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, 1997
--------------
[ ] 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 small business issuer as specified in its charter)
Delaware 72-0654145
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1521 Locust Street, Philadelphia, Pennsylvania 19102
(Address of principal executive offices)
(215) 546-5005
(Registrant's telephone number)
---------------------------------------------
(Former name, former address, and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 3,553,380
RESOURCE AMERICA, INC.
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) March 31, 1997,
and September 30, 1996. . . . . . . . . . . . . . . . . . . . 1 & 2
Consolidated Statements of Income (Unaudited) - Three
Months and Six Months Ended March 31, 1997, and 1996. . . . . 3
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended March 31, 1997, and 1996 . . . . . . . . . . 4
Notes to Consolidated Financial Statements (Unaudited). . . . . 5 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 14 - 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 20
<PAGE 1>
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
RESOURCE AMERICA, INC., AND SUBSIDIARIES
March 31, 1997, and September 30, 1996
=============================================================================
March 31, September 30,
1997 1996
------------ -------------
ASSETS
Current Assets
Cash and cash equivalents. . . . . . . . . . . $ 5,784,406 $ 4,154,516
Accounts and notes receivable. . . . . . . . . 945,339 1,478,702
Prepaid expenses and other current assets. . . 776,549 472,673
------------ ------------
Total Current Assets . . . . . . . . . . . . . 7,506,291 6,105,891
Net Investment in Direct Financing Leases. . . . 2,037,529 729,446
Notes Secured by Equipment Receivables . . . . . 2,624,256 -
Property and Equipment
Oil and gas properties and equipment
(successful efforts) . . . . . . . . . . . . 23,902,098 24,034,987
Gas gathering and transmission facilities. . . 1,535,781 1,535,781
Other. . . . . . . . . . . . . . . . . . . . . 1,772,570 1,666,085
------------ ------------
27,210,449 27,236,853
Less - accumulated depreciation, depletion,
and amortization. . . . . . . . . . . . . . . (15,307,384) (14,856,874)
------------ ------------
Net Property and Equipment . . . . . . . . . . . 11,903,065 12,379,979
Investments in Real Estate Loans . . . . . . . . 55,574,108 21,797,768
Restricted Cash. . . . . . . . . . . . . . . . . 1,013,550 935,346
Other Assets . . . . . . . . . . . . . . . . . . 4,470,684 2,010,498
------------ ------------
$ 85,129,486 $ 43,958,928
============ ============
1
<PAGE 2>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
RESOURCE AMERICA, INC., AND SUBSIDIARIES
March 31, 1997, and September 30, 1996
=============================================================================
March 31, September 30,
1997 1996
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable - trade . . . . . . . . . . $ 851,674 $ 584,985
Accrued liabilities. . . . . . . . . . . . . 973,022 596,783
Accrued income taxes . . . . . . . . . . . . 579,947 376,946
Current portion of long-term debt. . . . . . 240,000 105,000
------------ ----------
Total Current Liabilities. . . . . . . . . . 2,644,643 1,663,714
Long-term Debt . . . . . . . . . . . . . . . . 24,696,335 8,966,524
Deferred Income Taxes. . . . . . . . . . . . . 2,746,000 2,206,000
Other Long-term Liabilities. . . . . . . . . . 426,793 --
Commitments and Contingencies. . . . . . . . . -- --
Stockholders' Equity
Preferred stock, $1.00 par value, 1,000,000
authorized, none issued. . . . . . . . . . -- --
Common stock, $.01 par value, 8,000,000
authorized shares, 3,703,238 and 2,047,209
issued and outstanding shares (including
149,858 and 152,448 treasury shares) at
March 31, 1997, and September 30, 1996,
Respectively . . . . . . . . . . . . . . . 37,032 20,472
Additional paid-in capital . . . . . . . . . 41,298,168 21,760,695
Retained earnings. . . . . . . . . . . . . . 16,310,171 12,458,344
Less cost of treasury shares . . . . . . . . (2,643,966) (2,698,985)
Less loan receivable from ESOP . . . . . . . (385,690) (417,836)
------------ ------------
Total Stockholders' Equity . . . . . . . . . 54,615,715 31,122,690
------------ ------------
$ 85,129,486 $ 43,958,928
============ ============
The accompanying notes are an integral part of these financial statements.
