SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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
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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)
(215) 546-5005
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of outstanding shares of each of the issuer's classes of
common stock, as of the latest practicable date:
17,488,000 Shares August 10, 2001
RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2001 (Unaudited)
and September 30, 2000..........................................3
Consolidated Statements of Income (Unaudited)
Three Months and Nine Months Ended June 30, 2001 and 2000.......4
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months and Nine Months Ended June 30, 2001 and 2000.......5
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
Nine Months Ended June 30, 2001.................................6
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended June 30, 2001 and 2000........................7
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2001...................................................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................26
SIGNATURES....................................................................27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESOURCE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, September 30,
2001 2000
---------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 53,768 $ 117,107
Accounts and notes receivable........................................................ 10,175 8,643
Prepaid expenses..................................................................... 941 2,531
----------- -----------
Total current assets............................................................. 64,884 128,281
Investments in real estate loans (less allowance for possible losses of $2,379 and $2,013) 188,360 183,927
Investments in real estate ventures..................................................... 16,965 17,723
Investment in RAIT Investment Trust..................................................... 19,777 10,533
Property and equipment:
Oil and gas properties and equipment (successful efforts)............................ 101,383 86,028
Gas gathering and transmission facilities............................................ 23,364 18,775
Other................................................................................ 7,015 7,037
----------- -----------
131,762 111,840
Less - accumulated depreciation, depletion and amortization............................. (32,587) (26,977)
------------ -----------
Net property and equipment........................................................... 99,175 84,863
Goodwill (less accumulated amortization of $3,648 and $2,612)........................... 31,914 28,484
Other assets (less accumulated amortization of $7,021 and $6,029)....................... 43,044 47,306
----------- -----------
Total assets..................................................................... $ 464,119 $ 501,117
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................................... $ 6,986 $ 7,250
Accounts payable..................................................................... 10,379 5,625
Accrued interest..................................................................... 4,269 1,966
Accrued liabilities.................................................................. 5,354 17,205
Estimated income taxes............................................................... 1,500 7,470
Billings in excess of costs on completed contracts................................... 13,123 12,213
----------- -----------
Total current liabilities........................................................ 41,611 51,729
Long-term debt:
Senior............................................................................... 73,311 80,391
Non-recourse......................................................................... 65,508 42,040
Other................................................................................ 5,144 5,251
----------- -----------
143,963 127,682
Deferred revenue and other liabilities.................................................. 1,905 3,004
Deferred income taxes................................................................... 19,154 19,567
Minority interest in Atlas Pipeline Partners, L.P....................................... 20,695 17,920
Commitments and contingencies........................................................... - -
Stockholders' equity:
Preferred stock, $1.00 par value: 1,000,000 authorized shares ...................... - -
Common stock, $.01 par value: 49,000,000 authorized shares........................... 249 246
Additional paid-in capital........................................................... 223,735 221,361
Less treasury stock, at cost......................................................... (73,686) (15,778)
Less loan receivable from Employee Stock Ownership Plan ("ESOP")..................... (1,337) (1,393)
Accumulated other comprehensive income (loss)........................................ 1,899 (974)
Retained earnings.................................................................... 85,931 77,753
----------- -----------
Total stockholders' equity....................................................... 236,791 281,215
