SFAS") 19, "Financial Accounting and Reporting by Oil and Gas
Producing Companies" ("SFAS 19"), requires costs of drilling exploratory wells
to be capitalized pending determination of whether the well has found proved
reserves. If the well has found proved reserves, the capitalized costs become
part of the entity's wells, equipment, and facilities; if, however, the well has
not found proved reserves, the capitalized costs of drilling the well are
expensed.
Questions arose in practice about the application of this guidance due
to changes in oil and gas exploration processes and lifecycles. The issue was
whether there are circumstances that would permit the continued capitalization
of exploratory well costs if reserves cannot be classified as proved within one
year following the completion of drilling other than when additional exploration
wells are necessary to justify major capital expenditures and those wells are
underway or firmly planned for the near future. FSP FAS 19-1 amends SFAS 19 to
allow for the continued capitalization of suspended well costs when the well has
found a sufficient quantity of reserves to justify its completion as a producing
well and the enterprise is making sufficient progress assessing the reserves and
the economic and operating viability of the plan. This guidance requires
management to exercise more judgment than was previously required and also
requires additional disclosure. This new guidance is effective for the first
reporting period beginning after April 4, 2005 and is to be applied
prospectively to existing and newly capitalized exploratory well costs. The
Company does not believe this statement of position will have a significant
effect on our financial statements.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Assets Retirement Obligations" ("FIN 47"), which will result in (a)
more consistent recognition of liabilities relating to asset retirement
obligations, (b) more information about expected future cash outflows associated
with those obligations, and (c) more information about investments in long-lived
assets because additional asset retirement costs will be recognized as part of
the carrying amounts of the assets. FIN 47 clarifies that the term "conditional
asset retirement obligation" as used in SFAS 143, "Accounting for Asset
Retirement Obligations," refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and/or method of settlement.
Uncertainty about the timing and/or method of settlement of a conditional asset
retirement obligation should be factored into the measurement of the liability
when sufficient information exists. FIN 47 also clarifies when an entity would
have sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. Retrospective application of interim financial
information is permitted but is not required. Early adoption of this
interpretation is encouraged. As FIN 47 was recently issued, the Company has not
determined whether the interpretation will have a significant effect on its
financial position or results of operations.
8
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS - (CONTINUED)
In December 2004, the FASB issued SFAS 123-R, "Share-Based Payment"
("SFAS 123-R"), which is a revision of SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123-R supersedes Accounting Principles Board ("APB") Opinion
25, "Accounting for Stock Issued to Employees," and amends SFAS 95, "Statement
of Cash Flows." Generally, the approach to accounting in SFAS 123-R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values.
Currently, the Company accounts for these payments under the intrinsic value
provisions of APB 25 with no expense recognition in the financial statements.
SFAS 123-R is effective for the Company beginning October 1, 2005. The statement
offers several alternatives for implementation. At this time, the Company has
not made a decision as to which alternative it may select.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation plans under
the recognition and measurement principles of APB 25 and related
interpretations. For substantially all grants of stock options, no stock-based
employee compensation expense is reflected in net income since each option
granted had an exercise price equal to the market value of the underlying common
stock on the date of grant.
SFAS 123 requires the disclosure of pro forma net income and earnings
per share as if the Company had adopted the fair value method for stock options
granted after June 30, 1996. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also required
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values.
The following table provides the pro forma effects of recognizing
compensation expense in accordance with SFAS 123 (in thousands, except per
share data):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- ------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Net income as reported.................................... $ 7,462 $ 6,162 $ 16,029 $ 9,505
Stock-based employee compensation determined under
the fair value-based method for all grants, net of tax (290) (524) (581) (1,285)
--------- --------- --------- ---------
Pro forma net income...................................... $ 7,172 $ 5,638 $ 15,448 $ 8,220
========= ========= ========= =========
Basic earnings per share:
As reported............................................ $ 0.43 $ 0.35 $ 0.92 $ 0.55
Pro forma.............................................. $ 0.41 $ 0.32 $ 0.88 $ 0.47
Diluted earnings per share:
As reported............................................ $ 0.40 $ 0.34 $ 0.85 $ 0.53
Pro forma.............................................. $ 0.38 $ 0.31 $ 0.82 $ 0.46
9
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of periodic temporary
investments of cash and cash equivalents. The Company places its temporary cash
investments in high-quality, short-term money market instruments and deposits
with high-quality financial institutions and brokerage firms. At March 31, 2005,
the Company had $65.0 million in deposits at various banks, of which $61.9
million was over the insurance limit of the Federal Deposit Insurance
Corporation. No losses have been experienced on such investments.
RECEIVABLES - ENERGY
In evaluating its allowance for possible losses, the Company performs
ongoing credit evaluations of its customers and adjusts credit limits based upon
payment history and the customer's current creditworthiness, as determined by
the Company's review of its customers' credit information. The Company extends
credit on an unsecured basis to many of its energy customers. At March 31, 2005
and September 30, 2004, the Company's credit evaluation indicated that it had no
need for an allowance for possible losses.
REVENUE RECOGNITION - ENERGY
Because there are timing differences between the delivery of natural
gas, natural gas liquids ("NGLS") and oil and the Company's receipt of a
delivery statement, the Company has unbilled revenues. These revenues are
accrued based upon volumetric data from the Company's records and the Company's
estimates of the related transportation and compression fees which are, in turn,
based upon applicable product prices. The Company had unbilled trade receivables
at March 31, 2005 and September 30, 2004 of $26.7 million and $22.1 million,
respectively, which are included in accounts receivable on its consolidated
balance sheets.
INTEREST INCOME RECOGNITION - SECURITIES
The Company accounts for its interests in unconsolidated collateralized
debt obligations in accordance with Emerging Issues Task Force ("EITF") 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets" ("EITF 99-20"), using the
effective yield method.
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income (loss) includes net income (loss) and all other
changes in the equity of a business during a period from transactions and other
events and circumstances from non-owner sources. These changes, other than net
income (loss), are referred to as "other comprehensive income (loss)" and for
the Company include changes in the fair value, net of taxes, of marketable
securities and unrealized hedging gains and losses.
10
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 3 - COMPREHENSIVE INCOME - (CONTINUED)
The following table presents comprehensive income, net of tax (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- ------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Net income................................................ $ 7,462 $ 6,162 $ 16,029 $ 9,505
Other comprehensive income (loss):
Unrealized (losses) gains on investments in
marketable securities, net of tax of $211, $(630),
$(570) and $(1,273).................................. (392) 1,415 1,058 2,609
Less: reclassification for mark-to-market adjustments
for gains realized in net income, net of tax of $0,
$981, $511 and $1,868................................ - (1,995) (948) (3,626)
--------- --------- --------- ---------
(392) (580) 110 (1,017)
Unrealized gains (losses) on hedging contracts,
net of tax of $618 and $(463)... ................... (1,606) - 826 -
Less: reclassification for mark-to-market adjustments
for losses realized in net income,
net of tax of $(46) and $(23)........................ 82 - 41 -
--------- ----------- --------- ---------
(1,524) - 867 -
--------- ----------- --------- ---------
Comprehensive income...................................... $ 5,546 $ 5,582 $ 17,066 $ 8,488
========= ========= ========= =========
Accumulated other comprehensive loss, net of tax, is related to the
following (in thousands):
MARCH 31, SEPTEMBER 30,
2005 2004
----------- ------------
Marketable securities - unrealized gains....... $ 1,088 $ 978
Unrealized hedging losses...................... (1,686) (2,553)
----------- -----------
$ (598) $ (1,575)
=========== ===========
NOTE 4 - EARNINGS PER SHARE
Basic earnings per share ("Basic EPS") is determined by dividing net
income by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share ("Diluted EPS") is computed by
dividing net income by the sum of the weighted average number of shares of
common stock outstanding after giving effect to the potential dilution from the
exercise of securities, such as stock options, into shares of common stock as if
those securities were exercised.
11
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 4 - EARNINGS PER SHARE - (CONTINUED)
The following table presents a reconciliation of the components used in
the computation of Basic EPS and Diluted EPS (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- ------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Income from continuing operations......................... $ 7,177 $ 6,992 $ 15,676 $ 10,784
Income (loss) from discontinued operations................ 285 (830) 353 (1,279)
--------- --------- --------- ---------
Net income................................................ $ 7,462 $ 6,162 $ 16,029 $ 9,505
========= ========= ========= =========
Basic shares outstanding.................................. 17,526 17,374 17,516 17,364
Dilutive effect of stock option and award plans........... 1,303 779 1,249 688
--------- --------- --------- ---------
Dilutive shares outstanding............................... 18,829 18,153 18,765 18,052
========= ========= ========= =========
NOTE 5 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES
Financial Interpretation 46-R ("FIN 46-R") issued by the FASB in
December 2003 provides guidance as to the definition of a VIE and requires it to
be consolidated by its primary beneficiary, generally the party having an
ownership or other contractual financial interest that is expected to absorb the
majority of the VIE's expected losses. If no party has exposure to the majority
of the VIE's expected losses, the primary beneficiary will be the party, if any,
entitled to receive the majority of the VIE's residual returns. The primary
beneficiary is required to consolidate the VIE's assets, liabilities and
non-controlling interest at fair value.
Certain entities relating to the Company's real estate business have
been consolidated in accordance with FIN 46-R. Because of the timing of the
receipt of financial information, the Company accounts for these entities'
activities on a one quarter lag, except when adjusting for the impact of events
such as a refinance or sale. The assets, liabilities, revenues and costs and
expenses of the consolidated VIEs are included in the Company's financial
statements where previously the Company's interests had been recorded as
investments in real estate loans.
12
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 5 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES - (CONTINUED)
The assets, liabilities, revenues and costs and expenses 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 costs and
expenses associated with entities consolidated in accordance with FIN 46-R and
are not classified as held for sale at the dates indicated. The assets and
liabilities of these VIE's are included in the balance sheet captions as
indicated (in thousands):
MARCH 31, SEPTEMBER 30,
2005 2004
----------- ------------
ASSETS:
Cash................................................................... $ 1,408 $ 1,306
Accounts receivable and prepaid expenses............................... 422 347
----------- ------------
1,830 1,653
Property and equipment, net............................................ 55,066 58,897
Other assets........................................................... 24 8
----------- ------------
$ 56,920 $ 60,558
=========== ============
LIABILITIES:
Current portion of long-term debt...................................... $ 1,076 $ 790
Accounts payable....................................................... 4,321 4,036
Accrued liabilities.................................................... 1,099 481
----------- ------------
6,496 5,307
Long-term debt......................................................... 19,326 22,849
Deferred revenue and other liabilities................................. 934 1,835
----------- ------------
$ 26,756 $ 29,991
=========== ============
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
CONTINUING OPERATIONS - FIN 46:
Revenues - real estate.............................. $ 3,016 $ 2,948 $ 6,070 $ 5,268
Costs and expenses:
Operating expenses - real estate.................. 1,961 1,562 3,884 3,173
Depreciation and amortization..................... 355 368 710 654
---------- ---------- ---------- ----------
Operating income.................................... 700 1,018 1,476 1,441
Interest expense.................................... 260 236 524 627
---------- ---------- ---------- ----------
Income from continuing operations before taxes.... $ 440 $ 782 $ 952 $ 814
========== ========== ========== ==========
13
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 5 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES - (CONTINUED)
The following tables provide supplemental information about assets,
liabilities and discounted operations, associated with five entities that are
held for sale, substantially all of which are consolidated in accordance with
FIN 46-R (in thousands):
MARCH 31, SEPTEMBER 30,
2005 2004
------------ ------------
ASSETS:
Cash and cash equivalents............................................. $ 2,228 $ 5,073
Accounts receivable and prepaid expenses.............................. 1,650 873
Property and equipment, net........................................... 98,781 94,717
Other assets.......................................................... 1,014 2,300
------------ -----------
Total assets held for sale.......................................... $ 103,673 $ 102,963
============ ===========
LIABILITIES:
Mortgage loans on real estate......................................... $ 69,175 $ 58,168
Other liabilities..................................................... 4,245 7,132
------------ -----------
Total liabilities associated with assets held for sale.............. $ 73,420 $ 65,300
============ ===========
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
2005 2004 2005 2004
---------- ----------- ---------- -----------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Revenues............................................ $ 3,647 $ 3,802 $ 7,726 $ 6,155
Expenses............................................ 3,208 3,847 6,903 6,891
---------- ----------- ---------- -----------
Operating income.................................... 439 (45) 823 (736)
Loss on disposals................................... - (1,835) (280) (1,835)
Income tax (provision) benefit...................... (154) 658 (190) 900
---------- ----------- ---------- -----------
Income (loss) from discontinued operations........ $ 285 $ (1,222) $ 353 $ (1,671)
========== =========== ========== ===========
See Note 16 for all discontinued operations.
NOTE 6 - INVESTMENTS IN LEASE ASSETS
The Company's investments in lease assets include the following (in
thousands):
MARCH 31, SEPTEMBER 30,
2005 2004
---------- ------------
Direct financing leases, net............................................... $ 30,039 $ 20,845
Notes receivable, net...................................................... 6,360 2,822
Assets subject to operating leases, net of accumulated depreciation of
$66 and $22.............................................................. 2,006 510
---------- ----------
$ 38,405 $ 24,177
========== ==========
The interest rates on notes receivable range from 7% to 11%.
14
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 6 - INVESTMENTS IN LEASE ASSETS - (CONTINUED)
The components of direct financing leases are as follows (in
thousands):
MARCH 31, SEPTEMBER 30,
2005 2004
---------- ------------
Total future minimum lease payments receivable........... $ 35,024 $ 25,052
Initial direct costs, net of amortization................ 587 428
Unguaranteed residual.................................... 1,028 87
Unearned lease income.................................... (6,385) (4,695)
Unearned residual income................................. (215) (27)
---------- ----------
$ 30,039 $ 20,845
========== ==========
Although the lease terms extend over many years as indicated in the
table below, the Company routinely sells the leases it acquires to Lease Equity
Appreciation Fund I or Merrill Lynch Equipment Finance, LLC shortly after their
origination in accordance with agreements with each party. As a result of these
routine sales of leases and the Company's credit evaluation, management
concluded that no allowance for possible losses was needed at March 31, 2005 and
September 30, 2004. The contractual future minimum lease and note payments and
related rental payments expected to be received on direct financing
non-cancelable leases, notes receivable and operating leases for each of the
five succeeding annual periods ending March 31 and thereafter are as follows (in
thousands):
Direct Financing Notes Operating
Leases Receivable Leases
---------------- ---------- ---------
2006..................................... $ 4,608 $ 871 $ 259
2007..................................... 8,311 695 518
2008..................................... 7,399 797 496
2009..................................... 6,089 764 280
2010..................................... 4,934 738 113
Thereafter............................... 3,683 2,495 39
------------- --------- --------
$ 35,024 $ 6,360 $ 1,705
============= ========= ========
NOTE 7 - INVESTMENTS IN REAL ESTATE LOANS AND REAL ESTATE
The Company focuses its real estate operations on the sponsorship and
management of real estate investment programs and the management and resolution
of its investments in real estate loans and real estate. In the management of
its real estate investment programs, the Company receives fees for acquisitions,
debt placements and management services related to the properties acquired by
these programs.