2
<PAGE 3>
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
RESOURCE AMERICA, INC., AND SUBSIDIARIES
Three Months and Six Months Ended March 31, 1997 and 1996
=============================================================================
Three Months Six Months
Ended March 31, Ended March 31,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
REVENUES
Real estate finance. . . . . . . . . . . $ 3,778,134 $ 1,866,202 $ 6,996,976 $ 3,951,323
Equipment leasing. . . . . . . . . . . . 1,674,178 1,352,878 2,876,010 2,659,411
Energy: production . . . . . . . . . . . 947,557 769,793 1,897,969 1,591,784
: services . . . . . . . . . . . . 360,804 486,298 749,387 969,916
Interest . . . . . . . . . . . . . . . . 101,755 34,493 180,242 105,702
----------- ----------- ----------- -----------
6,862,428 4,509,664 12,700,584 9,278,136
COSTS AND EXPENSES
Real estate. . . . . . . . . . . . . . . 188,643 163,212 351,568 303,168
Equipment leasing. . . . . . . . . . . . 906,558 478,929 1,799,893 1,166,260
Energy: production and exploration . . . 425,015 363,437 836,793 735,849
: services . . . . . . . . . . . . 222,871 252,543 446,787 494,494
General and administrative . . . . . . . 658,021 550,879 1,249,932 1,004,721
Depreciation and amortization. . . . . . 391,853 298,907 771,157 708,765
Interest . . . . . . . . . . . . . . . . 608,935 214,159 1,017,723 428,725
Provision for possible losses. . . . . . 136,000 -- 146,000 --
Other - net. . . . . . . . . . . . . . . (1,705) 3,231 (17,936) 1,152
----------- ----------- ----------- -----------
3,536,191 2,325,297 6,601,917 4,843,134
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS . . . . . . . . . 3,326,237 2,184,367 6,098,667 4,435,002
OTHER INCOME (EXPENSE)
Gain (loss) on sale of property. . . . . (16,759) 4,738 70,995 5,165
----------- ----------- ----------- -----------
Income before income taxes . . . . . . . . 3,309,478 2,189,105 6,169,662 4,440,167
Provision for federal income taxes . . . . 775,000 634,000 1,350,000 1,287,000
----------- ----------- ----------- -----------
NET INCOME . . . . . . . . . . . . . . . $ 2,534,478 $ 1,555,105 $ 4,819,662 $ 3,153,167
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE - primary . . $ .55 $ .56 $ 1.19 $ 1.19
Weighted average common shares outstanding 4,625,200 2,847,800 4,045,400 2,657,400
NET INCOME PER COMMON SHARE -
fully diluted . . . . . . . . . . . . $ .55 $ .54 $ 1.18 $ 1.18
Weighted average common shares outstanding 4,642,000 2,872,200 4,086,000 2,669,600
The accompanying notes are an integral part of these financial statements.
3
<PAGE 4>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
RESOURCE AMERICA, INC., AND SUBSIDIARIES
Six Months Ended March 31, 1997, and 1996
=============================================================================
Six Months
Ended March 31,
-----------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . $ 4,819,662 $ 3,153,167
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . 771,157 708,765
Amortization of discount on senior note and
deferred finance costs. . . . . . . . . . . . 55,443 37,325
Provision for possible losses . . . . . . . . . 146,000 -
Property impairments and abandonments . . . . . 1,422 33,663
Accretion of discount . . . . . . . . . . . . . (1,502,851) (507,543)
Deferred income taxes . . . . . . . . . . . . . 117,000 917,000
Gain on dispositions and investments. . . . . . (3,096,399) 1,914,192)
Change in operating assets and liabilities
net of effects from purchase of subsidiaries:
(Increase) decrease in accounts receivable. . 533,362 (494,396)
Increase in prepaid expenses and others
current assets . . . . . . . . . . . . . . . (303,876) (371,351)
Increase (decrease) in accounts payable . . . 16,688 (354,820)
Increase in other current liabilities . . . . 579,240 23,790
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . 2,136,848 1,231,408
INVESTING ACTIVITIES:
Cost of equipment acquired for lease. . . . . . . (11,478,279) -
Capital expenditures. . . . . . . . . . . . . . . (258,209) (408,204)
Proceeds from sale of assets. . . . . . . . . . . 8,571,160 11,061,957
Payments received in excess of revenue
recognized on leases. . . . . . . . . . . . . . 720,336 -
Principal payments on notes receivable. . . . . . 1,878,346 -
Increase in other assets. . . . . . . . . . . . . (2,216,743) (35,320)
Investments in real estate loans. . . . . . . . . (30,394,190) 11,503,933)
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES . . . . . (33,177,579) (885,500)
FINANCING ACTIVITIES:
Short-term borrowings . . . . . . . . . . . . . . 5,000,000 -
Long-term borrowings. . . . . . . . . . . . . . . 14,070,000 -
Dividends paid. . . . . . . . . . . . . . . . . . (544,775) (358,346)
Principal payments on short-term debt . . . . . . (4,750,000) -
Principal payments on long-term debt. . . . . . . (560,457) (12,728)
Proceeds from issuance of common stock. . . . . . 19,608,991 82,001
Increase in restricted cash . . . . . . . . . . . (78,204) (90,001)
Purchase of treasury stock. . . . . . . . . . . . - (47,252)
Increase in other assets. . . . . . . . . . . . . (74,934) -
---------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIE . . . . . . . . . . . . . . . . . . 32,670,621 (426,326)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . 1,629,890 (80,418)
CASH AT BEGINNING OF YEAR . . . . . . . . . . . . . 4,154,516 2,457,432
----------- -----------
CASH AT MARCH 31. . . . . . . . . . . . . . . . . . $ 5,784,406 $ 2,377,014
=========== ===========
The accompanying notes are an integral part of these financial statements,
including Note 2 which discloses Interest and Taxes Paid and Noncash
Investing Activities.