----------- -----------
Total liabilities and stockholders' equity....................................... $ 464,119 $ 501,117
=========== ===========
See accompanying notes to consolidated financial statements
3
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ------------------------
2001 2000 2001 2000
---------- ----------- ----------- ----------
(in thousands, except per share data)
REVENUES
Energy................................................................. $ 22,618 $ 16,564 $ 73,055 $ 55,821
Real estate finance.................................................... 3,971 3,914 12,262 14,328
Interest and other..................................................... 1,049 2,533 4,252 7,112
--------- --------- --------- --------
27,638 23,011 89,569 77,261
COSTS AND EXPENSES
Energy................................................................. 14,398 11,193 44,291 39,549
Real estate finance.................................................... 408 628 1,169 2,083
General and administrative............................................. 1,620 1,890 4,162 5,735
Depreciation, depletion and amortization............................... 2,884 2,866 8,099 7,965
Interest............................................................... 3,601 4,557 11,292 13,767
Provision for possible losses.......................................... 150 150 806 450
Minority interest in Atlas Pipeline Partners, L.P...................... 895 770 3,505 1,130
Equity in loss of unconsolidated affiliate............................. 239 - 1,199 -
--------- --------- --------- --------
24,195 22,054 74,523 70,679
--------- --------- --------- --------
Income from continuing operations before income taxes.................. 3,443 957 15,046 6,582
Provision for income taxes............................................. 1,206 241 5,267 2,040
--------- --------- --------- --------
Income from continuing operations before extraordinary item............ 2,237 716 9,779 4,542
Discontinued operations:
Income from operations of subsidiary, net of taxes.................. - - - 453
Net gain on disposal of subsidiaries, net of taxes.................. - 552 - 8
--------- --------- --------- --------
2,237 1,268 9,779 5,003
Extraordinary item, net of taxes of $(6), $93 and $93.................. (6) - 173 197
--------- --------- --------- --------
Net income............................................................. $ 2,231 $ 1,268 $ 9,952 $ 5,200
========= ========= ========= ========
Net income per common share - basic:
From continuing operations.......................................... $ .13 $ .03 $ .54 $ .19
Discontinued operations............................................. - .02 - .02
Extraordinary item.................................................. - - .01 .01
--------- --------- --------- --------
Net income per common share - basic.................................... $ .13 $ .05 $ .55 $ .22
========= ========= ========= ========
Weighted average common shares outstanding............................. 17,483 23,395 18,126 23,364
========= ========= ========= ========
Net income per common share - diluted:
From continuing operations.......................................... $ .12 $ .03 $ .52 $ .19
Discontinued operations............................................. - .02 - .02
Extraordinary item.................................................. - - .01 .01
--------- --------- --------- --------
Net income per common share - diluted.................................. $ .12 $ .05 $ .53 $ .22
========= ========= ========= ========
Weighted average common shares......................................... 18,076 23,821 18,610 23,793
========= ========= ========= ========
See accompanying notes to consolidated financial statements
4
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ------------------------
2001 2000 2001 2000
---------- ----------- ----------- ----------
(in thousands)
Net income............................................................. $ 2,231 $ 1,268 $ 9,952 $ 5,200
Other comprehensive income (loss):
Unrealized gain (loss) on investment in RAIT Investment Trust....... 3,146 209 4,353 (104)
Tax effect.......................................................... (1,068) (71) (1,480) 32
--------- --------- --------- --------
2,078 138 2,873 (72)
--------- --------- --------- --------
Comprehensive income................................................... $ 4,309 $ 1,406 $ 12,825 $ 5,128
========= ========= ========= ========
See accompanying notes to consolidated financial statements
5
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 2001
(Unaudited)
(in thousands, except share data)
Common stock Additional Treasury Stock
--------------------------- Paid-In --------------------------
Shares Amount Capital Shares Amount
-------------------------------------------------------------------
Balance, October 1, 2000.................. 24,621,962 $ 246 $ 221,361 (1,029,982) $ (15,778)
Treasury shares issued.................... (329) 30,988 651
Issuance of common stock.................. 300,041 3 2,703
Cancellation of shares issued............. (153,526) (1,305)
Purchase of shares for treasury........... (6,296,521) (57,254)
Other comprehensive income................
Cash dividends ($.099 per share)..........
Repayment of ESOP loan....................
Net income................................