15
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 7 - INVESTMENTS IN REAL ESTATE LOANS AND REAL ESTATE - (CONTINUED)
The following is a summary of the changes in the carrying value of
investments in real estate loans and real estate for the periods presented (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- ---------------------------
2005 2004 2005 2004
----------- ------------ ----------- -----------
Real estate loans, beginning of period.................... $ 23,880 $ 48,611 $ 24,066 $ 40,416
New loan............................................... - - - 8,772
Additions to existing loans............................ 104 1,825 1,240 2,062
Loan writedowns........................................ (146) - (370) -
Accretion of discount (net of collection of interest).. 224 421 476 978
Collection of principal................................ (922) - (2,272) -
Cost of loans resolved................................. - (2,322) - (3,693)
----------- ------------ ----------- -----------
Real estate loans, end of period.......................... 23,140 48,535 23,140 48,535
Real estate ventures...................................... 22,092 10,936 22,092 10,936
Real estate owned, net of accumulated depreciation of
$737 and $493.......................................... 4,062 11,805 4,062 11,805
Allowance for possible losses............................. (770) (1,673) (770) (1,673)
----------- ------------ ------------ -----------
Real estate............................................... 25,384 21,068 25,384 21,068
----------- ------------ ----------- -----------
Total real estate loans and real estate, end of period.... $ 48,524 $ 69,603 $ 48,524 $ 69,603
=========== ============ =========== ===========
At March 31, 2005 and 2004, the Company held, for its own account, real
estate loans with aggregate face values of $58.1 million and $184.6 million,
respectively. Amounts receivable, net of senior lien interests, were $42.5
million and $100.6 million at March 31, 2005 and 2004, respectively.
In determining the Company's allowance for possible losses related to
its investments in real estate loans and real estate, 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 environmental 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. 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.
16
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 7 - INVESTMENTS IN REAL ESTATE LOANS AND REAL ESTATE - (CONTINUED)
The following is a summary of activity in the allowance for possible
losses related to real estate loans and real estate (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ----------- -----------
Balance, beginning of period.............................. $ 915 $ 1,717 $ 989 $ 1,417
Provision for possible losses............................. - 100 150 400
Write-downs............................................... (145) (144) (369) (144)
------------ ------------ ----------- -----------
Balance, end of period.................................... $ 770 $ 1,673 $ 770 $ 1,673
============ ============ =========== ===========
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation, depletion and
amortization is based on cost, less estimated salvage value, primarily using the
unit-of-production or straight-line method over the assets' estimated useful
lives. Maintenance and repairs are expensed as incurred. Major renewals and
improvements that extend the useful lives of property and equipment are
capitalized.
The Company uses the "successful efforts" method to account for its
exploration and production activities. Under this method, costs are accumulated
on a pool-by-pool basis with certain exploratory expenditures and exploratory
dry holes expensed as incurred. Costs of productive wells and development dry
holes are capitalized and amortized on the unit-of-production method for each
pool based on estimated proved oil and gas reserves.
The estimated service lives of other property and equipment are as
follows:
Pipelines, processing and compression facilities......... 15-20 years
Rights-of-way - Appalachia .............................. 20 years
Rights-of-way - Mid Continent-Velma...................... 40 years
Land, buildings and improvements......................... 10-40 years
Furniture and equipment.................................. 3-7 years
Other.................................................... 3-10 years
17
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 8 - PROPERTY AND EQUIPMENT - (CONTINUED)
Property and equipment, net, consists of the following (in thousands):
MARCH 31, SEPTEMBER 30,
2005 2004
------------- --------------
Mineral interests in properties:
Proved properties.......................................................... $ 2,936 $ 2,544
Unproved properties........................................................ 1,002 1,002
Wells and related equipment.................................................... 213,781 184,046
Pipeline, processing and compression facilities................................ 174,251 163,302
Rights-of-way.................................................................. 15,107 14,702
Land, buildings and improvements............................................... 8,181 7,394
Support equipment.............................................................. 3,193 2,902
Real estate assets - FIN 46.................................................... 57,117 60,357
Other.......................................................................... 7,930 7,413
------------- --------------
483,498 443,662
Accumulated depreciation, depletion and amortization:
Oil and gas properties..................................................... (73,060) (63,551)
Other ..................................................................... (7,426) (5,919)
------------- --------------
(80,486) (69,470)
------------- --------------
$ 403,012 $ 374,192
============= ==============
NOTE 9 - OTHER ASSETS AND INTANGIBLE ASSETS
OTHER ASSETS
The following table provides information about other assets (in
thousands):
MARCH 31, SEPTEMBER 30,
2005 2004
------------- -------------
Equity investments in structured finance investees......................... $ 9,276 $ 9,548
Investment in affiliate - Resource Capital Corp. at cost................... 16,148 -
Investments in collateralized debt obligations at lower of cost or market.. 15,714 -
Investment in The Bancorp, Inc. common shares, at estimated fair value
including unrealized gains of $1,602 and $0............................ 5,606 4,004
Deferred financing costs, net of accumulated amortization of
$1,716 and $1,132....................................................... 5,503 4,751
Investment in RAIT Investment Trust, at estimated fair value including
unrealized gains of $73 and $1,483..................................... 151 3,026
Other...................................................................... 11,500 10,290
------------- -------------
$ 63,898 $ 31,619
============= =============
The Company accounts for its investment in certain structured finance
investees using the equity method of accounting because its 50% ownership of the
general partner of these entities gives it the ability to exercise significant
influence over their operating and financial decisions. The Company's combined
general and limited partner interests in these entities range from 13% to 18%.
18
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 9 - OTHER ASSETS AND INTANGIBLE ASSETS - (CONTINUED)
In March 2005, the Company formed and sponsored Resource Capital Corp.
("RCC"), a real estate investment trust that is managed by the Company. RCC's
principal business activity is to purchase and manage a diversified portfolio of
real estate related securities and commercial finance assets. The Company
purchased 1.0 million shares of RCC common stock and was granted 345,000 shares
of RCC restricted common stock and options to purchase 651,666 common shares of
RCC at an exercise price of $15.00 per share. As of March 31, 2005, the Company
has awarded 279,000 of these restricted shares to certain members of management.
In December 2004, the shareholders of The Bancorp, Inc. ("TBBK")
approved a merger whereby its minority-owned subsidiary, The Bancorp Bank,
merged with and into a wholly-owned subsidiary of TBBK. The Company owns 400,428
common shares and 131,581 preferred shares of TBBK. The common shares became
publicly traded as a result of the merger. Since December 2004, the Company
accounts for its investment in the common shares of TBBK in accordance with SFAS
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 are reported as a separate
component of stockholders' equity. The preferred shares are valued at the lower
of cost or market.
Deferred financing costs are amortized over the terms of the related
loans.
The Company accounts for its investment in RAIT Investment Trust
("RAIT") in accordance with SFAS 115. This investment is classified as
available-for-sale and, as such, is carried at fair market value based on market
quotes. Unrealized gains are reported as a separate component of stockholders'
equity. The cost of securities sold is based on the specific identification
method.
INTANGIBLE ASSETS, NET
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 six months ended March 31, 2005 and 2004 was $490,000 and $543,000,
respectively. The following table provides information about intangible assets
(in thousands):
MARCH 31, SEPTEMBER 30,
2005 2004
------------- -------------
Partnership management and operating contracts............................. $ 14,343 $ 14,343
Leasing platform........................................................... 918 918
------------- -----------
15,261 15,261
Accumulated amortization................................................... (8,318) (7,828)
------------- -----------
$ 6,943 $ 7,433
============= ===========
19
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 9 - OTHER ASSETS AND INTANGIBLE ASSETS - (CONTINUED)
INTANGIBLE ASSETS, NET
The aggregate estimated annual amortization expense of intangible
assets over the next five years is as follows (in thousands):
2006..................................... $ 953
2007..................................... 902
2008..................................... 857
2009..................................... 793
2010..................................... 735
NOTE 10 - REAL ESTATE RENTAL PROPERTIES
The following table provides leasing information about rental
properties owned by the Company or real estate entities consolidated under FIN
46-R (in thousands):
MARCH 31, SEPTEMBER 30,
2005 2004
------------- ------------
Land....................................... $ 3,199 $ 3,368
Leasehold interest......................... 4,800 4,800
Retail buildings........................... 3,850 3,854
Office building............................ 3,877 3,853
Apartment buildings........................ 36,136 39,295
Hotel...................................... 10,055 9,987
------------- -----------
61,917 65,157
Less accumulated depreciation.............. (2,788) (2,135)
------------- -----------
$ 59,129 $ 63,022
============= ===========
Minimum future rental income under non-cancelable operating leases
associated with real estate rental properties that have terms in excess of one
year for each of the five succeeding years ended March 31, are as follows: 2006
- - $1.2 million; 2007 - $1.1 million; 2008 - $991,000; 2009 - $929,000 and 2010 -
$579,000.
20
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 11 - ASSET RETIREMENT OBLIGATIONS
The Company accounts for its estimated plugging and abandonment of its
oil and gas properties in accordance with SFAS 143, "Accounting for Asset
Retirement Obligations." The following table reconciles the Company's liability
for well plugging and abandonment costs (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- ------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Asset retirement obligations, beginning of period......... $ 5,618 $ 3,180 $ 4,888 $ 3,131
Liabilities incurred...................................... 1,008 71 1,658 101
Liabilities settled....................................... (28) (15) (32) (43)
Revision in estimates..................................... - 83 - 83
Accretion expense......................................... 109 52 193 99
--------- --------- --------- ---------
Asset retirement obligations, end of period............... $ 6,707 $ 3,371 $ 6,707 $ 3,371
========= ========= ========= =========
The above accretion expense is included in depreciation, depletion and
amortization in the Company's consolidated statements of income and the asset
retirement obligation liabilities are included in deferred revenue and other
liabilities in the Company's consolidated balance sheets.
NOTE 12 - DEBT
Total debt consists of the following (in thousands):
MARCH 31, SEPTEMBER 30,
2005 2004
------------- ------------
Energy:
Revolving credit facilities........................................... $ 60,000 $ 25,000
Term loan............................................................. 43,690 60,000
Real estate:
Mortgage loans on real estate - FIN 46................................ 20,402 23,639
Equipment leasing:
Revolving credit facilities........................................... 30,978 18,083
Other debt................................................................ 393 2,612
------------- -----------
Total debt............................................................ 155,463 129,334
Less current revolving credit facilities - equipment leasing.............. 30,978 8,487
Less current maturities................................................... 3,449 6,151
------------- -----------
Long-term debt........................................................... $ 121,036 $ 114,696
============= ===========
Annual debt principal payments over the next five years ending March 31
are as follows (in thousands):
2006................... $ 34,427
2007................... 53,898
2008................... 3,029
2009................... 13,011
2010................... 48,969
21
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In the ordinary course of its business operations, the Company has
ongoing relationships with several related parties. For a more detailed
description of these transactions, see the Company's annual report on Form 10-K
for the fiscal year ended September 30, 2004, at Note 5 of the "Notes to
Consolidated Financial Statements."
Relationship with Equipment Leasing Partnerships. In the three and six
months ended March 31, 2005 and 2004, the Company received fees from equipment
leasing partnerships in which it was the general partner of $1.2 million and
$612,000, respectively, and $1.7 million and $1.2 million, respectively.
Relationship with Real Estate Investment Partnerships. In the three and
six months ended March 31, 2005 and 2004, the Company received fees from real
estate investment partnerships in which it was the general partner of $797,000
and $197,000, respectively, and $1.4 million and $731,000, respectively.
Relationships with Trapeza and Structured Finance Fund ("SFF")
Partnerships. In the three and six months ended March 31, 2005 and 2004, the
Company received fees from Trapeza and SFF partnerships in which it was the
general partner of $2.2 million and $628,000, respectively, and $4.2 million and
$2.2 million, respectively.
Relationship with RCC. In the three months and six months ended March
31, 2005, the Company received management fees and net equity compensation
revenue of $208,000 and $149,000, respectively, from RCC formed in March 2005.
The Company is the external manager of this newly-formed real estate investment
trust (see Note 9).
Other Relationships. In October 2003, the Company paid $200,000 to
Messrs. S. Schaeffer, D. Cohen and E. Cohen to reimburse them (without interest)
for costs that they had incurred in assuming title to a property in 1998,
facilitating the Company's maintenance of control of the property at that time.
In October 2003, the asset of an entity that is consolidated on the
Company's financial statements (as a result of the application of FIN 46-R) and
that underlies one of the Company's loans was sold to an entity of which D.
Cohen is a shareholder. The buyer was the highest bidder for the property. The
Company received $6.6 million in cash and recognized a gain of $78,000. Prior to
such sale, the FIN 46 entity's asset had been owned by a partnership in which
Messrs. E. Cohen, D. Cohen and Mrs. B. Cohen were limited partners.
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. During January
2004, the Company borrowed and subsequently repaid the $10.0 million from RAIT.
22
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 14 - DERIVATIVE INSTRUMENTS
Atlas Pipeline enters into certain financial swap and option
instruments that are classified as cash flow hedges in accordance with SFAS 133,
"Accounting for Derivative Instruments and Hedging Activity." Atlas Pipeline
entered into these instruments to hedge the forecasted natural gas, NGLs and
condensate sales against the variability in expected future cash flows
attributable to changes in market prices. The swap instruments are contractual
agreements between counterparties to exchange obligations of money as the
underlying natural gas, natural gas liquids and condensate is sold. Under these
swap agreements, Atlas Pipeline receives a fixed price and pays a floating price
based on certain indices for the relevant contract period. The options fix the
price for Atlas Pipeline within the puts purchased and calls sold.