4
<PAGE 5>
NOTE 1 - MANAGEMENT'S OPINION REGARDING INTERIM FINANCIAL STATEMENTS
In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair statement of the results of
operations for the interim period included herein have been made.
The accounting policies followed by the Company are set forth in Note 1
to the Company's consolidated financial statements for the fiscal year ended
September 30, 1996, included in the Company's Annual Report on Form 10-K.
NOTE 2 - CASH FLOWS STATEMENT
Total interest paid during the first six months of fiscal 1997 and 1996
amounted to $860,000 and $389,000, respectively. Cash payments for income
taxes during the first six months of fiscal 1997 and 1996, amounted to
$1,030,000 and $370,000, respectively.
During the first quarter of fiscal 1997, noncash investing activities
include the sale of various equipment leases in exchange for a note with a
face value of $3.26 million.
During the second quarter of fiscal 1997, noncash activities include the
receipt of a note with a face value of $1.2 million, in partial payment for
the sale of leases. In satisfaction of a real estate loan, the Company
received a note with a face value of $3.5 million and became subject to a
$2.4 million obligation associated with the underlying property.
NOTE 3 - PUBLIC OFFERING OF COMMON STOCK
In November 1996, the Company closed a public offering of 1,656,000
shares of its Common Stock. The Company received net proceeds of
$19,991,000, before offering expenses of $433,000, from the offering.
NOTE 4 - EARNINGS PER SHARE
Management discovered in a review of earnings per share for the second
quarter of the prior fiscal year that the computation of the dilutive effect
of outstanding options was in error in that only vested options, as opposed
to all options, were considered. This resulted in an understatement of
353,800 shares and 581,600 shares for the quarter and six months ended March
31, 1996, respectively. Accordingly, primary earnings per share in the prior
fiscal year have been decreased by $.06 and $.09 for the quarter and six
months ended March 31, 1996, respectively.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," ("EPS") which is required to be adopted for
financial statements issued for periods ending after December 14, 1997. At
that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the
new requirements, primary EPS will be replaced by basic EPS which will not
include the dilutive effect of stock options. When adopted, this statement
will materially change earnings per share as currently reported.
NET 5 - LONG-TERM DEBT
March 31, September 30,
Long-term debt consists of the following: 1997 1996
------------- --------------
Mortgage note payable to a bank, secured
by real estate, monthly installments of
approximately $4,000 including interest at
3/4% above the prime rate through May 2002
(rate of 9% at March 31, 1997). . . . . . . . $ 200,719 $ 214,779
Loan payable to a bank, secured by a
certificate of deposit, 20 equal semiannual
installments of $32,143, through February,
2003, and quarterly payments of interest at
1/2% above the prime rate through 2003. . . . 385,690 417,836
9.5% senior secured note payable, interest
due semi- annually, principal due May 2004. . 7,908,958 7,902,708
Loan payable, secured by real estate,
Monthly installments of approximately
$5,200 including interest at 2.25% above
the prime rate (but not less than 7% nor
greater than 14.25%) through April 2004 at
which time the unpaid balance shall be due.
This loan was refinanced in December 1996
with the proceeds of the following loan . . . - 536,201
Loan payable, secured by real estate,
Monthly installments of approximately
$9,200 including interest at 10.25% through
December 2001, at which time the unpaid
balance shall be due. . . . . . . . . . . . . 689,802 -
Loan payable, secured by real estate,
interest due monthly at the greater of
8.75% or LIBOR (London InterBank Offered
Rate) plus 350 basis points, principal due
January 1999. . . . . . . . . . . . . . . . . 13,370,000 -
6
<PAGE 7>
Loan payable, secured by real estate,
Monthly installments of $13,300 including
interest at 1% above the prime rate, due
January 2019. . . . . . . . . . . . . . . . . 1,136,996 -
------------ -----------
24,936,335 9,071,524
Less amounts payable in one year. . . . . . . 240,000 105,000
------------ -----------
$ 24,696,335 $ 8,966,524
============ ===========
The following is the amount of long-term debt maturing during each of
the five periods ending on March 31: 1998 - $240,000; 1999 - $14,647,000;
2000 - $210,000; 2001 - $226,000 and 2002 - $671,000.
The senior secured note payable is collateralized by substantially all
of the Company's oil and gas properties and selected real estate assets.
Certain credit agreements require the Company to comply with certain
restrictive covenants. At March 31, 1997, the Company was in compliance with
such covenants.
In December 1996, a subsidiary of the Company ("FLI") entered into a new
Secured revolving credit and term loan facility with a maximum borrowing
limit of $20 million with two banking institutions. FLI pays interest on the
revolving and term borrowings at a rate equal to LIBOR plus 1.75% and LIBOR
plus 2.25% per annum, respectively. The initial maturity date of the credit
facility is March 31, 1998, but may be renewed annually at the lenders'
discretion. FLI incurs a commitment fee of 3/8% per annum on the unused
portion of the borrowing limit. The credit agreement is collateralized by
certain leases and leased equipment. The credit facility contains covenants
which, among other things, requires the maintenance of certain financial
ratios and restricts a change in the ownership or a key management position
by FLI. At March 31, 1997, FLI was in compliance with all covenants.