------------ --------- ---------- ---------- -----------
Balance, June 30, 2001.................... 24,922,003 $ 249 $ 223,735 (7,449,041) ($ 73,686)
============ ========= ========== ========== ===========
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 2001
(Unaudited)
(in thousands, except share data)
Accumulated
ESOP Other Totals
Stockholders' Comprehensive Retained Stockholders'
Receivable Income (Loss) Earnings Equity
-------------------------------------------------------------
Balance, October 1, 2000.................. $ (1,393) $ (974) $ 77,753 $ 281,215
Treasury shares issued.................... 322
Issuance of common stock.................. 2,706
Cancellation of shares issued............. (1,305)
Purchase of shares for treasury........... (57,254)
Other comprehensive income................ 2,873 2,873
Cash dividends ($.099 per share).......... (1,774) (1,774)
Repayment of ESOP loan.................... 56 56
Net income................................ 9,952 9,952
--------- ------------ --------- -----------
Balance, June 30, 2001.................... ($ 1,337) $ 1,899 $ 85,931 $ 236,791
========= ============ ========== ===========
See accompanying notes to consolidated financial statements
6
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended June 30,
------------------------------
2001 2000
----------- -----------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................ $ 9,952 $ 5,200
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization............................................... 8,099 7,965
Amortization of discount on senior debt and deferred finance costs..................... 770 841
Provision for possible losses.......................................................... 806 450
Equity in loss of unconsolidated subsidiary............................................ 1,199 -
Minority interest in Atlas Pipeline Partners, L.P...................................... 3,505 1,130
Gain on disposal of subsidiary......................................................... - (453)
Income from operations of discontinued subsidiary...................................... - (8)
Gain on asset dispositions............................................................. (736) (1,594)
Property impairments and abandonments.................................................. 201 627
Deferred income taxes.................................................................. (413) (7,100)
Accretion of discount.................................................................. (4,579) (3,995)
Collection of interest................................................................. 1,330 4,570
Extraordinary gain on debt extinguishment.............................................. (173) (197)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable and other assets............................ 602 (1,174)
(Decrease) increase in accounts payable and other liabilities.......................... (8,573) 2,232
----------- -----------
Net cash provided by operating activities of continuing operations........................ 11,990 8,494
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................................... (9,988) (8,997)
Asset acquisitions........................................................................ (6,500) -
Principal payments on notes receivable.................................................... 4,063 71,799
Proceeds from sale of assets.............................................................. 22,333 788
Increase in other assets.................................................................. (9,359) (4,837)
Investments in real estate loans and ventures............................................. (23,408) (2,540)
Net change in net assets of discontinued operations....................................... - (17,424)
Decrease in other liabilities............................................................. (80) (279)
----------- -----------
Net cash (used in) provided by investing activities of continuing operations.............. (22,939) 38,510
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings................................................................................ 84,778 76,657
Principal payments on borrowings.......................................................... (78,219) (146,739)
Dividends paid............................................................................ (1,774) (2,338)
Net proceeds from Atlas Pipeline Partners, L.P. public offering .......................... - 14,042
Treasury stock purchased.................................................................. (57,254) (172)
Increase (decrease) in restricted cash.................................................... (53) 32
Repayment of ESOP loan.................................................................... 32 56
Decrease in other assets.................................................................. (290) (82)
Proceeds from issuance of stock........................................................... 390 725
----------- -----------
Net cash used in financing activities of continuing operations............................ (52,390) (57,819)
----------- -----------
Net cash used in discontinued operations.................................................. - (10,467)
----------- -----------
Decrease in cash and cash equivalents..................................................... (63,339) (21,282)
Cash and cash equivalents at beginning of period.......................................... 117,107 42,643
----------- -----------
Cash and cash equivalents at end of period................................................ $ 53,768 $ 21,361
=========== ===========
See accompanying notes to consolidated financial statements
7
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited)
NOTE 1 - Management's Opinion Regarding Interim Financial Statements
These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP") for interim financial information and the instructions to
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by US GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation have been
reflected in these consolidated financial statements. Operating results for the
three months ended and nine months ended June 30, 2001 are not necessarily
indicative of the results that may be expected for the year ending September 30,
2001. Certain reclassifications have been made in the fiscal 2000 consolidated
financial statements to conform to the fiscal 2001 presentation. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2000.