Atlas Pipeline formally documents all relationships between hedging
instruments and the items being hedged, including its risk management objective
and strategy for undertaking the hedging transactions. This includes matching
the natural gas futures and options contracts to the forecasted transactions.
Atlas Pipeline assesses, both at the inception of the hedges and on an ongoing
basis, whether the derivatives are effective in offsetting changes in the
forecasted cash flow of hedged items. If it is determined that a derivative is
not effective as a hedge or it has ceased to be an effective hedge due to the
loss of correlation between the hedging instrument and the underlying commodity,
Atlas Pipeline will discontinue hedge accounting for the derivative and
subsequent changes in fair value for the derivative will be recognized
immediately into earnings.
Derivatives are recorded on the consolidated balance sheets as assets
or liabilities at fair value. For derivatives qualifying as hedges, the
effective portion of changes in fair value are recognized in stockholders'
equity as accumulated other comprehensive income (loss) and reclassified to
earnings as such transactions are settled. For non-qualifying derivatives and
for the ineffective portion of qualifying derivatives, changes in fair value are
recognized in earnings as they occur. At March 31, 2005, Atlas Pipeline
reflected a net hedging liability on its balance sheet of $10.8 million. Of the
Company's $1.7 million accumulated other comprehensive loss related to
unrealized hedging losses at March 31, 2005, $1.1 million of losses will be
reclassified to earnings over the next twelve month period as these contracts
expire, and $600,000 will be classified in later periods if the fair values of
the instruments remain constant. Actual amounts that will be reclassified will
vary as a result of future changes in prices. Ineffective gains and losses are
recorded in income while the hedge contract is open and may increase or decrease
until settlement of the contract. Atlas Pipeline recognized a loss of $669,000
and $645,000 related to these hedging instruments for the three and six months
ended March 31, 2005, respectively. A loss of $224,000 and a hedging gain of
$216,000 resulting from ineffective hedges are included in energy revenues for
the three and six months ended March 31, 2005, respectively.
A portion of Atlas Pipeline's future natural gas sales is periodically
hedged through the use of swap and collar contracts. Realized gains and losses
on these instruments are reflected in the contract month being hedged as an
adjustment to energy revenues.
23
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 14 - DERIVATIVE INSTRUMENTS - (CONTINUED)
As of March 31, 2005, Atlas Pipeline had the following natural gas,
NGLs and crude oil volumes hedged:
NATURAL GAS BASIS SWAPS - PRICE SWAPS
Average Fair Value
Production Volumes Fixed Price Liability (3)
---------- ------- ----------- --------------
(mmbtu)(1) (per mmbtu) (in thousands)
2006 990,000 $ (0.500) $ 156
===========
NATURAL GAS LIQUIDS FIXED - PRICE SWAPS
Average Fair Value
Production Volumes Fixed Price Liability (2)
---------- ------- ----------- --------------
(gallons) (per gallon) (in thousands)
2006 15,966,000 $ 0.585 $ (5,453)
2007 4,536,000 0.574 (1,581)
-----------
$ (7,034)
===========
NATURAL GAS FIXED - PRICE SWAPS
Average Fair Value
Production Volumes Fixed Price Liability (2)
---------- ------- ----------- -------------
(mmbtu)(1) (per mmbtu) (in thousands)
2006 1,110,000 $ 6.203 $ (2,077)
2007 300,000 5.905 (426)
-----------
$ (2,503)
===========
CRUDE OIL FIXED - PRICE SWAPS
Average Fair Value
Production Volumes Fixed Price Liability (3)
---------- ------- ----------- -------------
(barrels) (per barrel) (in thousands)
2006 9,000 $ 40.958 $ (136)
2007 21,000 40.818 (295)
-----------
$ (431)
===========
CRUDE OIL OPTIONS
Average Fair Value
Production Option Type Volumes Strike Price Liability (3)
---------- ----------- ------- ------------ -------------
(barrels) (per barrel) (in thousands)
2006 Puts purchased 45,000 $ 30.00 $ -
2006 Calls sold 45,000 34.25 (1,007)
-----------
$ (1,007)
===========
Total liability $ (10,819)
===========
- -------------
(1) mmbtu means million British Thermal Units.
(2) Fair value based on Atlas Pipeline's internal model which forecasts forward
NGL prices as a function of forward NYMEX natural gas and light crude
prices.
(3) Fair value based on forward NYMEX natural gas and light crude prices, as
applicable.
24
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 15 - OTHER INCOME, NET
The Company's other income consists of the following (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Settlement of Alaska Pipeline arbitration, net of
termination expenses.................................. $ (136) $ - $ 4,310 $ -
Settlement of claim against directors' and officers'
liability insurance carrier........................... - - 1,400 -
Gains on sales of RAIT shares............................. - 2,986 1,459 5,494
Dividend income from RAIT................................. 5 267 8 671
Loss on early extinguishment of debt...................... - (428) - (1,955)
Interest income........................................... 474 97 786 268
Other..................................................... (293) 318 (168) 633
---------- ---------- ---------- ----------
$ 50 $ 3,240 $ 7,795 $ 5,111
========== ========== ========== ==========
NOTE 16 - DISCONTINUED OPERATIONS
The assets and liabilities of five and seven real estate entities as of
March 31, 2005 and 2004, respectively, that are consolidated under the
provisions of FIN 46-R, and include two real estate properties owned have been
classified as held for sale based on the Company's intent to sell its interests
in the properties and in the VIE's real estate loans underlying assets and
liabilities included in the Company's consolidated financial statements.
Summarized operating results of the Company's entities held for sale
are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ -------------------------
2005 2004 2005 2004
----------- ---------- ---------- ----------
Income from discontinued operations before
income taxes.......................................... $ 439 $ (45) $ 823 $ (736)
Loss on disposal.......................................... - (1,835) (280) (1,835)
Income tax (provision) benefit............................ (154) 658 (190) 900
----------- ---------- ---------- ----------
Income (loss) from discontinued operations................ $ 285 $ (1,222) $ 353 $ (1,671)
========== ========== ========== ==========
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.
25
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 16 - DISCONTINUED OPERATIONS - (CONTINUED)
The estimated loss on the disposal of FMF was originally $275,000 (net
of tax of $148,000) including anticipated operating losses after the date of
disposal. Upon final resolution of certain lease obligations associated with
FMF, the Company had recognized a gain on disposal in the three months ended
March 31, 2004. Summarized results of FMF are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
2005 2004 2005 2004
---------- ----------- ---------- ----------
Gain on disposal.......................................... $ - $ 602 $ - $ 602
Income tax provision...................................... - (210) - (210)
---------- ----------- ---------- ----------
Income from discontinued operations....................... $ - $ 392 $ - $ 392
========== ========== ========== ==========
Summarized results of discontinued real estate and FMF operations are
as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Income from discontinued operations, net of
tax of $(154), $16, $(288) and $258................... $ 285 $ (29) $ 535 $ (478)
Loss on disposal, net of tax of $0, $432, $98 and $432.... - (801) (182) (801)
---------- ---------- ---------- ----------
Income (loss) from discontinued operations................ $ 285 $ (830) $ 353 $ (1,279)
========== ========== ========== ==========
NOTE 17 -ACQUISITION OF SPECTRUM
On July 16, 2004, Atlas Pipeline acquired Spectrum Field Services, Inc.
("Spectrum," "APLMC" or Mid-Continent-Velma"), for approximately $143.0 million,
including transaction costs and the payment of taxes due as a result of the
transaction. Spectrum's principal assets include 1,900 miles of natural gas
pipelines and a natural gas processing facility in Velma, Oklahoma.
The acquisition was accounted for using the purchase method of
accounting under SFAS 141, "Business Combinations." The following table presents
the allocation of the purchase price, including professional fees and other
related acquisition costs to the assets acquired and liabilities assumed, based
on their fair values at the date of acquisition (in thousands):
Cash and cash equivalents........................... $ 803
Accounts receivable................................. 18,505
Prepaid expenses.................................... 649
Property, plant and equipment....................... 140,780
Other long-term assets.............................. 1,054
-----------
Total assets acquired............................. 161,791
-----------
Accounts payable and accrued liabilities............ (17,153)
Hedging liabilities................................. (1,519)
Long-term debt...................................... (164)
-----------
Total liabilities assumed......................... (18,836)
-----------
Net assets acquired............................. $ 142,955
===========
Atlas Pipeline is in the process of evaluating certain estimates made
in the purchase price and related allocations; accordingly, the purchase price
and allocation are both subject to adjustment.
26
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 17 -ACQUISITION OF SPECTRUM - (CONTINUED)
The following summarized unaudited pro forma consolidated income
statement information for the three months and six months ended March 31, 2004
assumes that the acquisition of Spectrum occurred as of October 1, 2003. The
Company has prepared these pro forma financial results for comparative purposes
only. These pro forma financial results may not be indicative of the results
that would have occurred for the three months and six months ended March 31,
2004 had the acquisition been completed on October 1, 2003 or the results that
will be attained in the future. The amounts presented below are in thousands,
except per share amounts:
THREE MONTHS ENDED
MARCH 31, 2004
--------------------------------------------
PRO FORMA PRO
AS REPORTED ADJUSTMENTS FORMA
----------- ----------- ----------
Revenues....................................................... $ 50,746 $ 27,202 $ 77,948
Net income..................................................... $ 6,162 $ (287) $ 5,875
Net income per common share - basic............................ $ 0.35 $ (0.02) $ 0.33
Weighted average common shares outstanding..................... 17,374 - 17,374
Net income per common share - diluted.......................... $ 0.34 $ (0.02) $ 0.32
Weighted average common shares outstanding..................... 18,153 - 18,153
SIX MONTHS ENDED
MARCH 31, 2004
--------------------------------------------
PRO FORMA PRO
AS REPORTED ADJUSTMENTS FORMA
----------- ----------- ----------
Revenues....................................................... $ 92,964 $ 49,736 $ 142,700
Net income..................................................... $ 9,505 $ (752) $ 8,753
Net income per common share - basic............................ $ 0.55 $ (0.04) $ 0.51
Weighted average common shares outstanding..................... 17,364 - 17,364
Net income per common share - diluted.......................... $ 0.53 $ (0.04) $ 0.49
Weighted average common shares outstanding..................... 18,052 - 18,052
Significant pro forma adjustments include revenues and costs and
expenses for the period prior to Atlas Pipeline's acquisition, interest and
depreciation expenses and the elimination of income taxes.
27
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 18 - OPERATING SEGMENT AND MAJOR CUSTOMER INFORMATION
The Company's operations include seven reportable operating segments
that reflect the way the Company manages its operations and makes business
decisions. In addition to reportable operating segments, certain other
activities are reported in the "Other energy" and "All other" categories. The
Company does not allocate income taxes to its operating segments. Summarized
operating segment data are as follows:
THREE MONTHS ENDED MARCH 31, 2005 (in thousands):
Other
Revenues from Depreciation, significant
external Interest Interest depletion and Segment items:
customers income expense amortization profit (loss) segment assets
--------- ------ ------- ------------ ------------- --------------
Well drilling............ $ 41,451 $ - $ - $ - $ 4,892 $ 9,263
Production and
exploration........... 13,959 - - 3,114 8,393 194,287
Natural gas and liquids.. 42,334 11 5 988 2,852 163,160
Transportation and
compression........... 1,407 65 - 573 (165) 37,710
Other energy(a).......... 2,350 6 1,618 106 (2,665) 47,014
Real estate.............. 4,981 - 237 447 (1,577) 151,691
Equipment leasing ....... 3,384 - 363 206 114 53,944
Structured finance....... 4,730 - - 15 1,238 24,623
All other(a)............. - 392 - 12 530 122,082
Eliminations............. - - - - - -
-------- --------- --------- ---------- ---------- ----------
Totals................... $114,596 $ 474 $ 2,223 $ 5,461 $ 13,612 $ 803,774
======== ========= ========= ========== ========== ==========
THREE MONTHS ENDED MARCH 31, 2004 (in thousands):
Other
Revenues from Depreciation, significant
external Interest Interest depletion and Segment items:
customers income expense amortization profit (loss) segment assets
--------- ------ ------- ------------ ------------- --------------
Well drilling............ $ 26,248 $ - $ - $ - $ 3,007 $ 7,725
Production and
Exploration........... 11,799 - - 2,513 5,847 150,683
Natural gas and liquids.. - - - - - -
Transportation and
compression........... 1,579 17 - 518 200 32,605
Other energy(a).......... 2,123 3 473 503 (1,341) 36,518
Real estate.............. 4,992 31 601 498 972 242,051
Equipment leasing........ 2,084 8 275 109 (1,171) 21,817
Structured finance....... 1,921 - - - 1,684 10,341
All other(a)............. - 100 188 - 1,308 39,418
Eliminations............. - (62) (62) - - -
-------- --------- --------- ---------- ---------- ----------
Totals................... $ 50,746 $ 97 $ 1,475 $ 4,141 $ 10,506 $ 541,158
======== ========= ========= ========== ========== ==========
28
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 18 - OPERATING SEGMENT AND MAJOR CUSTOMER INFORMATION - (CONTINUED)
SIX MONTHS ENDED MARCH 31, 2005 (in thousands):
Other
Revenues from Depreciation, significant
external Interest Interest depletion and Segment items:
customers income expense amortization profit (loss) segment assets
--------- ------ ------- ------------ ------------- --------------
Well drilling............ $ 72,009 $ - $ - $ - $ 8,570 $ 9,263
Production and
exploration........... 28,618 - - 5,918 18,506 194,287
Natural gas and liquids.. 84,395 37 13 3,150 6,500 163,160
Transportation and
compression........... 3,128 289 - 1,118 (95) 37,710
Other energy(a).......... 4,598 (131) 3,300 467 (6,280) 47,014
Real estate.............. 9,179 - 574 890 (1,484) 151,691
Equipment leasing ....... 5,975 - 699 383 74 53,944
Structured finance....... 6,024 - - 28 2,028 24,623
All other(a)............. - 591 - 12 1,578 122,082
Eliminations............. - - - - - -
-------- --------- --------- ---------- ---------- ----------
Totals................... $213,926 $ 786 $ 4,586 $ 11,966 $ 29,397 $ 803,774
======== ========= ========= ========== ========== ==========
SIX MONTHS ENDED MARCH 31, 2004 (in thousands):
Other
Revenues from Depreciation, significant
external Interest Interest depletion and Segment items:
customers income expense amortization profit (loss) segment assets
--------- ------ ------- ------------ ------------- --------------
Well drilling............ $ 48,207 $ - $ - $ - $ 5,505 $ 7,725
Production and
exploration........... 21,995 - - 4,723 12,031 150,683
Natural gas and liquids.. - - - - - -
Transportation and
compression........... 3,178 37 - 1,023 (90) 32,605
Other energy(a).......... 4,060 22 960 1,033 (2,205) 36,518
Real estate.............. 8,936 64 1,484 907 630 242,051
Equipment leasing........ 3,708 34 607 178 (1,469) 21,817
Structured finance....... 2,880 - - - 2,430 10,341
All other(a)............. - 218 1,589 - (493) 39,418
Eliminations............. - (107) (107) - - -
-------- --------- --------- ---------- ---------- ----------
Totals................... $ 92,964 $ 268 $ 4,533 $ 7,864 $ 16,339 $ 541,158
======== ========= ========= ========== ========== ==========
- ---------------
(a) Includes revenues and expenses from the Company's well services business
which does not meet the quantitative threshold for reporting segment
information and general corporate expenses not allocable to any particular
segment.