NOTE 6 - INVESTMENT IN DIRECT FINANCING LEASES
Components of the net investment in direct financing leases as of March
31, 1997, are as follows:
Total minimum lease payments receivable $ 2,292,775
Initial direct costs, net of amortization 51,516
Unguaranteed residual 93,430
Unearned lease income (313,025)
Provision for possible losses (87,167)
---------------
Net investment in direct financing leases $ 2,037,529
===============
In December 1996, the Company sold leases with a net book value of
approximately $3.0 million to a special-purpose financing entity in return
for a note with a face value of approximately $3.3 million, of which $1.9
million was collected in the second quarter of fiscal 1997, resulting in a
gain of $313,000 (see Note 2).
7
<PAGE 8>
In March 1997, the Company sold leases with a net book value of
approximately $6.4 million to a special-purpose financing entity in return
for cash of $5.3 million and a note with a face value of $1.2 million,
resulting in a gain of $763,000 (see Note 2).
NOTE 7 - INVESTMENTS IN REAL ESTATE
The Company has focused its real estate activities on the purchase of
income producing mortgages at a discount to the face value of such mortgages
and also to the appraised value of the property underlying the mortgage. Cash
received by the Company for payment on each mortgage is allocated between
principal and interest - the interest portion of the cash received is
recorded as income to the Company. Additionally, the Company records as
income the accrual of a portion of the discount to the underlying collateral
value. This "accretion of discount" amounted to $1,502,851 during the six
months ended March 31, 1997. As the Company sells participations or receives
funds from refinancings in such mortgages, a portion of the cash received is
employed to reduce the cumulative accretion of discount included in the
carrying value of the Company's investment in real estate loans.
At March 31, 1997, the Company held real estate loans having aggregate
face values of $167.9 million, which were being carried at an aggregate cost
of $55.5 million, including cumulative accretion of $3.5 million. The
following is a summary of the changes in the carrying value of the Company's
investments in real estate loans for the quarter ended March 31, 1997:
1997
----------------
Balance, beginning of period $ 21,797,768
New real estate loans 33,086,520
Additions to existing loans 1,031,370
Reserve for possible losses (66,000)
Accretion of discount 1,502,851
Collections of principal (183,321)
Cost of mortgages sold (1,595,080)
----------------
Balance, end of period $ 55,574,108
================
8
<PAGE 9>
Investments in Real Estate Loans consist of:
March 31, September 30,
1997 1996
------------ ------------
Property 001 Subordinated wraparound note,
face value of $4,500,000,
secured by residential real
estate located in Pittsburgh,
PA, interest at 14.5%, due
December 31, 2002. . . . . . . . . . .$ 2,457,262 $ 2,410,665
Property 002 Note, face value of $1,080,000,
secured by residential real
estate located in Philadelphia,
PA, interest at 12%, due
October 31, 1998 . . . . . . . . . . . 180,054 179,980
Property 003 Mortgage note, face value of
$1,798,000, secured by
residential real estate
located in Margate, NJ,
interest at the Chase
Manhattan Bank prime rate (but
not less than 9% nor greater
than 15.5%), due January 1, 2003 . . . 705,744 694,850
Property 004 Note, face value of $1,312,000,
secured by residential real estate
located in Philadelphia, PA,
interest at 2 1/2% over the
monthly national median annualized
cost of funds for SAIF-insured
institutions as announced by the
Federal Deposit Insurance
Corporation, due October 31, 1998. . . 239,109 226,968
Property 005 Note, face value of $4,234,000
by commercial real estate located
in Pittsburgh, PA, interest at
10.6%, due February 7, 2001. . . . . . 756,769 1,086,709
Property 006 Subordinated note, face value of
$4,165,000, interest at 1/2% over
the Maryland National Bank prime
rate, due July 31, 1998. . . . . . . . 1,569,908 1,537,546
Property 007 Note, face value of $1,776,000,
secured by a judgment lien,
relating to real estate located
in St. Cloud, MN, interest at 10%,
due December 31, 2014. . . . . . . . . 541,734 527,846
9
<PAGE 10>
Property 008 Subordinated note, face value
of $3,559,000, secured by an
unrecorded deed relating to real
estate located in Philadelphia,
PA, interest at 2% over the yield
of one-year United States Treasury
securities, due July 31, 1998. . . . . 811,691 721,212
Property 009 Subordinated notes, face value of
$1,495,000 secured by residential
real estate located in Philadelphia,
PA, interest at 2% over the Mellon
Bank prime rate, due October 31, 1999. 526,835 510,608
Property 010 Mortgage note, face value of
$1,211,000, secured by residential
real estate located in Philadelphia,
PA, interest at 3% over the Federal
Home Loan Bank of Pittsburgh rate,
due September 2, 1999. . . . . . . . . 123,289 112,467
Property 011 Mortgage note, face value of
$900,000, secured by commercial
real estate located in Washington,
D.C., interest at 1 1/2% over the
First Union National Bank rate,
due September 30, 1999 . . . . . . . . 560,692 414,360
Property 012 Mortgage notes, face value of