NOTE 2 - Summary of Significant Accounting Policies
Other Assets
Other assets consist of the following:
June 30, September 30,
2001 2000
---------------- -------------
(Unaudited)
(in thousands)
Contracts acquired (including syndication network), net......................... $ 17,235 $ 17,378
Deferred financing costs........................................................ 1,794 2,533
Investments..................................................................... 6,145 6,930
Note and escrow received upon disposal of subsidiary
(net of allowance for possible losses of $5,799 and $8,944).................. 12,521 16,080
Other (net of allowance for possible losses of $677 and $500)................... 5,349 4,385
------------ ----------
$ 43,044 $ 47,306
============ ==========
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating the fair value of each class of financial instruments for which it is
practicable to estimate fair value.
For cash and cash equivalents, receivables and payables, the carrying
amounts approximate fair value because of the short maturity of these
instruments.
For investments in real estate loans, because each loan is a unique
transaction involving a discrete property, it is impractical to determine their
fair values. However, the Company believes the carrying amounts of the loans are
reasonable estimates of their fair value considering the nature of the loans and
the estimated yield relative to the risks involved.
8
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2001
(Unaudited)
NOTE 2 - Summary of Significant Accounting Policies - (Continued)
The following table provides information for financial instruments as
of June 30, 2001:
Carrying Estimated
Amount Fair Value
----------- ----------
(in thousands)
Energy debt.......................................................................... $ 37,855 $ 37,840
Real estate finance debt............................................................. 34,654 34,654
Senior debt.......................................................................... 73,311 71,845
Other debt........................................................................... 5,129 5,144
----------- -----------
$ 150,949 $ 149,483
=========== ===========
Earnings Per Share
The following table presents a reconciliation of the components used in
the comparison of net income per common share-basic and net income per common
share-diluted for the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(in thousands)
Income from continuing operations before
extraordinary item..................................... $ 2,237 $ 716 $ 9,779 $ 4,542
Gain from discontinued operations......................... - 552 - 461
Extraordinary (loss) gain on early extinguishment
of debt, net of taxes................................. (6) - 173 197
------------ ----------- ----------- -----------
Net income........................................... $ 2,231 $ 1,268 $ 9,952 $ 5,200
=========== =========== =========== ===========
Basic average shares of common stock outstanding.......... 17,483 23,395 18,126 23,364
Dilutive effect of stock option and award plans........... 593 426 484 429
----------- ----------- ----------- -----------
Dilutive average shares of common stock................... 18,076 23,821 18,610 23,793
=========== =========== =========== ===========
New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement
No. 141 (SFAS 141), "Business Combinations" and Statement No. 142 (SFAS 142),
"Goodwill and Other Intangible Assets." SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for under the
purchase method of accounting. SFAS 142 is effective for fiscal years beginning
after December 15, 2001; however, certain provisions of this statement apply to
goodwill and other intangible assets acquired between July 1, 2001 and the
effective date of SFAS 142. SFAS 142 requires that goodwill and other purchased
intangible assets no longer be amortized to earnings, but instead be reviewed
for impairment. Earlier adoption of SFAS 142 is permitted and the Company has
elected to adopt the provisions of SFAS 142 as of October 1, 2001.
The Company will continue to amortize goodwill and other intangible
assets recognized prior to July 1, 2001 under its current method until October
1, 2001, at which time the annual amortization of goodwill and other intangible
assets of approximately $2.8 million will no longer be recognized. By October 1,
2001, the Company will have completed a transitional fair value-based impairment
test of goodwill and other intangible assets. Impairment losses, if any,
resulting from the transitional test will be recognized in the quarter ending
December 31, 2001 as a cumulative effect of a change in accounting principle.