29
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 18 - OPERATING SEGMENT AND MAJOR CUSTOMER INFORMATION - (CONTINUED)
Segment profit (loss) represents income from continuing operations.
The Company's natural gas and NGLs are sold under contract to various
purchasers. For the six months ended March 31, 2005, sales to one of Atlas
Pipeline's purchasers accounted for 17% of the Company's energy revenues. No
other operating segments had revenues from a single customer which exceeded 10%
of total revenues.
NOTE 19 - SETTLEMENT OF ALASKA PIPELINE COMPANY ARBITRATION
In September 2003, Atlas Pipeline entered into an agreement with SEMCO
Energy, Inc. to purchase all of the stock of Alaska Pipeline Company ("APC"). 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 pursued its remedies under the acquisition
agreement. In connection with the acquisition, subsequent termination, and
settlement of the legal action, Atlas Pipeline incurred costs of approximately
$1.2 million in the six months ended March 31, 2005 which were included in other
income on the Company's consolidated statements of income. Atlas Pipeline also
incurred $3.0 million of costs in the year ended September 30, 2004. On December
30, 2004, Atlas Pipeline entered into an agreement with SEMCO settling all
issues and matters related to SEMCO's termination of the sale of APC to Atlas
Pipeline and SEMCO paid Atlas Pipeline $5.5 million which was also included in
other income.
NOTE 20 - COMMITMENTS AND CONTINGENCIES
In connection with the Company's sale on August 1, 2000 of its former
leasing subsidiary, Fidelity Leasing, Inc. and its subsidiary, JLA Credit
Corporation, the Company has been advised in April 2005 by the successor in
interest to the purchaser that the State of California has asserted a claim for
sales taxes, plus interest, of $4.0 million relating to JLA's operations for the
period from October 1996 through July 2000. Fidelity Leasing acquired JLA in
February 1999. The successor has asserted that payments, if any, with respect to
such claim are covered under indemnification provisions of the agreement of
sale. The Company believes it has meritorious defenses to any such
indemnification claim, as well as cross claims against the entities and persons
from whom it acquired JLA for that portion of any sales tax claim made by the
State of California relating to periods before the Company acquired JLA. The
Company also believes that JLA likely has meritorious defenses to the sales tax
claim purportedly being made by the State of California.
From time to time, the Company is named as a defendant in legal actions
arising from its normal business activities. Although the amount of any
liability that could arise with respect to currently pending actions cannot be
accurately predicted, the Company does not believe that the resolution of any
pending action will have a material adverse effect on its financial position,
results of operations or liquidity.
30
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 21 - SUBSEQUENT EVENTS
ELK CITY ACQUISITION
On April 14, 2005, Atlas Pipeline acquired all of the outstanding
equity interests in ETC Oklahoma Pipeline, Ltd. ("Elk City"), a Texas limited
partnership, for $194.4 million including related transaction costs. Elk City's
principal assets include 318 miles of natural gas pipelines located in the
Anadarko Basin in western Oklahoma, a natural gas processing facility in Elk
City, Oklahoma, and a gas treatment facility in Prentiss, Oklahoma.
The acquisition will be accounted for using the purchase method of
accounting under SFAS 141. The following table presents the preliminary
allocation of the purchase price, including professional fees and other related
acquisition costs, to the assets acquired and liabilities assumed, based on
their fair values at the date of acquisition (in thousands):
Accounts receivable.......................................... $ 3,837
Other current assets......................................... 1,237
Property, plant and equipment................................ 193,121
-----------
Total assets acquired...................................... 198,195
Accounts payable and accrued liabilities..................... (3,770)
-----------
Total liabilities assumed.................................. (3,770)
-----------
Net assets acquired...................................... $ 194,425
===========
The purchase price is subject to post-closing adjustments based, among
other things, on gas imbalances, certain prepaid expenses, capital expenditures,
and title defects, if any. In addition, Atlas Pipeline is in the process of
evaluating certain estimates made in the purchase price and related allocations;
accordingly, the purchase price and allocation are both subject to adjustment.
CREDIT FACILITY
On April 14, 2005, Atlas Pipeline entered into a new $270.0 million
credit facility which replaced its existing $135.0 million facility. Wachovia
Capital Markets, LLC and Bank of America Securities LLC are co-lead arrangers
for this facility. The bank group consists of the twelve banks that participated
in the prior credit facility plus five new participants. The five year facility
is comprised of a $225.0 million revolving line of credit and a $45.0 million
five year term loan. Atlas Pipeline immediately drew down $249.5 million to
refinance the existing $53.8 million outstanding on the prior $135.0 million
facility and to finance the acquisition of Elk City. The credit facility
requires Atlas Pipeline to maintain a specified interest coverage ratio, a
specified ratio of funded debt to earnings before interest, taxes, depreciation,
depletion and amortization ("EBITDA"), adjusted as provided in the credit
facility and a specified ratio of senior secured debt to such adjusted EBITDA.
SPIN-OFF OF ATLAS AMERICA, INC.
In May 2005, the Company received the rulings it requested from the
Internal Revenue Service in connection with the distribution of its remaining
10.7 million shares of Atlas America to the Company's stockholders. The effect
of the rulings is that, among other things, the distribution will be tax-free
for U.S. federal income tax purposes to the Company and its stockholders.
According to the terms of the spin-off, each stockholder of the Company will
receive a tax-free dividend of approximately 0.6 shares of Atlas America for
each share of Company common stock owned. The Company intends to complete the
distribution by the close of its June 30, 2005 fiscal quarter. Although the
distribution itself will be entirely tax-free to recipients, the consequent
deconsolidation of the Company and Atlas America may result in some tax
liability to Atlas America arising from prior unrelated corporate transactions
among Atlas America and some of its subsidiaries.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED)
WHEN USED IN THIS FORM 10-Q, THE WORDS "BELIEVES" "ANTICIPATES,"
"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES MORE
PARTICULARLY DESCRIBED IN ITEM 1, UNDER THE CAPTION "RISK FACTORS", IN OUR
ANNUAL REPORT ON FORM 10-K FOR FISCAL 2004. THESE RISKS AND UNCERTAINTIES COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATE HEREOF. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS TO FORWARD-LOOKING STATEMENTS WHICH WE MAY MAKE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS FORM 10-Q OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
OVERVIEW OF THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 2005 AND 2004
For the three and six months ended March 31, 2005, our results reflect
the continued dominant position of our energy operations. However, the
initiatives we began in fiscal 2003 and continue in fiscal 2004 and 2005 to
expand our specialized asset management business in preparation for the spin-off
of Atlas America, Inc., our energy business, resulted in material revenue growth
for certain of those operations. We intend to spin-off Atlas America in our
third fiscal quarter ending June 30, 2005. After the spin-off, we will no longer
consolidate Atlas America's financial statements with ours and, as a result, our
assets, revenues and stockholders' equity will be substantially reduced.
Although the distribution itself will be entirely tax-free to recipients, as a
result of the deconsolidation there may be some tax liability arising from prior
unrelated corporate transactions among Atlas America and some of its
subsidiaries.
During the three and six months ended March 31, 2005, we continued to
build our specialized asset management business focusing on the structured
finance, equipment leasing and real estate businesses that we will retain
following the planned spin-off of Atlas America. In structured finance, we
increased the amount of assets we managed for issuers of collateralized debt
obligations, or CDOs, by $335.0 million through our sponsorship of Trapeza CDO
VII. In addition, we formed a wholly-owned subsidiary, Ischus Capital Management
LLC ("Ischus"), focusing on selecting, investing in and managing primarily real
estate-related asset-backed securities ("ABS"). In December 2004, we closed our
first Ischus CDO which, as of March 31, 2005, had approximately $400.0 million
in ABS collateral. We also formed Apidos Capital Management, LLC ("Apidos") to
focus on selecting, investing in and managing syndicated loans. In addition, we
formed Resource Capital Corp. ("RCC"), a real estate investment trust, that is
externally managed by Resource Capital Manager, Inc. ("RCM"), an indirect
wholly-owned subsidiary. RCC's principal business activity is to purchase and
manage a diversified portfolio of real estate-related securities and commercial
finance assets. As a result of these initiatives, our structured finance
revenues increased by $2.8 million (146%) to $4.7 million and by $3.1 million
(109%) to $6.0 million in the three months and six months ended March 31, 2005,
respectively, from $1.9 million and $2.9 million in the three and six months
ended March 31, 2004, respectively.
In equipment leasing, the amount of assets we managed for investors in
the investment partnerships we sponsored and on behalf of Merrill Lynch through
a multi-year alliance, increased $88.5 million (54%) to an aggregate of $253.3
million at March 31, 2005 from $164.8 million at September 30, 2004. The growth
was principally due to portfolio acquisitions, new vendor programs and expansion
of our sales staff.
32
In real estate, we increased the amount of assets we managed on behalf
of the investment limited partnerships we sponsored to $143.2 million at March
31, 2005 from $86.5 million at March 31, 2004. As part of our strategic plan, we
are continuing to resolve our real estate loan portfolio through sales and loan
resolutions. In the twelve months ended March 31, 2005, we resolved loans with a
book value of $25.2 million, realizing $25.6 million in net proceeds. In
addition, we refinanced the first mortgage on a property accounted for by us as
a FIN 46 asset and received net proceeds of $8.6 million. As a result, the loans
and real estate assets in our loan portfolios, principally outstanding loan
receivables, decreased from $454.4 million at March 31, 2004 to $330.7 million
at March 31, 2005.
The following is an analysis and discussion of the results of our
energy, real estate, equipment leasing and structured finance operations and our
costs and expenses and other income (expense).
RESULTS OF OPERATIONS: ENERGY
The following table sets forth information relating to revenues
recognized and costs and expenses incurred (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Revenues:
Well drilling........................................ $ 41,451 $ 26,248 $ 72,009 $ 48,207
Gas and oil production and exploration............... 13,959 11,799 28,618 21,995
Gathering, transmission and processing............... 43,741 1,579 87,523 3,178
Well services........................................ 2,350 2,123 4,598 4,060
---------- ---------- ---------- ----------
$ 101,501 $ 41,749 $ 192,748 $ 77,440
========== ========== ========== ==========
Costs and expenses:
Well drilling........................................ $ 36,044 $ 22,824 $ 62,617 $ 41,919
Gas and oil production and exploration............... 2,413 3,323 4,215 5,008
Gathering, transmission and processing............... 37,462 620 73,142 1,216
Well services........................................ 1,316 1,021 2,507 2,062
Non-direct........................................... 1,739 1,247 3,612 2,156
---------- ---------- ---------- ----------
$ 78,974 $ 29,035 $ 146,093 $ 52,361
========== ========== ========== ==========
WELL DRILLING
Our well drilling revenues and costs and expenses incurred represent
the billings and costs associated with the completion of wells for drilling
investment partnerships we sponsor. The following table sets forth information
relating to these revenues and the related costs, gross profit margins and
number of net wells drilled during the periods indicated (dollars in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
2005 2004 2005 2004
---------- --------- --------- ---------
Average drilling revenue per well....................... $ 200 $ 167 $ 210 $ 180
Average drilling cost per well.......................... 174 145 183 156
---------- --------- --------- ---------
Average drilling gross profit per well.................. $ 26 $ 22 $ 27 $ 24
========== ========= ========= =========
Gross profit margin..................................... $ 5,407 $ 3,424 $ 9,392 $ 6,288
========== ========= ========= =========
Gross margin percent.................................... 13% 13% 13% 13%
========== ========= ========= =========
Net wells drilled....................................... 207 157 343 268
========== ========= ========= =========
33
Our well drilling gross margin was $5.4 million and $9.4 million in the
three months and six months ended March 31, 2005, respectively, an increase of
$2.0 million (58%) and $3.1 million (49%) from $3.4 million and $6.3 million in
the three and six months ended March 31, 2004, respectively. In the three months
ended March 31, 2005, the increase of $2.0 million in gross margin was
attributable to an increase in the number of wells drilled ($1.3 million) and an
increase in the gross profit per well ($677,000). In the six months ended March
31, 2005, the increase of $3.1 million was attributable to an increase in the
number of wells drilled ($1.0 million) and an increase in the gross profit per
well ($2.1 million). Since our drilling contracts are on a "cost plus" basis
(typically cost plus 15%), an increase in our average cost per well also results
in an increase in our average revenue per well. The increase in our average cost
per well in the three and six months ended March 31, 2005 resulted from an
increase in the cost of tangible equipment used in the wells. In addition, it
should be noted that "Liabilities associated with drilling contracts" on our
consolidated balance sheets includes $17.1 million of funds raised in our
drilling investment programs in late fiscal 2004 and in the three months ended
December 31, 2004 that had not been applied to drill wells as of March 31, 2005
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 2005. Because we raised $62.3 million in the first six
months of fiscal 2005 as compared to $40.2 million in the six months of fiscal
2004, we anticipate drilling revenues and related costs to be substantially
higher in fiscal 2005 than in fiscal 2004.