$1,962,000, secured by residential
real estate located in Philadelphia,
PA, varying interest rates from
9 1/2% to 14 1/2%, due December
2, 1999. . . . . . . . . . . . . . . . 722,496 747,640
Property 013 Mortgage note, face value of
$3,000,000, secured by commercial
real estate located in Pasadena,
CA, interest at 2.75% over the
average cost of funds to FSLIC-
insured savings and loan
associations, 11th District (but
not less than 5.5% nor greater than
15.5%), due May 1, 2001. . . . . . . . 327,528 302,354
Property 014 Subordinated wraparound note, face
value of $12,000,000 consisting of
a first mortgage held by the
Company of $9,000,000 secured by
commercial real estate located in
Washington, D.C., and a $3,000,000
second mortgage held by the Company,
interest at 12%, due November 30,
1998 . . . . . . . . . . . . . . . . . 5,281,983 3,170,843
10
<PAGE 11>
Property 015 Subordinated wraparound note, face
value of $3,500,000, secured by
residential real estate located in
New Concord, NC, interest at 12%,
due August 25, 2000. The property
securing this note was obtained
through default by the borrower,
and subsequently sold for
$3,700,000 in return for cash of
$150,000 and the following note. . . . - 356,147
Subordinated wraparound note, face
value of $3,550,000, secured by
residential real estate located in
New Concord, NC, interest at 8%,
due March 2002 . . . . . . . . . . . . 3,550,000 -
Property 016 Wraparound note, face value of
$5,198,000, secured by real estate
located in Rancho Cordova, CA,
interest at 8.5%, due December 31,
2019 Company of $4,143,000 . . . . . . 450,417 428,703
Property 017 Subordinated wraparound note, face
value of $3,300,000 secured by
commercial real estate located in
Elkins, WV, interest at 13.6%, due
in equal installments through
December 31, 2018. In November
1996, the owner of the property
refinanced the property with an
unaffiliated party, simultaneously
paying the Company $169,000 toward
principal and interest on this
loan . . . . . . . . . . . . . . . . . 969,962 961,756
Property 018 Mortgage note, face value of
$2,271,000, secured by commercial
real estate located in Northridge,
CA, interest at 9%, due December
27, 2000 . . . . . . . . . . . . . . . 794,872 782,973
Property 019 Mortgage note, face value of
$4,627,000, secured by residential
real estate located in Philadelphia,
PA, interest at 7.75%, due
December 31, 2000. . . . . . . . . . . 898,525 900,017
Property 020 Subordinated note, face value of
$4,800,000 secured by real estate
located in Cherry Hill, NJ,
interest at 10%, due February
7, 2001. . . . . . . . . . . . . . . . 1,750,636 1,536,729
11
<PAGE 12>
Property 021 Mortgage notes, face value of
$3,269,000, secured by real estate
located in Philadelphia, PA,
interest at 12%, due March and
April, 2001. . . . . . . . . . . . . . 707,483 516,036
Property 022 Subordinated participation loan,
face value of $2,038,000, secured
by real estate located in
Philadelphia, PA, interest at 85%
of the 30-day rate on $100,000
Certificates of Deposit as
published by the Wall Street
Journal plus 2.75%, due October
31, 1998 . . . . . . . . . . . . . . . 1,260,733 1,060,176
Property 023 Subordinated mortgage note, face
value of $600,000, secured by real
estate located in Philadelphia, PA,
interest at 12%, due March 28,
2001 . . . . . . . . . . . . . . . . . 174,262 110,559
Property 024 Mortgage note, face value of
$3,500,000, secured by residential
real estate located in Sharon Hill,
PA, interest at 10.5%, due December
31, 2002. In December 1996, the
Company sold a senior participation
in this mortgage for $1,980,000,
resulting in a gain of $384,919 and
a face value due the Company
of $1,694,000. . . . . . . . . . . . . 990,634 2,500,624
Property 025 Tax free bonds, face value of
$5,800,000, secured by hotel/
commercial real estate located in
Savannah, GA, interest at 14%, due
August 2015. . . . . . . . . . . . . . 5,922,178 -
Property 026 Subordinated mortgage note, face
value of $3,423,000, secured by
commercial real estate located in
Ambler, PA, interest at 12%, due
September 2003 . . . . . . . . . . . . 1,345,890 -
Property 027 Mortgage notes, face value of
$40,644,000, secured by commercial
real estate located in Philadelphia,
PA, interest at 12%, due
January 2002 . . . . . . . . . . . . . 20,350,445 -
12
<PAGE 13>
Property 028 Mortgage note, face value of
$1,670,000, secured by real estate
located in New Concord, NC,
interest at 8% due March 2002. . . . . 1,670,000 -
Reserve for possible losses . . . . . . . . . . . . (66,000) -
------------ ------------
$ 55,574,108 $ 21,797,768
============ ============
As referenced above, in the first quarter of fiscal 1997 the Company
sold a senior participation in one real estate loan to a financial
institution. The financial institution has certain recourse rights against
the Company should the loan not perform under the terms of the participation
agreement. Further, as referenced above, in November 1996 the owner of
one property on which the Company held a mortgage note refinanced that Note
with an unaffiliated party. The Company received payments of principal and
interest on the note and now holds a position which is subordinated to the
new first mortgage note placed on the property by the unaffiliated party.