9
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2001
(Unaudited)
NOTE 3 - Cash Flow Statements
Supplemental disclosure of cash flow information:
Nine Months Ended
-----------------------------
June 30,
-----------------------------
2001 2000
----------- -----------
(in thousands)
Cash paid during the period for:
Interest........................................................................... $ 8,219 $ 10,984
Income taxes....................................................................... $ 11,724 $ 6,521
Nine Months Ended
-----------------------------
June 30,
-----------------------------
2001 2000
----------- -----------
(in thousands)
Non-cash activities include the following:
Cancellation of shares issued in contingency settlement............................ $ 1,305 $ -
Shares issued in contingency settlement............................................ $ (2,089) $ -
Atlas Pipeline units issued in exchange for gas gathering and transmission
facilities....................................................................... $ (2,250) $ -
Buyer's assumption of liabilities upon sale of loan................................ $ 460 $ -
Detail of asset acquisitions:
Fair value of assets acquired...................................................... $ 9,180 $ -
Atlas Pipeline units issued in exchange for gas gathering and transmission
facilities....................................................................... (2,250) -
Liabilities assumed................................................................ (430) -
----------- -----------
Net cash paid.................................................................... $ 6,500 $ -
=========== ===========
NOTE 4 - Investments in Real Estate Loans
The Company has primarily focused its real estate activities on
managing its existing real estate loan portfolio. These real estate loans
generally were acquired at discounts from both their face value and the
appraised value of the properties underlying the loans. Cash received by the
Company for payment on each real estate loan is allocated between principal and
interest. The Company also records as income the accretion of a portion of the
difference between its cost basis in a real estate loan and the sum of projected
cash flows therefrom. This accretion of discount amounted to $1.4 million and
$1.5 million during the three months ended June 30, 2001 and 2000, respectively,
and $4.6 million and $4.0 million during the nine months ended June 30, 2001 and
2000, respectively. As the Company sells senior lien interests or receives funds
from refinancings of such loans by the borrower, a portion of the cash received
is employed to reduce the cumulative accretion of discount included in the
carrying value of the Company's investments in real estate loans.
10
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2001
(Unaudited)
NOTE 4 - Investments in Real Estate Loans - (Continued)
At June 30, 2001, the Company held real estate loans having an
aggregate face value of $622.4 million, which were being carried at aggregate
cost of $188.4 million, including cumulative accretion. The following is a
summary of the changes in the carrying value of the Company's investments in
real estate loans for the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(in thousands)
Balance, beginning of period.............................. $ 189,335 $ 183,599 $ 183,927 $ 250,231
Additions to existing loans............................... 10 928 23,408 2,822
Provision for possible losses............................. (150) (150) (450) (450)
Accretion of discount (net of collection of interest)..... 1,427 1,507 4,579 3,995
Collection of principal................................... (75) (2,576) (1,063) (62,079)
Cost of loans sold........................................ (2,187) (1,652) (22,041) (12,863)
----------- ---------- ----------- -----------
Balance, end of period.................................... $ 188,360 $ 181,656 $ 188,360 $ 181,656
=========== ========== =========== ===========
The following is a summary of activity in the Company's allowance for
possible losses related to real estate loans for the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(in thousands)
Balance, beginning of period.............................. $ 2,229 $ 1,705 $ 2,013 $ 1,405
Provision for possible losses............................. 150 150 450 450
Write-down................................................ - - (84) -
----------- ----------- ----------- -----------
Balance, end of period.................................... $ 2,379 $ 1,855 $ 2,379 $ 1,855
=========== =========== =========== ===========
11
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2001
(Unaudited)
NOTE 5 - Debt
Total debt consists of the following:
June 30, September 30,
2001 2000
-------------- ----------------
(in thousands)
Senior debt..................................................................... $ 73,311 $ 80,391
Non-recourse debt:
Energy:
Revolving and term bank loans.............................................. 37,855 23,165
Real estate finance:
Revolving credit facilities................................................ 18,000 18,000
Other...................................................................... 875 875
------------ -------------
Total non-recourse debt.................................................... 56,730 42,040
Other debt...................................................................... 20,908 12,501
------------ -------------
150,949 134,932
Less current maturities......................................................... 6,986 7,250
------------ -------------
$ 143,963 $ 127,682
============= =============
NOTE 6 - Derivative Instruments and Hedging Activities
The Company, through its energy subsidiaries, from time to time enters
into natural gas futures and option contracts to hedge its exposure to changes
in natural gas prices. At any point in time, such contracts may include
regulated New York Mercantile Exchange ("NYMEX") futures and options contracts
and non-regulated over-the-counter futures contracts with qualified
counter-parties. NYMEX contracts are generally settled with offsetting
positions, but may be settled by delivery of natural gas.