GAS AND OIL PRODUCTION
The following table sets forth information relating to our production
revenues, production volumes, sales prices, production costs and depletion:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Production revenues (in thousands):
Gas (1).............................................. $ 12,285 $ 10,116 $ 24,982 $ 19,182
Oil.................................................. $ 1,647 $ 1,666 $ 3,589 $ 2,789
Production volume:
Gas (mcf/day) (1) (3) ............................... 19,315 18,265 19,806 18,875
Oil (bbls/day)....................................... 406 576 427 514
Total (mcfe/day) (3)................................. 21,751 21,721 22,368 21,959
Average sales prices:
Gas (per mcf) (3).................................... $ 7.07 $ 6.09 $ 6.93 $ 5.55
Oil (per bbl) (3).................................... $ 45.06 $ 31.81 $ 46.18 $ 29.65
Production costs: (2)
As a percent of production revenues.................. 16% 15% 14% 16%
Per mcf equivalent unit ............................. $ 1.11 $ 0.91 $ 0.96 $ 0.85
Depletion per mcfe: (3).................................. $ 1.36 $ 1.24 $ 1.29 $ 1.15
- ------------
(1) Excludes sales of residual gas and sales to landowners.
(2) 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.
(3) "Mcf" and "mmcf" means thousand cubic feet and million cubic feet; "mcfe"
and "mmcfe" means thousand cubic feet equivalent and million cubic feet
equivalent, and "bbls" means barrels. Bbls are converted to mcfe using the
ratio of six mcfs to one bbl.
34
Our natural gas revenues were $12.3 million and $25.0 million in the
three months and six months ended March 31, 2005, respectively, an increase of
$2.2 million (21%) and $5.8 million (30%) from $10.1 million and $19.2 million
in the three and six months ended March 31, 2004, respectively. The increases
were due to an increase in the average sales price of natural gas of 16% and 25%
for the three and six months ended March 31, 2005, respectively, and an increase
of 6% and 5% in the volume of natural gas produced in the three and six months
ended March 31, 2005, respectively. The $2.2 million increase in gas revenues in
the three months ended March 31, 2005 as compared to the prior period consisted
of $1.6 million attributable to increases in natural gas sales prices, and
$582,000 attributable to increased production volumes. The $5.8 million increase
in natural gas revenue in the six months ended March 31, 2005 as compared to the
prior year period consisted of $4.7 million attributable to increases in natural
gas sales prices, and $1.1 million attributable to increased production volumes.
Our oil revenues were $1.6 million and $3.6 million, respectively, for
the three and six months ended March 31, 2005, a decrease of $19,000 (1%) and an
increase of $800,000 (29%), respectively, from $1.7 million and $2.8 million in
the three and six months ended March 31, 2004, respectively. The average sales
price of oil increased 42% and 56% for the three and six months ended March 31,
2005 as compared to the prior periods. The $19,000 decrease in oil revenues in
three months ended March 31, 2005 as compared to the prior year period consisted
of $694,000 attributable to increases in sales prices, offset by a $713,000
decrease in production volumes. The $800,000 increase in oil revenues for the
six months ended March 31, 2005 as compared to the prior year period consisted
of $1.6 million attributable to increases in sales prices offset by $755,000
attributable to decreased production volumes.
Our production costs were $2.2 million and $3.9 million in the three
and six months ended March 31, 2005, respectively, an increase of $382,000 (21%)
and $495,000 (14%) from $1.8 million and $3.4 million in the three and six
months ended March 31, 2004, respectively. These increases include an increase
in insurance expense, material costs related to well workovers and an increase
in transportation expenses associated with increased production volumes and
natural gas sales prices, as a portion of our wells are charged transportation
based on the sales price of the gas transported.
Our exploration costs were $236,000 and $288,000 in the three and six
months ended March 31, 2005, a decrease of $1.3 million (82%), from $1.5 million
and $1.6 million in the three and six months ended March 31, 2004. We attribute
these decreases to the following: a $907,000 increase in the benefit we receive
for our contribution of well sites to our drilling investment partnerships as a
result of more wells drilled; dry hole costs decreased $587,000 which were
expensed in the prior period, no such costs were incurred in the six months
ended March 31, 2005 and partially offset by an increase of $206,000 in the cost
of running our land department due to the increase in our drilling activities.
Our depletion of oil and gas properties as a percentage of oil and gas
revenues was 20 % and 19% in the three and six months ended March 31, 2005,
respectively, compared to 21% in the three and six months ended March 31, 2004,
respectively. Depletion expense per mcfe was $1.36 and $1.29 in the three and
six months ended March 31, 2005, respectively, an increase of $.12 (10%) per
mcfe and $.14 (12%) per mcfe from $1.24 and $1.15 in the three and six months
ended March 31, 2004, respectively. Increases in our depletable basis and
production volumes caused depletion expense to increase $240,000 (10%) and
$730,000 (15%) to $2.8 million and $5.5 million in the three and six months
ended March 31, 2005 compared to $2.5 million and $4.7 million in the three and
six months ended March 31, 2004, respectively. The variances from period to
period are directly attributable to changes in our oil and gas reserve
quantities, product prices and changes in the depletable cost basis of our oil
and gas properties.
GATHERING, TRANSMISSION AND PROCESSING
Our gathering, transmission and processing revenues and related
expenses for the three and six months ended March 31, 2005 increased
significantly from the prior year periods due to the acquisition of Spectrum on
July 16, 2004.
Revenues increased $42.2 million and $84.3 million to $43.7 million and
$87.5 million for the three and six months ended March 31, 2005 from $1.6
million and $3.2 million for the three and six months ended March 31, 2004.
Expenses increased $36.8 million and $71.9 million to $37.5 million and
$73.1 million for the three and six months ended March 31, 2005 from $620,000
and $1.2 million for the three and six months ended March 31, 2004.
35
WELL SERVICES
Our well services revenues were $2.3 million and $4.6 million in the
three and six months ended March 31, 2005, respectively, an increase of $227,000
(11%) and $538,000 (13%) from $2.1 million and $4.1 million in the three and six
months ended March 31, 2004, respectively. The increase resulted from an
increase in the number of wells operated for our investment partnerships due to
additional wells drilled in the twelve months ended March 31, 2005.
Our well services expenses were $1.3 million and $2.5 million in the
three and six months ended March 31, 2005, respectively, an increase of $295,000
(29%) and $445,000 (22%) from $1.0 million and $2.1 million in the three and six
months ended March 31, 2004, respectively. The increases were attributable to an
increase in wages, benefits, and field office expenses associated with an
increase in employees due to the increase in the number of wells we operate for
our investment partnerships.
NON-DIRECT COSTS AND EXPENSES
Our non-direct expenses were $1.7 million and $3.6 million in the three
and six months ended March 31, 2005, respectively, an increase of $492,000 and
$1.5 million from $1.2 million and $2.2 million in the three and six months
ended March 31, 2004, respectively. These expenses include, among other things,
salaries and benefits not allocated to a specific energy activity, costs of
running our energy corporate office, partnership syndication activities and
outside services. These expenses are partially offset by reimbursements we
receive from our drilling investment partnerships. The increase of $1.5 million
in the six months ended March 31, 2005 as compared to the six months ended March
31, 2004 is attributable principally to the following:
o non-direct expenses related to our Atlas Pipeline operations
were $1.3 million in the six months ended March 31, 2005;
we acquired Spectrum on July 16, 2004;
o costs associated with Atlas Pipeline's long-term stock incentive
plan were $1.1 million in the six months ended March 31, 2005;
there were no such expenses in the prior year similar period;
These increases in expenses were partially offset by the following:
o non-direct expense reimbursements from our investment partnerships
increased by $209,000 as we continue to increase the number of
wells we drill and manage; and
o net syndication revenues increased $547,000 due to increased
credits we received for costs incurred in organizing and offering
our partnership investments.
36
RECENT DEVELOPMENTS
On April 14, 2005, Atlas Pipeline acquired all of the outstanding
equity interests in ETC Oklahoma Pipeline, Ltd., a Texas limited partnership,
for $194.4 million including related transaction costs. ETC Oklahoma Pipeline's
principal assets include approximately 318 miles of natural gas pipelines
located in the Anadarko Basin in western Oklahoma, a natural gas processing
facility in Elk City, Oklahoma with total capacity of 130 million cubic feet of
gas per day or mmcf/d and a gas treatment facility in Prentiss, Oklahoma, with a
total capacity of 100 mmcf/d. Total gas throughput is currently approximately
262 mmcf/d. Total compression horsepower consists of 21,000 hp at six field
stations and 12,000 horsepower within the Elk City and Prentiss facilities. The
system gathers and processes gas from more than 300 receipt points representing
more than fifty producers and delivers that gas into multiple interstate
pipeline systems. The acquisition expands Atlas Pipeline's activities in the
mid-continent area and provides the potential for further growth in Atlas
Pipeline's operations based in Tulsa, Oklahoma.
37
To finance the acquisition, Atlas Pipeline entered into a new $270.0
million credit facility which replaces its existing $135.0 million facility.
Wachovia Capital Markets, LLC and Bank of America Securities LLC were co-lead
arrangers. The bank group consisted of the twelve banks that participated in the
prior credit facility, plus five new participants.
RESULTS OF OPERATIONS: REAL ESTATE
During the three and six months ended March 31, 2005, 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 and
restructurings;
o we sought growth in our real estate business through the
sponsorship of real estate investment partnerships in which we are
also an investor; and
o the adoption of FIN 46-R.
The principal effects of the first two factors has been to reduce the
number of our real estate loans while increasing our interests in real property
and, as a result of repayments, sales, refinancings and restructurings, also
increasing our cash flow from loan resolutions. The principal effect of the
adoption of FIN 46-R has been to consolidate in our financial statements the
assets, liabilities, revenues and costs 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.
The following table sets forth certain information relating to the
revenues recognized and costs and expenses incurred in our real estate
operations (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Revenues:
FIN 46 revenues...................................... $ 3,016 $ 2,948 $ 6,070 $ 5,268
Fee income........................................... 873 197 1,515 731
Interest............................................. 209 388 401 566
Accreted loan discount (net of collection of interest) 224 421 476 978
Gains on resolution of loans, FIN 46 assets and
ventures........................................... 33 659 83 732
Equity in earnings of equity investees............... 558 240 464 377
Rental............................................... 68 139 170 284
---------- ---------- ---------- ----------
$ 4,981 $ 4,992 $ 9,179 $ 8,936
========== ========== ========== ==========
Costs and expenses:
Real estate general and administrative............... $ 1,577 $ 1,303 $ 3,053 $ 2,353
Rental properties.................................... - 8 - 52
FIN 46 operating expenses............................ 1,961 1,562 3,884 3,173
---------- ---------- ---------- ----------
$ 3,538 $ 2,873 $ 6,937 $ 5,578
========== ========== ========== ==========
Three Months Ended March 31, 2005 as Compared to the Three Months Ended March
31, 2004
Revenues decreased $11,000 for the three months ended March 31, 2005 as
compared to the prior year period. We attribute the decrease to the following:
o a $376,000 decrease in interest and accreted discount income (46%)
for the three months ended March 31, 2005 as compared to the three
months ended March 31, 2004 resulting from the resolution of six
loans which decreased interest income by $369,000;
o a $71,000 decrease in rental income reflecting the sale of a real
estate investment during the fourth quarter of fiscal 2004; and
38
o a $626,000 decrease in gains on resolution of loans, FIN 46 assets
and ventures. In the three months ended December 31, 2004, we sold
an investment and recorded an estimated gain of $50,000. In the
three months ended March 31, 2005, an additional gain of $33,000
was recognized. In the three months ended March 31, 2004, we
resolved one loan with a book value of $2.3 million for $2.1
million recognizing a loss of $182,000. We also received $3.4
million for the sale of our investment in one venture resulting in
a gain of $841,000.
The decrease was partially offset by the following:
o a $676,000 increase (343%) in fee income. We earned fees for
services provided to the real estate investment partnerships which
we sponsored relating to the purchase and third party financing of
three properties during the three months ended March 31, 2005.
These transaction fees totaled $478,000 for the three months ended
March 31, 2005. No such fees were earned in the three months ended
March 31, 2004. Additionally, we earned management fees for the
properties owned by real estate investment partnerships which we
sponsored totaling $395,000 for the three months ended March 31,
2005 as compared to $197,000 for the three months ended March 31,
2004. We anticipate earning additional fees from our existing
partnerships and any future real estate investment partnerships
which we may sponsor; and
o a $318,000 increase (133%) in our share of the operating results
of our unconsolidated real estate investments accounted for on the
equity method. The increase was primarily due to the results from
one investment which provided $700,000 of the income in the three
months ended March 31, 2005; this income was offset by the loss
from an equity investment which was converted from a loan during
fiscal 2004 and the losses from other equity investments in our
real estate investment partnerships made subsequent to March 31,
2004.
Gain on resolution of loans, FIN 46 assets and other real estate assets
(if any) and the amount of fees received (if any) vary by each transaction and,
accordingly, there may be significant variations in our gains on resolutions and
fee income from period to period.
Costs and expenses of our real estate operations increased $665,000
(23%) for the three months ended March 31, 2005 as compared to for the three
months ended March 31, 2004. We attribute the increase to the following:
o a $274,000 increase in real estate general and administrative
expenses. The increase resulted primarily from the following:
- a $392,000 increase in wages and benefits 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;
- a $73,000 increase in sales and marketing expenses (none for
the three months ended March 31, 2004) reflecting the efforts
of in-house marketing personnel and external wholesale
representatives to sell interests in our real estate
investment partnerships and an increase in travel costs of
$31,000 due to the increased acquisition activity associated
with our management of our real estate investment programs;
- a $13,000 decrease in property management expenses related to
real estate investment partnerships; and
- a $207,000 net decrease in outside services and office
expenses.
39
o an increase of $399,000 (26%) in FIN 46 operating expenses. We
early adopted FIN 46-R on July 1, 2003, which resulted in our
consolidating six and seven entities for the three months ended
March 31, 2005 and 2004, respectively. The decrease resulted from
two of the six entities having lower operating expenses offsetting
higher operating expenses for the other four entities for the
three months ended March 31, 2005.
Six Months Ended March 31, 2005 as Compared to the Six Months Ended March 31,
2004
Revenues increased $243,000 (3%) to $9.2 million in the six months
ended March 31, 2005 from $8.9 million in the six months ended March 31, 2004.