In the second quarter of fiscal 1997 a borrower defaulted on an existing
Forbearance agreement associated with one property. In settlement, the
borrower assigned its ownership interest in the property to the Company which
was subsequently sold in exchange for cash and a note with a face value of
$3,550,000, resulting in a gain of $837,000. In addition, the Company
acquired a note on another property and the right to acquire an equity
interest in this property. This right was subsequently assigned in exchange
for cash and a note with a face value of $1,670,000, resulting in a gain of
$724,000.
13
<PAGE 14>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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
WHICH 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. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY
RELEASE THE RESULTS OF ANY REVISIONS TO FORWARD LOOKING STATEMENTS WHICH MAY
BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO
REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
RESULTS OF OPERATIONS: ASSET ACQUISITION AND RESOLUTION
The following table sets forth certain information relating to the
revenue recognized on the Company's commercial real estate loan portfolio
during the periods indicated:
Quarters Ended Six Months Ended
March 31, March 31,
------------------ -----------------
1997 1996 1997 1996
-------- -------- -------- -------
(Dollars in thousands)
Interest . . . . . . . . . . . . . . $ 1,500 $ 421 $ 2,134 $ 875
Accreted discount. . . . . . . . . . 710 379 1,503 508
Fees . . . . . . . . . . . . . . . . 7 604 1,414 659
Gains on refinancings and
sale of participations . . . . . 1,561 462 1,946 1,909
-------- -------- -------- --------
Total. . . . . . . . . . . . . . . . $ 3,778 $ 1,866 $ 6,997 $ 3,951
======== ======== ======== ========
Average balance of investment, net . $ 52,634 $ 18,632 $ 38,686 $ 19,482
Yield on net average balance . . . . 28.7% 40.0% 36.1% 40.6%
Revenues from asset acquisition and resolution operations increased 102%
in the second quarter and 77% in the six months ended March 31, 1997,
compared to the same periods of the prior fiscal year. This increase was
attributable to an increase of $1.4 million and $2.3 million in interest
(including accretion of discount) in the quarter and six months ended March
31, 1997, respectively, compared to the prior similar periods, as a result of
an increase in the average amount of real estate loans outstanding in the
current fiscal year as compared to the prior fiscal year. The average
balance of investment in real estate loans increased by 182% in the quarter
and 99% in the six months ended March 31, 1997, respectively. Fees decreased
$597,000 and increased $755,000, while gains increased $1.1 million and
$37,000 in the quarter and six months ended March 31, 1997, respectively.
The amount of fees earned and
14
<PAGE 15>
gains recognized are dependent on the closing of certain transactions and are
not earned ratably throughout the year.
During the quarter and six months ended March 31, 1997, the Company
purchased or originated two and six real estate loans, for a total cost of
$5.2 and $33.1 million, as compared to four and six loans for a total cost of
$3.4 and $10.8 million in the quarter and six months ended March 31, 1996.
Gains were recognized on two and three loans in the quarter and six months
ended March 31, 1997, compared to one and four loans in the similar prior
periods. Asset acquisition and resolution expenses increased 15% in the
quarter and 16% in the six months ended March 31, 1997 compared to the prior
fiscal year. The increase was primarily a result of higher personnel costs
associated with the expansion of these operations.
RESULTS OF OPERATIONS: EQUIPMENT LEASING
The following table sets forth certain information relating to the
revenue recognized in the Company's equipment leasing operations during the
periods indicated:
Quarters Ended, Six Months Ended
March 31, March 31,
---------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
(Dollars in thousands)
Partnership Management
Servicing. . . . . . . . . . . . . $ 212 $ 355 $ 432 $ 706
Partnership leasing. . . . . . . . 10 560 22 751
Reimbursement of administrative
Costs . . . . . . . . . . . . . 186 217 467 915
Lease brokerage . . . . . . . . . . . 283 221 583 287
Small ticket leasing. . . . . . . . . 220 - 296 -
Gain on sale of leases. . . . . . . . 763 - 1,076 -
------- ------- ------- -------
Total. . . . . . . . . . . . . . . $ 1,674 $ 1,353 $ 2,876 $ 2,659
The decrease in servicing revenue, partnership leasing and reimbursement
Of administrative costs was the result of the liquidation, in accordance with
the terms of the partnership agreement, of one leasing partnership in the
second quarter of fiscal 1996. Partnership leasing revenue in the previous
fiscal periods includes the settlement of the Company's general partner share
revenues from prior fiscal periods. The Company now acts as general partner for
six limited partnerships which held a total of $64 million (original cost) in
lease assets at March 31, 1997. Lease brokerage revenue increased
substantially in the quarter and six months ended March 31, 1997, as compared
to the similar periods of the prior year; this revenue is transaction based
and the Company closed several large transactions in the first six months of
fiscal 1997. The gain on sale of leases resulted from the sale of leases
with a book value of $3.0 million in exchange for a note with a face value
of $3.3 million in the first quarter of fiscal 1997 and the sale of leases
with a book value of $6.4 million in exchange for cash of $5.3 million and a
note with a face value of $1.2 million in the second quarter of fiscal 1997.