Effective October 1, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (as amended by SFAS 138). This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. The statement requires that all derivative financial instruments be
recognized in the financial statements as either assets or liabilities measured
at fair value. Changes in the fair value of derivative financial instruments are
recognized in income or other comprehensive income, depending on their
classification.
On the date a contract is entered into, the Company designates the
derivative as a cash flow hedge or a fair value hedge. The change in fair value
of those contracts that qualify as effective cash flow hedges under SFAS 133 is
recorded in other comprehensive income and subsequently recognized as income in
the month the gas being hedged is sold. During the nine months ended June 30,
2001, the Company experienced hedging losses totaling approximately
$829,000. As of June 30, 2001, the Company had no open futures or option
contracts.
12
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2001
(Unaudited)
NOTE 7- Discontinued Operations
In August 2000, the Company sold its small ticket equipment leasing
business, Fidelity Leasing, Inc. ("FLI"). Accordingly, FLI is reported as a
discontinued operation for the three months and nine months ended June 30, 2000.
Summarized operating results of the discontinued FLI operation are as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(in thousands)
Net revenues.............................................. $ - $ - $ - $ 29,552
=========== =========== =========== ===========
Income from discontinued operations
(net of income taxes of $322)......................... $ - $ - $ - $ 453
=========== =========== =========== ===========
Gain on disposal of discontinued operations
(net of income taxes of $374).......................... $ - $ 605 $ - $ 605
=========== =========== =========== ===========
In November 2000, the Company disposed of Fidelity Mortgage Funding,
Inc. ("FMF"), its residential mortgage lending business. Accordingly, FMF is
reported as a discontinued operation for the three months and nine months ended
June 30, 2000. Summarized operating results of the discontinued FMF operation
are as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(in thousands)
Loss on disposal of discontinued operations
(net of income taxes of $22 and $309).................. $ - $ (53) $ - $ (597)
=========== =========== =========== ===========
13
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2001
(Unaudited)
NOTE 8 - Operating Segment and Major Customer Information
The operating segments reported below are the segments of the Company
for which separate financial information is available and for which segment
operating income or loss amounts are evaluated regularly by management in
deciding how to allocate resources and in assessing performance.
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(in thousands)
Revenues:
Energy................................................. $ 22,618 $ 16,564 $ 73,055 $ 55,821
Intersegment......................................... 36 - 86 -
---------- ----------- ----------- -----------
22,654 16,564 73,141 55,821
Real estate finance.................................... 3,971 3,914 12,262 14,328
Corporate.............................................. 1,049 2,533 4,252 7,112
Intersegment......................................... (36) - (86) -
---------- ----------- ----------- -----------
1,013 2,533 4,166 7,112
---------- ----------- ----------- -----------
$ 27,638 $ 23,011 $ 89,569 $ 77,261
========== =========== =========== ===========
Operating profit (loss):
Energy................................................. $ 3,457 $ 932 $ 15,014 $ 5,462
Real estate finance.................................... 1,465 2,596 5,376 10,249
Corporate.............................................. (1,479) (2,571) (5,344) (9,129)
---------- ----------- ------------ -----------
$ 3,443 $ 957 $ 15,046 $ 6,582
========== =========== =========== ===========
June 30, September 30,
2001 2000
----------- ---------------
(Unaudited)
(in thousands)
Identifiable assets:
Energy............................................................................. $ 159,349 $ 147,775
Real estate finance................................................................ 206,224 202,335
Corporate.......................................................................... 98,546 151,007
----------- -----------
$ 464,119 $ 501,117
=========== ===========
Operating profit (loss) represents total revenues less costs
attributable thereto, including interest expense, provision for possible losses,
and, with respect to energy and real estate finance, general and administrative
expenses and depreciation, depletion and amortization.
The Company markets its production on a competitive basis. Gas is sold
under various types of contracts ranging from life-of-the-well to short-term
contracts. The Company is party to a ten-year agreement to sell the majority of
its existing and future production to First Energy Services Inc. (FES).
Approximately 70% of the Company's current production is dedicated to the
performance of this agreement for the 12-month period ending March 31, 2002.