We attribute the increase to the following:
o an $802,000 increase in FIN 46 revenues for the six months ended
March 31, 2005, as compared to the six months ended March 31,
2004. We adopted FIN 46 which resulted in our consolidating six
entities as of March 31, 2005 and recording their operations as
FIN 46 revenue and expenses. The increase is primarily related to
a hotel property in Savannah, Georgia;
o an $87,000 increase in our share of the operating results of our
unconsolidated real estate investments accounted for on the equity
method for the six months ended March 31, 2005 as compared to the
six months ended March 31, 2004. The increase was the result of
higher earnings from one of our investments offset by the loss of
income from five other investments, including an asset sold during
the second quarter of fiscal 2004;
o a $784,000 increase in fee income for the six months ended March
31, 2005 as compared to the six months ended March 31, 2004. We
earned fees for services provided to the real estate investment
partnerships which we sponsored relating to the purchase and third
party financing of four properties in the six months ended March
31, 2005 and one property in the six months ended March 31, 2004.
The transaction fees totaled $968,000 for the six months ended
March 31, 2005 and $397,000 for the six months ended March 31,
2004. Additionally, we earned management fees for the properties
owned by real estate investment partnerships which we sponsored
totaling $547,000 for the six months ended March 31, 2005 and
$334,000 for the six months ended March 31, 2004.
The increases were partially offset by the following:
o a $114,000 decrease in rental income for the six months ended
March 31, 2005 as compared to the six months ended March 31, 2004
because of the sale of a real estate investment during the fourth
quarter of fiscal 2004;
o a $667,000 decrease in interest and accreted discount income
(43%) resulting from the resolution of five loans since March
31, 2004. The decrease relates principally to one loan
resolved during fiscal 2004;
o a $649,000 decrease in gains on resolutions of loans, FIN 46
assets and real estate assets. In the six months ended March
31, 2004, we resolved three loans having an aggregate book
value of $3.7 million for $3.5 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 six months ended March 31, 2005, we resolved one
investment having a book value of $917,000 for $1.0 million,
recognizing a gain of $83,000.
Gains on resolutions of loans, FIN 46 assets and other real estate
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.
40
Costs and expenses of our real estate operations were $6.9 million for
the six months ended March 31, 2005, an increase of $1.4 million (24%) as
compared to the six months ended March 31, 2004.
We attribute the increase to the following:
o an increase of $700,000 in real estate general and administrative
expenses in the six months ended March 31, 2005, as compared to
the six months ended March 31, 2004. The increase resulted
primarily from the following:
- a $620,000 increase in wages and benefits and $127,000 in
office expenses 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;
- a $72,000 increase in both property management expenses
related to real estate investment partnerships and $78,000 of
travel costs due to the increased acquisition activity
associated with managing our real estate investment programs;
- a $181,000 increase in sales and marketing expenses reflecting
the efforts of in-house marketing personnel and external
wholesale representatives to sell interests in our real estate
investment partnerships;
- a $377,000 decrease in outside services, primarily legal and
consulting.
o a $52,000 decrease in rental properties expenses for the six
months ended March 31, 2005 as compared to the six months ended
March 31, 2004. These expenses are primarily related to one
property upon which we foreclosed during fiscal 2004 and sold at
the end of fiscal 2004; and
o a $711,000 increase in FIN 46 operating expenses for the six
months ended March 31, 2005 as compared to the six months ended
March 31, 2004. We early adopted FIN 46 on July 1, 2003, which
resulted in our consolidating six and seven entities for the six
months ended March 31, 2005 and 2004, recording their operations
as FIN 46 revenues and operating expenses.
RESULTS OF OPERATIONS: EQUIPMENT LEASING
The following table sets forth certain information related to the type
of business in which our equipment lessees engage and the concentration by type
of equipment lease under management as of March 31, 2005, as a percentage of our
total managed portfolio:
LESSEE BUSINESS EQUIPMENT UNDER LEASE
- --------------- ---------------------
Services 53% Industrial 24%
Manufacturing services 12% Medical 21%
Retail trade services 11% Computers 17%
Wholesaler trade 6% Office equipment 10%
Transportation / Communication 6% Software 8%
Finance / Insurance 4% Garment care 7%
Construction 4% Communication 3%
Agriculture 2% Building systems 3%
Other 2% Other 7%
-------- -------
100% 100%
======== =======
41
The following table sets forth certain information relating to the
revenues recognized and costs and expenses incurred in our equipment leasing
operations (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- -------------------------
2005 2004 2005 2004
---------- ----------- ---------- ----------
Revenues:
Lease................................................ $ 1,020 $ 540 $ 1,787 $ 1,010
Asset management fees................................ 924 662 1,851 1,401
Asset acquisition fees............................... 1,329 448 2,074 817
Other............................................... 111 434 263 480
---------- ----------- ---------- ----------
$ 3,384 $ 2,084 $ 5,975 $ 3,708
========== =========== ========== ==========
Costs and expenses...................................... $ 2,496 $ 2,880 $ 4,807 $ 4,426
========== =========== ========== ==========
The growth in originations and assets under management resulted in
total revenues from leasing operations increasing to $3.4 million and $6.0
million for the three and six months ended March 31, 2005, an increase of $1.3
million (62%) and $2.3 million (61%) from $2.1 million and $3.7 million in the
three and six months ended March 31, 2004, respectively. Our lease originations
for the three and six months ended March 31, 2005 were $79.9 million and $121.7
million, respectively, an increase of $59.9 million (299%) and $74.7 million
(159%) from the three and six months ended March 31, 2004, respectively. Our
total lease assets under management at March 31, 2005 were $253.3 million, an
increase of $164.0 million (184%) from $89.3 million at March 31, 2004. Our
leasing origination growth was driven by our March 21, 2005 acquisition of the
business and lease portfolio of Allco Enterprises of Lake Oswego, Oregon, new
vendor programs and expansion of our sales staff. This growth was facilitated by
our relationships with Merrill Lynch and our investment partnership.
Our lease operation revenues consist primarily of leasing revenues from
leases owned by us before they are sold, asset acquisition fees which are earned
when leases are sold to one of the investment partnerships and asset management
fees which are earned over the life of the lease after a lease is sold. Lease
revenues were $1.0 million and $1.8 million in the three and six months ended
March 31, 2005, an increase of $480,000 (89%) and $777,000 (77%) from $540,000
and $1.0 million in the three and six months ended March 31, 2004, respectively.
The increase in leasing revenues is attributable to the March 2005 interim
expansion of our warehouse lines of credit to $60.0 million from $35.0 million,
which enabled us to maintain a larger lease portfolio, as well as the increase
in our lease originations. Asset management fees were $924,000 and $1.9 million
for the three and six months ended March 31, 2005, respectively, an increase of
$262,000 (40%) and $450,000 (32%) from $662,000 and $1.4 million in the three
and six months ended March 31, 2004, respectively. The increase in asset
management fees was due to an increase in assets under management to $253.3
million as of March 31, 2005 from $89.3 million as of March 31, 2004. Asset
acquisition fees were $1.3 million and $2.1 million in the three and six months
ended March 31, 2005, respectively, an increase of $881,000 (197%) and $1.3
million (154%) from $448,000 and $817,000 in the three and six months ended
March 31, 2004, respectively. The increase in lease originations for the three
and six months ended March 31, 2005 over March 31, 2004 allowed us to sell more
leases to our investment partnership and Merrill Lynch.
In December 2004, we began a $60.0 million offering of our second
investment partnership, Lease Equity Appreciation Fund II ("LEAF II"). On April
14, 2005, we sold the required number of units which allowed us to break escrow
and commence operations. We will begin selling leases to LEAF II in April 2005.
As of March 31, 2005, Lease Equity Appreciation Fund I, our first investment
partnership, is approaching full investment and has $94.0 million in leased
assets. In March 2005, our agreement with Merrill Lynch Equipment Finance LLC
was extended for two more years until April 2007.
42
Included in other income are gains on lease terminations which vary
from transaction to transaction and can result in significant income variances
from period to period depending upon the termination schedules.
Our equipment leasing expenses were $2.5 million and $4.8 million in
the three and six months ended March 31, 2005, respectively, a decrease of
$384,000 (13%) and an increase of $381,000 (9%) from $2.9 million and $4.4
million for the three and six months ended March 31, 2004, respectively.
Included in equipment leasing expenses for the three and six months ended March
31, 2004 are charges to earnings of $1.1 million and $1.3 million, respectively,
related to the expected reimbursements of capitalized offering costs from our
LEAF I investment partnership. Without those charges, expenses increased
$700,000 (38%) and $1.7 million (62%) in the three and six months ended March
31, 2005, respectively. The increase in expenses is primarily related to an
increase in general corporate overhead and an increase in wages and benefits of
$535,000 and $1.2 million for the three and six months ended March 31, 2005,
respectively, as compared to the three and six months ended March 31, 2004, due
to the expansion of our leasing operations.
RESULTS OF OPERATIONS: STRUCTURED FINANCE
TRAPEZA
We have co-sponsored, structured and currently co-manage seven
collateralized debt obligations ("CDO") CDO issuers holding approximately $2.4
billion in bank and bank holding company trust preferred securities.
We own a 50% interest in an entity that manages five CDO issuers with
collateral pools consisting of the trust preferred securities of financial
institutions and a 33.33% interest in another entity that manages two collateral
pools of trust preferred CDO issuers. We also own a 50% interest in the general
partners of the limited partnerships that own the equity interest of the five
Trapeza CDO issuers (the "Trapeza Partnerships"). We also have invested as a
limited partner in each of these limited partnerships.
We derive revenues from these CDO operations through management and
administration fees. We also receive distributions on amounts we invest in the
limited partnerships. Management fees vary by CDO issuer, but have ranged from
between 0.25% and 0.60% of the aggregate principal balance of the collateral
securities owned by the CDO issuers. These fees are also shared with our
co-sponsors. The fees are payable monthly, quarterly or semi-annually, as long
as we continue as the collateral manager of the CDO issuer. Our interest in
distributions from the CDO issuers varies with the amount of our investment in a
particular limited partnership and with the terms of our general partner
interest. We have incentive distribution interests in four of the partnerships.
ISCHUS
In June 2004, we formed Ischus to focus on selecting, managing and
investing in asset backed securities ("ABS") (primarily real estate asset backed
securities) including residential mortgage backed securities and commercial
mortgage backed securities. In December 2004, we closed Ischus CDO LTD, a CDO
with approximately $400.0 million in ABS collateral. Ischus will act as
collateral manager for the CDO.
We own a 50% interest in the general partner of Structured Finance
Fund, L.P. and Structured Finance Fund II, L.P., ("SFF"). These partnerships own
a portion of the equity interests of three Trapeza CDO issuers and one Ischus
CDO issuer. We also have invested as a limited partner in each of these limited
partnerships.
43
We derive revenues from these CDO operations through management and
administration fees. We also receive distributions on amounts we invest in the
limited partnerships. Ischus receives management fees of 0.35% of the aggregate
principal balance of the collateral securities owned by the CDO issuer of which
a portion is subordinated. Our interest in distributions from the CDO issuer
varies with the amount of our investment in a particular limited partnership and
with the terms of our general partner interest.
APIDOS
In January 2005, we formed Apidos to focus on selecting, investing in
and managing syndicated loans. Apidos intends to leverage the Company's
expertise and experience as a CDO collateral manager.
RESOURCE CAPITAL CORP. ("RCC")
In March 2005, we formed RCC, a real estate investment trust, that is
externally managed by Resource Capital Manager, Inc. ("RCM"), an indirect
wholly-owned subsidiary. RCC's principal business activity is to purchase and
manage a diversified portfolio of real estate related securities and commercial
finance assets.
We derive revenues from RCC through its management agreement with RCM.
In return for certain investment and advisory services, RCM is entitled to
receive a base management fee, an incentive management fee and a reimbursement
for certain out-of-pocket expenses that relate to RCC. In addition, we have
invested $15.0 million in RCC and expect to receive dividends on our investment
in the future.
In connection with the formation of RCC, we were granted 345,000 shares
of restricted common stock and options to purchase 651,666 common shares at an
exercise price of $15.00 per share. We subsequently transferred 279,000 of
restricted shares to certain members of management. RCC's net equity
compensation is the difference between the revenue recognized on the shares and
the options received and the expense associated with those shares transferred to
management.
The following table sets forth certain information relating to the
revenues recognized and costs and expenses incurred in our structured finance
operations (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ------------------------
2005 2004 2005 2004
---------- ----------- ---------- ----------
Revenues:
Collateral management fees......................... $ 1,446 $ 456 $ 1,999 $ 773
Equity in earnings of consolidated partnerships.... 1,243 - 1,163 -
General partner interests.......................... 940 877 1,332 1,372
Limited partner interests.......................... 428 168 630 315
Consulting and advisory fees....................... 336 - 530 -
RCC management fee................................. 208 - 208 -
RCC net equity compensation........................ 149 - 149 -
Other.............................................. (20) 420 13 420
---------- ----------- ---------- ----------
$ 4,730 $ 1,921 $ 6,024 $ 2,880
========== ========== ========== ==========
Costs and expenses..................................... $ 1,790 $ 74 $ 2,401 $ 413
========== ========== ========== ==========
44
Revenues - Three Months Ended March 31, 2005 as Compared to the Three Months
Ended March 31, 2004
Revenues increased $2.8 million (146%) to $4.7 million in the three
months ended March 31, 2005 from $1.9 million in the three months ended March
31, 2004. We attribute the increase to the following:
o a $990,000 increase in collateral management fees for the three
months ended March 31, 2005 as compared to the three months ended
March 31, 2004 was principally caused by the completion of our
seventh Trapeza CDO issuer and our first Ischus CDO issuer,
coupled with a full quarter of collateral management fees for our
fourth, fifth and sixth Trapeza CDO issuers;
o a $323,000 increase in limited partner and general partner
interests for the three months ended March 31, 2005 as compared to
the three months ended March 31, 2004, to $1.4 million from $1.0
million. The increase resulted primarily from an increase in net
unrealized appreciation on the mark-to-market of securities and
swap agreements of $472,000. In addition, there was a decrease in
net reimbursement fees accrued of $145,000 for the three months
ended March 31, 2005 as compared to March 31, 2004 in connection
with the completion of a Trapeza CDO issuer in the three months
ended March 31, 2004. No such fees were accrued at March 31, 2005;
o a $1.2 million increase in equity in earnings of consolidated
partnerships resulting from the following:
- in May 2004, SFF invested $6.9 million in Trapeza CDO V and
VI. In December 2004, SFF invested $4.5 million in Ischus CDO
I. In January 2005, SFF invested $1.3 million in Trapeza CDO
VII. We began to consolidate SFF on July 1, 2004, when we
assumed control. Interest income from SFF investments in
unconsolidated CDO issuers of $1.1 million was recognized in
the three months ended March 31, 2005; and
- in December 2004, we invested $2.5 million in Ischus CDO I
which resulted in the recognition of $133,000 of interest
income in the three months ended March 31, 2005.
o a $336,000 increase in consulting and advisory fees for the three
months ended March 31, 2005, as compared to the three months ended
March 31, 2004. These fees are the result of a consulting
agreement entered into by Ischus to provide consulting services
relating to structuring of financing transactions. This agreement
terminates on April 8, 2005;
o a $208,000 increase in RCC management fees for the three months
ended March 31, 2005 as compared to the three months ended March
31, 2004. These fees are the result of the management agreement,
dated March 8, 2005, between RCM and RCC;
o a $149,000 increase in RCC net equity compensation for the three
months ended March 31, 2005 as compared to the three months ended
March 31, 2004. In connection with the formation of RCC, we were
granted 345,000 shares of restricted common stock and options to
purchase 651,666 common shares at an exercise price of $15 per
share. In March 2005, we transferred 279,000 of the restricted
shares to certain members of management. RCC's net equity
compensation is the difference between the revenue recognized on
the shares and the options received and the expense associated
with the shares transferred to management; and
o a decrease of $440,000 in other revenue in the three months ended
March 31, 2005 as compared to the three months ended March 31,
2004. This was primarily due to the accrual of two net
reimbursement fees of $514,000 in anticipation of the completion
of Trapeza CDO V and VI in the three months ended March 31, 2004.