During the second quarter of fiscal 1997 the Company collected $1.9 million
in principal payments on the $3.3 million note.
In June 1996, the Company entered the "small ticket" leasing business
and began writing leases in August 1996. In the quarter and six months ended
March 31, 1997, the
15
<PAGE 16>
Company acquired equipment for lease with a cost of $7.1 million and $11.5
million, respectively. This new business segment is expected to grow
significantly during the remainder of fiscal 1997.
The following table sets forth certain information relating to expenses
recognized in the Company's equipment leasing operations during the periods
indicated:
Quarters Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
----- ----- ------- -------
(Dollars in thousands)
Partnership management . . . $ 323 $ 275 $ 695 $ 879
Lease brokerage. . . . . . . 226 204 384 287
Small ticket leasing . . . . 358 - 721 -
----- ----- ------- -------
Total . . . . . . . . . . $ 907 $ 479 $ 1,800 $ 1,166
===== ===== ======= =======
Partnership leasing expenses decreased as a result of the liquidation of
One partnership, as discussed above. Lease brokerage expenses increased as a
result of an increase in commissions paid in association with the higher
level of revenues earned.
RESULTS OF OPERATIONS: ENERGY
Oil and gas production revenues increased 23% in the quarter and 19% in
the six months ended March 31, 1997, compared to the similar periods of the
previous year. A comparison of the Company's revenues, daily production
volumes, and average sales prices follows:
Quarter Ended Six Months Ended
March 31, March 31,
--------------- -----------------
1997 1996 1997 1996
------ ------ ------- -------
Revenues (in thousands)
- -----------------------
Gas $ 752 $ 606 $ 1,507 $ 1,286
Oil 178 143 363 277
Production Volumes
- -----------------------
Gas (Mcf/day) 3,101 2,935 3,206 3,168
Oil (Bbls/day) 91 90 91 88
Average Sales Price
- -----------------------
Gas (per Mcf) $ 2.69 $ 2.27 $ 2.58 $ 2.22
Oil (per Bbl) 21.75 17.44 21.98 17.08
Natural gas revenues from production sales increased 24% in the quarter
and 17% in the six months ended March 31, 1997, compared to the similar
periods of the prior year due to a 19% and 16% increase in the average price
per mcf of natural gas for the quarter and six months ended March 31, 1997,
respectively. Oil revenues increased by 24% and 31% in the quarter and six
months ended March 31, 1997, compared to the similar periods of fiscal 1996,
due to a 25% and 29% increase in the average price per barrel for the quarter
and six months ended March 31, 1997, respectively. Production volumes for
both oil and gas remained stable in both the quarter and six months ended
March 31, 1997
Energy services revenues decreased 26% and 23% in the quarter and six
months ended March 31, 1997, from the similar prior periods of fiscal 1996.
This decrease resulted from reduced service rig work, a decrease in the
number of wells operated for partnerships managed by the Company and a
reduction in financial reporting services provided to certain partnerships.
A comparison of the Company's production costs as a percentage of oil
and gas sales, and the production cost per equivalent unit for oil and gas
for the quarter and six months ended March 31, 1997 is as follows:
Quarter Ended Six Months Ended
March 31, March 31,
--------------- ---------------
Production Costs 1997 1996 1997 1996
--------------------- ------ ------ ------ ------
As a percent of sales . . . 42% 44% 40% 43%
Gas (mcf) . . . . . . . . . $ 1.20 $ 1.06 $ 1.11 $ 1.00
Oil (bbl) . . . . . . . . . $ 7.20 $ 6.36 $ 6.66 $ 6.00
Production costs increased 17% ($59,000) and 12% ($82,000) in the
quarter and six months ended March 31, 1997 from the similar periods of
fiscal 1996 as a result of an increase in repairs and maintenance. Repairs
are conducted on an as-needed basis and, accordingly, costs incurred by the
Company may vary from year to year.
Amortization of oil and gas property costs as a percentage of oil and
gas revenues was 22% and 21% in the quarter and six months ended March 31,
1997 compared to 21% and 27% in the quarter and six months ended March 31,
1996. The variance from year to year is directly attributable to changes in
the Company's oil and gas reserve quantities, product prices and fluctuations
in the depletable cost basis of oil and gas properties.
RESULTS OF OPERATIONS: OTHER INCOME (EXPENSE)
General and administrative expense increased 19% ($107,000) and 24%
($245,000) in the quarter and six months ended March 31, 1997 as compared to
the same periods in fiscal 1996 primarily as a result of higher legal and
professional fees and the payment of incentive compensation to executive
officers.
Interest expense increased substantially in both the first quarter and
six months ended March 31, 1997 from the similar periods of the prior fiscal
year, reflecting the changes in borrowings to fund the growth of the
Company's asset acquisition and resolution and small ticket leasing
operations. In December 1996, the Company borrowed $13.4 million to fund the
acquisition of a series of mortgage loans on a property located in
Philadelphia, Pennsylvania (see Note 5 to Consolidated Financial Statements).
The Company also borrowed and subsequently repaid $5.0 million to fund the
acquisition of equipment for lease.