Payments from FES are guaranteed by its parent, First Energy Corporation, a
publicly-traded company (NYSE: FE).
14
The Company anticipates that it will negotiate mutually agreeable
pricing terms for subsequent 12-month periods pursuant to the aforementioned
agreement with FES. Management believes that the loss of any one customer would
not have a material adverse as our production volumes could readily be absorbed
by other purchasers.
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 2000. 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 Third Quarter of Fiscal 2001
Our operating results and financial condition for the third quarter of
fiscal 2001 reflect the further expansion of our energy operations, continuing a
trend which began with the acquisition of The Atlas Group (now Atlas America) at
the end of fiscal 1998 and continuing with the acquisition of Viking Resources
at the end of fiscal 1999 and certain energy assets of Kingston Oil Corporation
and American Exploration Company in the second quarter of fiscal 2001. The
expansion of our energy operations is shown in the following tables:
Revenues as a Percent of Total Revenues(1)
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Energy ..................................................... 82% 72% 82% 72%
Real estate finance......................................... 14% 17% 14% 19%
Assets as a Percent of Total Assets(2)
June 30, September 30,
2001 2000
---------------- ---------------
Energy(3)............................................................................. 34% 29%
Real estate finance................................................................... 44% 40%
(1) The balance (4% and 11%, and 4% and 9%, for the three and nine months ended
June 30, 2001 and 2000, respectively) is attributable to revenues derived
from corporate assets not allocated to a specific industry segment,
including cash and the common shares held in RAIT Investment Trust.
(2) The balance (22% and 31% at June 30, 2001 and September 30, 2000,
respectively) is attributable to corporate assets not attributable to a
specific industry segment, as referred to in (1), above.
(3) Energy assets expressed as a percent of total assets, excluding cash, were
39% and 38% at June 30, 2001 and September 30, 2000, respectively.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Unaudited) (Continued)
Results of Operations: Energy
The following tables set forth information relating to revenues
recognized and costs and expenses incurred, daily production volumes, average
sales prices and production cost per equivalent unit in our energy operations
during the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(in thousands, except
sales price and production cost data)
Revenues:
Production............................................ $ 10,078 $ 6,342 $ 29,456 $ 17,069
Well drilling......................................... 8,905 6,921 32,389 28,463
Well services......................................... 2,115 2,018 6,928 6,693
Transportation........................................ 1,520 1,283 4,282 3,596
----------- ----------- ----------- -----------
$ 22,618 $ 16,564 $ 73,055 $ 55,821
=========== =========== =========== ===========
Costs and expenses:
Production............................................ $ 1,743 $ 1,452 $ 4,957 $ 5,166
Exploration........................................... 644 240 1,203 874
Well drilling......................................... 7,718 5,485 26,646 23,176
Well services......................................... 989 699 2,963 3,079
Transportation........................................ 396 512 1,224 975
Non-direct............................................ 2,908 2,805 7,298 6,279
----------- ----------- ----------- -----------
$ 14,398 $ 11,193 $ 44,291 $ 39,549
=========== =========== =========== ===========
Production revenues(1):
Gas................................................... $ 8,784 $ 4,672 $ 25,669 $ 13,438
Oil................................................... $ 1,187 $ 1,593 $ 3,586 $ 3,511
Production volumes:
Gas (thousand cubic feet ("mcf")/day) (1)............. 19,521 15,401 17,944 16,701
Oil (barrels ("bbls")/day)............................ 574 617 507 547
Average sales price:
Gas (per mcf)......................................... $ 4.94 $ 3.33 $ 5.24 $ 2.94
Oil (per bbl)......................................... $ 22.71 $ 28.35 $ 25.92 $ 23.42
Average production cost:
(per mcf equivalent unit)............................. $ .83 $ .83 $ .86 $ .94
- ----------
(1) Excludes sales of residual gas and sales to landowners.