No such fees were accrued in other revenue in the three months
ended March 31, 2005. The fees in the three months ended March 31,
2004 were partially offset by an increase in net operating
expenses of $94,000.
45
Revenues - Six Months Ended March 31, 2005 as Compared to the Six Months Ended
March 31, 2004
Revenues increased $3.1 million (109%) to $6.0 million in the six
months ended March 31, 2005 from $2.9 million in the six months ended March 31,
2004. We attribute the increase to the following:
o a $1.2 million increase in collateral management fees for the six
months ended March 31, 2005 as compared to the six months ended
March 31, 2004 which was principally caused by the completion of
our seventh Trapeza CDO issuer and our first Ischus CDO issuer,
coupled with six months of collateral management fees for our
fourth, fifth and sixth Trapeza CDO issuers;
o a $275,000 increase in revenues from limited partner and general
partner interests resulting from the following:
- a $140,000 increase in net unrealized appreciation on
mark-to-market securities and swap agreements in the six
months ended March 31, 2005 as compared to the six months
ended March 31, 2004;
- an increase of $293,000 from our general and limited partner
share of the operating results of our unconsolidated Trapeza
Partnerships for the six months ended March 31, 2005 as
compared to the six months ended March 31, 2004. The increase
was the result of having five Trapeza Partnerships for the
entire six months ended March 31, 2005 as compared to three
Trapeza Partnerships for the entire six months ended March 31,
2004; and
- a $166,000 decrease from net reimbursement fees accrued for
the six months ended March 31, 2004 in connection with the
completion of Trapeza CDO issuers in the six months ended
March 31, 2004. No such fees were accrued at March 31, 2005.
o a $1.2 million increase in equity in earnings of consolidated
partnerships of resulting from the following:
- in May 2004, SFF invested $6.9 million in Trapeza CDO V and
VI. In December 2004, SFF invested $4.5 million in Ischus CDO
I. In January 2005, SFF invested $1.3 million in Trapeza CDO
VII. We began to consolidate SFF in July 1, 2004 when we
assumed control. Interest income from SFF investments in
unconsolidated CDO issuers of $1.1 million was recognized in
the six months ended March 31, 2005; and
- in December 2004, we invested $2.5 million in Ischus CDO I.
Interest income from our investments in unconsolidated CDO
issuers of $112,000 was recognized in the six months ended
March 31, 2005.
o a $530,000 increase in consulting and advisory fees for the six
months ended March 31, 2005 as compared to the six months
ended March 31, 2004;
o a $208,000 increase in RCC management fees for the six months
ended March 31, 2005 as compared to the six months ended March 31,
2004. These fees are the result of the management agreement, dated
March 8, 2005, between RCM and RCC, previously described. These
fees are paid on a monthly basis;
o a $149,000 increase in RCC net equity compensation for the six
months ended March 31, 2005 as compared to the six months ended
March 31, 2004. In connection with the formation of RCC, we were
granted 345,000 shares of restricted common stock and options to
purchase 651,666 common shares at an exercise price of $15 per
share. In March 2005, we transferred 279,000 of these shares to
certain members of management. RCC's net equity compensation is
the difference between the revenue recognized on the shares and
the options received and the expense associated with the shares
transferred to management; and
46
o a decrease of $407,000 in other revenue in the six months ended
March 31, 2005, as compared to the six months ended March 31,
2004. This was primarily due to the accrual of two net
reimbursement fees of $514,000 in anticipation of the completion
of Trapeza CDO V and VI in the six months ended March 31, 2004. No
such fees were accrued in other revenue in the six months ended
March 31, 2005. These fees in the six months ended March 31, 2004
were partially offset by an increase in net operating expenses of
$94,000.
Costs and Expenses for the Three and Six Months March 31, 2005 and 2004
Our structured finance expenses were $1.8 million and $2.4 million for
the three and six months ended March 31, 2005, respectively. These expenses
represent costs associated with our sponsorship and management of investment
partnerships in the trust preferred, asset backed securities and syndicated loan
areas. These expenses include primarily salaries and benefits and legal and
professional fees associated with the significant growth of our structured
finance businesses. These expenses were partially offset by reimbursements of
$1.0 million from the closing of Ischus CDO I for the three and six months ended
March 31, 2005. Expenses totaling $823,000 have been specifically identified as
relating to RCC start-up costs on the consolidated statement of income for the
three and six months ended March 31, 2005, respectively.
Our sturctured finance expenses were $74,000 and $413,000 in the three
and six months ended March 31, 2004, respectively. These expenses represent
costs associated with our sponsorship and management of investment partnerships
in the trust preferred area. These expenses include primarily salaries and
benefits and legal and professional fees.
RESULTS OF OPERATIONS: OTHER COSTS AND EXPENSES AND OTHER INCOME (EXPENSE)
Our general and administrative expenses were $2.2 million and $3.7
million for the three and six months ended March 31, 2005, respectively, an
increase of $631,000 (40%) and $143,000 (4%) as compared to $1.6 million and
$3.6 million for the three and six months ended March 31, 2004, respectively.
The company expended an additional $566,000 in accounting and consulting fees
during the first six months of 2005 related in part to additional auditing,
monitoring and testing of accounting systems as required by Section 404 of the
Sarbanes-Oxley Act of 2002.
Our depreciation, depletion and amortization expense was $5.5 million
and $12.0 million for the three and six months ended March 31, 2005,
respectively, an increase of $1.3 million (32%) and $4.1 million (52%) as
compared to $4.1 million and $7.9 million for the three and six months ended
March 31, 2004, respectively. This increase arose primarily from our energy
operations. Our depletion of oil and gas properties as a percentage of oil and
gas revenues was 20 % and 19% in the three and six months ended March 31, 2005,
respectively, as compared to 21% for the three and six months ended March 31,
2004. Depletion expense per mcfe was $1.36 and $1.29 for the three and six
months ended March 31, 2005, respectively, an increase of $.12 (10%) per mcfe
and $.14 (12%) per mcfe from the $1.24 and $1.15 for the three and six months
ended March 31, 2004, respectively. Increases in our depletable basis and
production volumes caused depletion expense to increase $240,000 (10%) and
$730,000 (15%) to $2.8 million and $5.5 million for the three and six months
ended March 31, 2005, respectively, compared to $2.5 million and $4.7 million in
the three and six months ended March 31, 2004, respectively. The variances from
period to period are directly attributable to changes in our oil and gas reserve
quantities, product prices and changes in the depletable cost basis of our oil
and gas properties.
Our provision for possible losses decreased to $161,000 for the six
months ended March 31, 2005 from $400,000 for the six months ended March 31,
2004. This decrease reflects primarily our decreased investment in our real
estate loan portfolio and other real estate assets owned through the repayment
of loans and property resolutions during the past twelve months.
47
Interest expense was $2.2 million and $4.6 million for the three and
six months ended March 31, 2005, respectively, an increase of $748,000 and
$53,000, as compared to $1.5 million and $4.5 million for the three and six
months ended March 31, 2004, respectively. The increase in interest expense
reflects the higher borrowings on our credit facilities, primarily used to fund
the expansion of our businesses including acquisitions made by Atlas Pipeline
and LEAF, offset in part by the reduction of interest from the prior year
redemption of our 12% senior notes during the six months ended March 31, 2004
and the repayment of other debt related to our real estate operations.
At March 31, 2005, we owned 24% of Atlas Pipeline through both our
general partner interest and our limited partner units, compared to 39% at March
31, 2004, as a result of the completion by Atlas Pipeline of its secondary
equity offerings of its common units in April and July 2004. As the general
partner, we control the operations of Atlas Pipeline, and therefore include it
in our consolidated financial statements and show the ownership by the public as
a minority interest. The minority interest in Atlas Pipeline's earnings was $2.5
million and $9.7 million for the three and six months ended March 31, 2005,
respectively, an increase of $1.2 million and $7.1 million, as compared to $1.3
million and $2.6 million for the three and six months ended March 31, 2004,
respectively. This increase was the result of an increase in the percentage
interest of public unitholders and an increase in Atlas Pipeline's net income,
principally as a result of the settlement of the terminated Alaska Pipeline
arbitration, the acquisition of the Spectrum and increases in transportation
rates received. Atlas Pipeline's transportation rates vary, to a significant
extent, with the prices of natural gas and natural gas liquids, which, on
average, were higher in the three and six months ended March 31, 2005 than the
three and six months ended March 31, 2004.
At March 31, 2005, we owned a 15.1% and 36.1% limited partner interest
in Structured Finance Fund, L.P. and Structured Finance Fund II, L.P., ("SFF"),
respectively, limited partnerships formed to invest in the equity of CDO issuers
we have formed. We also own a 50% interest in Structured Finance Management, LLC
and Structured Finance Fund GP LLC, the manager and general partner,
respectively, of the SFF. As the general partner, we control the operations of
the SFF and, therefore, include it in our consolidated financial statements and
reflect the ownership of the partners as a minority interest. For the six months
ended March 31, 2005, we recorded $743,000 of minority interest related to these
entities. As of March 31, 2004, these entities were not yet formed.
Other income, net, was $50,000 and $7.8 million for the three and six
months ended March 31, 2005, respectively, a decrease of $3.2 million and an
increase of $2.7 million, as compared to $3.2 million and $5.1 million for the
three and six months ended March 31, 2004, respectively. The increase for the
first six months of fiscal 2005 primarily reflects the $4.3 million we received
in December 2004, net of expenses, upon the settlement of the arbitration
associated with our terminated Alaska Pipeline acquisition. Additionally, in
November 2004, we had received a $1.4 million settlement against one of our
directors' and officers' liability insurance carriers for reimbursement of our
costs. During the six months ended March 31, 2005 and 2004, we sold 105,000 and
447,700 shares, respectively, of RAIT and recorded gains of $1.5 million and
$5.5 million, respectively. Dividend income from RAIT decreased by $663,000 to
$8,000 for the six months ended March 31, 2005 from $671,000 for the six
months ended March 31, 2004 as a result of these sales. As of March 31, 2005, we
own approximately 5,600 shares of RAIT. The three and six months ended March 31,
2004 reflected charges of $428,000 and $2.0 million, respectively, related to
the write-off of deferred finance costs and the premium paid on the redemption
of our 12% senior notes.
Our effective tax rate was 35% for the three months and six months
ended March 31, 2005, a 1% increase as compared to the 34% effective rate for
the three and six months ended March 31, 2004. The increase in rate reflects the
reduced benefit of statutory depletion and tax exempt interest relative to the
increase in our pre-tax income.
48
DISCONTINUED OPERATIONS
In accordance with SFAS 144, "Accounting for the Impairment or Disposal
of Long Lived Assets," our decision to dispose of certain real estate properties
resulted in the presentation of these assets, liabilities and operations as
discontinued operations. We classified three FIN 46 entities and two real estate
properties owned as held for sale at March 31, 2005 and have reported their
operations as discontinued.
LIQUIDITY AND CAPITAL RESOURCES
General. Our major sources of liquidity have historically 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, leasing and corporate credit facilities and sales of our
RAIT shares. We have employed these funds principally to expand our energy and
specialized asset management operations and to reduce our outstanding debt and
for the redemption of our senior notes. The following table sets forth our
sources and uses of cash for the periods presented (in thousands):
SIX MONTHS ENDED
MARCH 31,
-------------------------------
2005 2004
----------- -----------
Provided by continuing operations.................. $ 16,305 $ 7,366
Used in investing activities of continuing
operations....................................... (59,254) (4,136)
Provided by (used in) financing activities of
continuing operations............................ 21,917 (51,546)
Provided by discontinued operations................ 6,895 34,276
----------- -----------
$ (14,137) $ (14,040)
=========== ===========
We had $55.0 million in cash and cash equivalents at March 31, 2005
compared to $69.1 million at September 30, 2004. Our ratio of earnings from
continuing operations before income taxes, minority interest and interest
expense to fixed charges was 10.1 to 1.0 for the six months ended March 31, 2005
as compared to 5.0 to 1.0 for the six months ended March 31, 2004. Our working
capital was $28.3 million as of March 31, 2005 as compared to $54.5 million at
September 30, 2004. The decrease primarily reflected our investments in drilling
partnerships and structured finance entities. Our ratio of long-term debt
(including current maturities) to equity was 57% and 50% at March 31, 2005 and
September 30, 2004, 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 10-K for fiscal 2004.
Cash Flows from Operating Activities. Cash provided by operating
activities of continuing 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 investment
partnerships, obtaining sufficient financing for our operational expansion, and
the strength of the market for rentals of the types of properties secured by our
real estate loans and real estate. Net cash provided by operating activities
increased $8.9 million for the six months ended March 31, 2005 as compared to
the six months ended March 31, 2004, substantially as a result of the following:
49
o our net income, before depreciation, depletion and amortization,
increased by $10.6 million;
o changes in operating assets and liabilities accounted for a $13.7
million decrease in cash flows, primarily as a result of an
increase in the drilling obligations related to our investment
partnerships; and
o minority interests increased by $11.3 million, reflecting
primarily the May 2004 initial public offering of Atlas America
and two follow on offerings by Atlas Pipeline in addition to the
increased earnings generated by those entities.