The effective tax rate decreased to 23% in the quarter and 22% in the
six months ended March 31, 1997 from 29% in the second quarter and first half
of fiscal 1996. The decrease in fiscal 1997 is the result of the investment
in several real estate partnerships which will generate tax credits and tax-
exempt interest earned on several real estate loans.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are for continued expansion of its
Asset acquisition and resolution and small ticket leasing subsidiaries,
activities that are the core of the Company's growth strategy. The Company
will add to its real estate loan portfolio as, and when, economically
attractive opportunities become available and, further, expects substantial
ongoing growth in its small ticket leasing activities. In energy, while
the Company does not envision substantial cash needs, it will seek to add to
its reserve base through selected acquisition of producing properties and
further development of its mineral interests.
The Company has been able to finance each of these activities through a
variety of sources including internally generated funds, borrowings and
financings through the placement of notes and sale of equity. The Company
expects to finance its future activities in a similar manner and is exploring
several alternative public and/or private financings that would provide it
with a significant increase in liquidity and capital to permit additional
growth.
Sources and (uses) of cash for the three months ended March 31, 1997 and
1996 are as follows:
Six Months
Ended March 31,
--------------------------
1997 1996
---------- -----------
(in thousands of dollars)
Provided by operations $ 2,137 $ 1,231
Used in investing activities (33,178) (885)
Provided by (used in) financing activities 32,671 (426)
---------- -----------
$ 1,630 $ (80)
========== ===========
The Company had $5.8 million in cash and cash equivalents on hand at
March 31, 1997, a compared to $4.2 million at September 30, 1996. The
Company's ratio of current assets to current liabilities was 2.8:1 at March
31, 1997 and 3.7:1 on September 30, 1996. Working capital at March 31, 1997
was $4.9 million as compared to $4.4 million at September 30, 1996.
Cash provided by operating activities in the first six months of fiscal
1997 increased $905,000, as compared to the first six months of fiscal 1996.
The fiscal 1997 increase was primarily the result of an increase in operating
income in the asset acquisition and resolution business segment.
18
<PAGE 19>
The Company's cash used in investing activities increased $32.3 million
in the first six months of fiscal 1997, as compared to the first six months
of fiscal 1996. The increase resulted primarily from an increase in the
amount of cash used to fund asset acquisition and resolution and small ticket
leasing activities. The Company invested $29.4 million and $10.8 million in
the acquisition of five loans and six loans in the first half of fiscal years
1997 and 1996, respectively. In addition, the Company advanced funds on
existing loans of $1.0 million in both the first half of fiscal years 1997
and 1996. Cost of equipment acquired for lease represents the equipment cost
and initial direct costs associated with small ticket leasing operations.
The Company commenced leasing operations for its own account in June 1996 and
began to write leases in August 1996. Proceeds received upon refinancings or
the sale of participations amounted to $2.4 million and $10.9 million in the
first half of fiscal years 1997 and 1996, respectively. These proceeds
reflect the refinancing or sale of participations in two and four loans,
respectively, of which gains were recognized on one and three of these loans
in the first quarter of fiscal 1997 and 1996, respectively. Proceeds
received upon the sale of lease equipment receivables totaled $5.8 million in
the six months ended March 31, 1997. Increase in other assets represents the
investment of $2.0 million in several real estate partnerships, some of which
will generate tax credits.
The Company's cash flow provided by financing activities increased $33.1
million during the first half of fiscal 1997, as compared to the first half
of fiscal 1996. In December 1996, the Company entered into a secured
revolving/term credit facility with a maximum credit limit of $20 million.
During the first half of fiscal 1997 the Company borrowed and subsequently
repaid $5.0 million under this line of credit agreement. In November 1996,
the Company completed a public offering of shares of its common stock and
received net proceeds (after all underwriting expenses) of $19.6 million.
During the first quarter of fiscal 1997, the Company also borrowed $13.4
million to fund the acquisition of a mortgage loan on a property located in
Philadelphia, Pennsylvania. As discussed in Note 5, the Company also
refinanced an unsecured loan with a principal balance of approximately
$530,000 with the proceeds of an unsecured loan with a principal balance of
$700,000.
19
<PAGE 20>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
10.35 Employment Agreement, dated March 11, 1997, between Registrant
and Edward E. Cohen
10.36 Employment Agreement, dated April 9, 1997, between Fidelity
Mortgage Funding, Inc. and Daniel G. Cohen and Registrant
10.37 Grant of Incentive Stock Option Pursuant to Fidelity Mortgage
Funding, Inc. 1997 Key Employee Stock Option Plan, dated April 9,
1997, between Daniel G. Cohen and Fidelity Mortgage Funding, Inc.
11 Calculation of Primary and Fully Diluted Earnings per share.
27 Financial Data Schedule
b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March
31, 1997.
20
<PAGE 21>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESOURCE AMERICA, INC.
(Registrant)
Date May 14, 1997 By /s/ Michael L. Staines
------------------------------- ---------------------------------
Michael L. Staines
Senior Vice President and
Secretary
Date May 14, 1997 By /s/ Nancy J. McGurk
------------------------------- ----------------------------------
Nancy J. McGurk
Vice President - Finance and
Treasurer
21