Cash Flows from Investing Activities. Net cash used in our investing
activities of continuing operations decreased by $55.1 million for the six
months ended March 31, 2005 as compared to the six months ended March 31, 2004,
primarily reflective of the following:
o capital expenditures increased by $23.0 million due to an increase
in the number of wells we drilled and expenditures related to
Atlas Pipeline's gathering system extensions and compressor
upgrades;
o we invested $15.0 million in RCC, an affiliated real estate
investment trust we formed in March 2005;
o structured finance investments increased by $4.3 million,
primarily reflecting our investment in the Ischus initial CDO; and
o a decrease of $8.6 million net proceeds received from the sale of
shares we held of RAIT Investment Trust to $2.9 million for the
six months ended March 31, 2005 as compared to $11.5 million for
the six months ended March 31, 2004.
Cash Flows from Financing Activities. Net cash provided by our
financing activities of continuing operations increased by $73.5 million for the
six months ended March 31, 2005 as compared to the six months ended March 31,
2004. This increase in our cash flows is principally reflective of the
following, as follows:
o our borrowings, net of repayments, increased by $75.3 million in
the six months ended March 31, 2005, principally to fund the
acquisitions made by our energy and leasing companies and
increased lease originations;
o dividends paid to minority interests increased by $5.1 million as
a result of higher earnings and more common units outstanding for
Atlas Pipeline as a result of its fiscal 2004 offerings of its
common units; and
o we received $3.6 million of additional investor contributions,
principally in our Structure Finance Fund II.
Cash Flows from Discontinued Operations. Net cash provided by
discontinued operations decreased by $27.4 million for the six months ended
March 31, 2005 as compared to the six months ended March 31, 2004. We received
$6.9 million principally from the proceeds from refinancing a first mortgage on
a FIN 46 property during the six months ended March 31, 2005 as compared to
$34.3 million of proceeds received related to the sale of two FIN 46 assets
during the comparable period last year.
50
Capital Requirements
During the six months ended March 31, 2005 and 2003, our capital
expenditures related primarily to investments in our drilling partnerships and
pipeline expansions, in which we invested $20.2 million and $17.3 million,
respectively. For the six months ended March 31, 2005 and the remaining quarters
of fiscal 2005, 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 September 2004, the borrowing base under
Atlas Pipeline's credit facility was increased to $75.0 million from $65.0
million. In December 2004, the borrowing base further was further increased to
$90.0 million.
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 $138.0 million
in fiscal 2005 through drilling partnerships. During the six months ended March
31, 2005, we raised $62.3 million. We believe cash flows from operations and
amounts available under our energy 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.
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, the amount of funds we must commit to investments in our
real estate, equipment leasing and structured finance operations depends upon
the level of funds raised through real estate, equipment leasing and structured
finance partnerships. We believe cash flows from operations, cash on hand and
amounts available under our real estate and equipment leasing credit facilities
will be adequate to fund our contribution to these partnerships. However, the
amount of funds we raise and the level of our investments will vary in the
future depending on market conditions.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes our contractual obligations at March 31,
2005:
PAYMENTS DUE BY PERIOD
------------------------------------------------------
LESS THAN 1 - 3 4 - 5 AFTER 5
CONTRACTUAL CASH OBLIGATIONS: TOTAL 1 YEAR YEARS YEARS YEARS
----------- ---------- --------- --------- ----------
Long-term debt......................... $ 124,396 $ 3,436 $ 56,899 $ 61,932 $ 2,129
Secured revolving credit facilities.... 30,978 30,978 - - -
Operating lease obligations............ 6,618 2,288 2,544 1,784 2
Capital lease obligations.............. 89 13 28 48 -
Unconditional purchase obligations..... - - - - -
Other long-term obligations............ - - - - -
----------- ---------- --------- --------- ----------
Total contractual cash obligations..... $ 162,081 $ 36,715 $ 59,471 $ 63,764 $ 2,131
=========== ========== ========= ========= ==========
51
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
-------------------------------------------------------
LESS THAN 1 - 3 4 - 5 AFTER 5
OTHER COMMERCIAL COMMITMENTS: TOTAL 1 YEAR YEARS YEARS YEARS
----------- ----------- ---------- --------- ----------
Standby letters of credit.............. $ 3,012 $ 3,012 $ - $ - $ -
Guarantees............................. - - - - -
Standby replacement commitments........ 5,960 4,778 1,182 - -
Other commercial commitments........... 322,386 12,017 67,526 69,085 173,758
----------- ----------- ---------- --------- ----------
Total commercial commitments........... $ 331,358 $ 19,807 $ 68,708 $ 69,085 $ 173,758
=========== =========== ========== ========= ==========
A real estate investment partnership in which we have a general partner
interest has obtained senior lien financing with respect to five properties it
acquired. The senior liens are with recourse only to the properties securing
them subject to certain standard exceptions, which we have guaranteed. These
guarantees expire as the related indebtedness is paid down over the next ten
years. In addition, property owners have obtained senior lien financing with
respect to 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.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of our
assets, liabilities, revenues and cost and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to the provision for possible losses,
deferred tax assets and liabilities, goodwill and identifiable intangible
assets, and certain accrued liabilities. We base our estimates on historical
experience and on various other assumptions that we believe reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
For a detailed discussion on the application of policies critical to
our business operations and other accounting policies, see our annual report on
Form 10-K for fiscal 2004, at Note 2 of the "Notes to Consolidated Financial
Statements."
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In March 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 47, "Accounting for Conditional Assets Retirement
Obligations" ("FIN 47"), which will result in (a) more consistent recognition of
liabilities relating to asset retirement obligations, (b) more information about
expected future cash outflows associated with those obligations, and (c) more
information about investments in long-lived assets because additional asset
retirement cost will be recognized as part of the carrying amounts of the
assets. FIN 47 clarifies that the term conditional asset retirement obligation
as used in SFAS 143, "Accounting for Asset Retirement Obligations," refers to a
legal obligation to perform an asset retirement activity in which the timing and
(or) method of settlement are conditional on a future event that may or may not
be within the control of the entity. The obligation to perform the asset
retirement activity is unconditional even though uncertainty exists about the
timing and (or) method of settlement. Uncertainty about the timing and (or)
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. FIN 47 also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. FIN 47
is effective no later than the end of fiscal years ending after December 15,
2005. Retrospective application of interim financial information is permitted
but is not required. Early adoption of this interpretation is encouraged. As FIN
47 was recently issued, we have not determined whether the interpretation will
have a significant adverse effect on its financial position or results of
operations.
52
In December 2004, the FASB issued SFAS 123-R "Share-Based Payment"
("SFAS 123-R"), which is a revision of SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123-R supersedes Accounting Principal Board Opinion ("APB")
25, "Accounting for Stock Issued to Employees," and amends SFAS 95, "Statement
of Cash Flows." Generally, the approach to accounting in SFAS 123-R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values.
Currently, we account for these payments under the intrinsic value provisions of
APB 25 with no expense recognition in the financial statements. SFAS 123-R is
effective for us beginning July 1, 2005. The Statement offers several
alternatives for implementation. At this time, management has not made a
decision as to which alternative it may select.
In April 2005, the FASB issued FASB Staff Position No. FAS 19-1 ("FSP
FAS 19-1"), which addressed a discussion that was ongoing within the oil and gas
industry regarding capitalization of costs of drilling exploratory wells.
Paragraph 19 of SFAS 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies ("SFAS 19"), requires costs of drilling exploratory wells to
be capitalized pending determination of whether the well has found proved
reserves. If the well has found proved reserves, the capitalized costs become
part of the entity's wells, equipment, and facilities; if, however, the well has
not found proved reserves, the capitalized costs of drilling the well are
expensed.
Questions arose in practice about the application of this guidance due
to changes in oil and gas exploration processes and lifecycles. The issue was
whether there are circumstances that would permit the continued capitalization
of exploratory well costs if reserves cannot be classified as proved within one
year following the completion of drilling other than when additional exploration
wells are necessary to justify major capital expenditures and those wells are
underway or firmly planned for the near future. FSP FAS 19-1 amends SFAS 19
to allow for the continued capitalization of suspended well costs when the well
has found a sufficient quantity of reserves to justify its completion as a
producing well and the enterprise is making sufficient progress assessing the
reserves and the economic and operating viability of the plan. This guidance
requires management to exercise more judgment than was previously required and
also requires additional disclosure. This new guidance is effective for the
first reporting period beginning after April 4, 2005 and is to be applied
prospectively to existing and newly capitalized exploratory well costs. We do
not believe this statement of position will have a significant effect on our
financial statements.
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 following discussion is not meant to be a precise
indicator of expected future losses, but rather an indicator 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 such as forward contracts and interest rate cap
and swap agreements.
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The following analysis presents the effect on our earnings, cash flows
and financial position as if hypothetical changes in market risk factors
occurred at March 31, 2005. Only the potential impacts of hypothetical
assumptions are analyzed. The analysis does not consider other possible effects
that could impact our business.
ENERGY
Interest Rate Risk. At March 31, 2005, the amount outstanding under our
credit facility had increased to $50.0 million from $25.0 million at September
30, 2004. The weighted average interest rate for this facility increased from
4.1% at September 30, 2004 to 5.4% at March 31, 2005 due to a larger portion of
our borrowings tied to the bank's prime rate.
At March 31, 2005, Atlas Pipeline had a $90.0 million revolving credit
facility ($10.0 million outstanding) and a $45.0 million term loan ($43.7
million outstanding) to fund the expansion of its existing gathering systems and
the acquisitions of other gas gathering systems. The weighted average interest
rate for these borrowings increased from 5.7% at September 30, 2004 to 5.5% at
March 31, 2005 due to a larger portion of our borrowings tied to the bank's
LIBOR rate.
Holding all other variables constant, if interest rates hypothetically
increased or decreased by 10%, our annual net income would have changed by
approximately $176,000.
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 also are exposed to commodity prices as a result of being paid for
certain services in the form of commodities rather than cash. For gathering
services, we receive fees or commodities from the producers to bring the raw
natural gas from the wellhead to the processing plant.
For processing services, we either receive fees or commodities as
payment for these services, based on the type of contractual agreement. Based on
Atlas Pipeline's current contract mix, we have a long condensate, NGL and
natural gas position. Based upon Atlas Pipeline's portfolio of supply contracts,
a change in the average price of 10% of NGLs, natural gas and crude oil sold and
processed by Atlas Pipeline would result in a change to our annual net income of
approximately $24,000.
Atlas Pipeline acquired and/or entered into certain financial swap and
option instruments that are classified as cash flow hedges in accordance with
SFAS 133. Atlas Pipeline entered into these instruments to hedge the forecasted
natural gas, natural gas liquids and condensate sales against the variability in
expected future cash flows attributable to changes in market prices. The swap
instruments are contractual agreements between counterparties to exchange
obligations of money as the underlying natural gas, natural gas liquids and
condensate is sold. Under these swap agreements, Atlas Pipeline receives a fixed
price and pays a floating price based on certain indices for the relevant
contract period. The options fix the price for Atlas Pipeline within the puts
purchased and calls sold.
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Derivatives are recorded on our consolidated balance sheets as assets
or liabilities at fair value. For derivatives qualifying as hedges, the
effective portion of changes in fair value are recognized in stockholders'
equity as accumulated other comprehensive income (loss) and reclassified to
earnings as such transactions are settled. For non-qualifying derivatives and
for the ineffective portion of qualifying derivatives, changes in fair value are
recognized in earnings as they occur. At March 31, 2005, Atlas Pipeline
reflected an unrealized net pre-tax commodity hedging loss of $10.8 million on
its balance sheet. Of the Company's $1.7 million in accumulated other
comprehensive loss related to unrealized hedging losses at March 31, 2005, $1.1
million of losses will be reclassified to earnings over the next twelve month
period as these contracts expire, and $600,000 will be later periods, if future
prices remained constant. Actual amounts that will be reclassified will vary as
a result of future change in prices. Ineffective gains or losses are recorded in
income while the hedge contract is open and may increase or decrease until
settlement of the contract. Atlas Pipeline recognized a loss of $669,000 and
$645,000 related to these hedging instruments in the three and six months ended
March 31, 2005, respectively. A hedging loss of $224,000 and a hedging gain of
$216,000 resulting from ineffective hedges is included in energy revenues for
the three and six months ended March 31, 2005, respectively.
A portion of our future natural gas sales is periodically hedged
through the use of swap and collar contracts. Realized gains and losses on these
instruments are reflected in the contract month being hedged as an adjustment to
energy revenues.
REAL ESTATE
Portfolio Loans and Related Senior Liens. We believe that none of the
five loans held in our portfolio as of March 31, 2005 (including loans treated
in our consolidated financial statements as FIN 46 entities) 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 ahead of our 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.
FIN 46 Loans. Three of the four loans we treated as FIN 46 liabilities
upon adoption of FIN 46-R are at fixed interest rates and are thus not subject
to interest rate fluctuations. One loan is variable but the impact on annual net
income is immaterial.
EQUIPMENT LEASING
At March 31, 2005, the amount outstanding on the $45.0 million LEAF
credit facility with National City Bank was $27.6 million at a weighted average
interest rate of 5.8%; while the amount outstanding on its $15.0 million credit
facility with Commerce Bank was $3.3 million at a weighted average interest rate
of 5.7%. A hypothetical 10% change in the weighted average interest rates on
these facilities would change our annual net income by approximately $126,000.
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ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our periodic reports
required under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, 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 partially affected, or is reasonably likely to
materially affect, our internal control over financial reporting during our most
recent fiscal quarter.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation of Resource
America. (1)
3.2 Amended and Restated Bylaws of Resource America. (1)
31.1 Certification Pursuant to Rule 13a-15(e)/15(d) - 15(e).
31.2 Certification Pursuant to Rule 13a-15(e)/15(d) - 15(e).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K
None
- --------------
(1) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 and by this reference incorporated herein.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RESOURCE AMERICA, INC.
(REGISTRANT)
Date: May 10, 2005 By: /s/ Steven J. Kessler
---------------------
STEVEN J. KESSLER
Senior Vice President and Chief Financial Officer
Date: May 10, 2005 By: /s/ Arthur J. Miller
--------------------
ARTHUR J. MILLER
Chief Accounting Officer
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