Our natural gas revenues were $8.8 million and $25.7 million in the
three month and nine month periods ended June 30, 2001, an increase of $4.1
million (88%) and $12.2 million (91%) from $4.7 million and $13.4 million in the
three month and nine month periods ended June 30, 2000. The increases were due
to increases in the average sales price of natural gas of 48% and 78% for the
three month and nine month periods ended June 30, 2001, respectively, and
increases in the volume of natural gas we produced of 27% and 7% in the three
month and nine month periods ended June 30, 2001, respectively. Our oil revenues
were $1.2 million and $3.6 million in the three month and nine month periods
ended June 30, 2001, a decrease of $406,000 (25%) and an increase of $75,000
(2%) from $1.6 million and $3.5 million in the three month and nine month
periods ended June 30, 2000. In the three months ended June 30, 2001 the average
sales price of oil decreased 20% while the average daily production decreased
7%. In the nine months ended June 30, 2001 oil volumes decreased 7% while
average sales prices increased 11%.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Continued)
Results of Operations: Energy (Continued)
Our production costs increased $291,000 (20%) and decreased $209,000
(4%) to $1.7 million and $5.0 million in the three month and nine month periods
ended June 30, 2001, as compared to the same periods in the prior fiscal year.
The increase for the three months ended June 30, 2001 as compared to the three
months ended June 30, 2000 resulted from an increase in gas production volumes.
The average production cost was unchanged at $.83 per mcf. The decrease for the
nine months ended June 30, 2001 as compared to the nine months ended June 30,
2000 reflects efficiencies we realized through our consolidation of field
operations subsequent to various acquisitions.
Our exploration costs were $644,000 and $1.2 million in the three month
and nine month periods ended June 30, 2001, an increase of $404,000 (168%) and
$329,000 (38%) from the three month and nine month periods ended June 30, 2000.
These increases were due to increased personnel and operating expenses resulting
from our increased drilling activities.
Our well drilling revenues and expenses in the three month and nine
month periods ended June 30, 2001 represent the billings and costs associated
with the completion of 48 and 181 net wells for partnerships sponsored by Atlas
America in the three month and nine month periods ended June 30, 2001 as
compared to 42 and 151 net wells in the three month and nine month periods ended
June 30, 2000, an increase of 6 wells and 30 wells, respectively. Our gross
profit from drilling operations was $1.2 million (a 13% margin) and $5.7 million
(an 18% margin) in the three month and nine month periods ended June 30, 2001 as
compared to $1.4 million (a 21% margin) and $5.3 million (a 19% margin) in the
three month and nine month periods ended June 30, 2000. The decrease in gross
profit for the three months ended June 30, 2001 arose from a decrease in the
average gross profit per well of approximately $9,000 (28%), which decreased
gross profit by $398,000. This decrease was partially offset by an increase in
the number of wells drilled, which increased gross profit by $148,000. The
increase in gross profit for the nine months ended June 30, 2001 arose from an
increase in the number of wells drilled, which increased gross profit by
$952,000, partially offset by a decrease in gross profit per well, which
decreased gross profit by $496,000. The average revenue per well increased
$21,000 and decreased $10,000 during the three months and nine months ended June
30, 2001, respectively, while the average cost per well increased $30,000 and
decreased $6,000 during the three months and nine months ended June 30, 2001,
respectively. Both the revenue and cost per well are affected by changes in oil
and gas prices and competition for services. Demand for drilling equipment and
services has increased in the nine months ended June 30, 2001 as compared to the
same period of the prior year, increasing the cost to us of obtaining
third-party drilling and completion services.
Our well services revenues increased as a result of an increase in the
number of wells we operate. The increase in the number of wells resulted from
new partnership wells drilled during fiscal 2001 and 2000 as discussed above.
This increase was partially offset by a decrease in gas marketing revenues,
associated with reduced activities in this area. Our well service expenses
increased 41% in the three months ended June 30, 2001 and decreased 4% in the
nine months ended June 30, 2001 as compared to the prior year. The increase in
the three months resulted from an increase in labor costs due to the number of
wells we service.
Our transportation revenues, which are derived from our natural gas
transportation agreements with partnerships we sponsor, increased slightly due
to volumes associated with the addition of wells drilled and pipelines acquired.
Our transportation expenses decreased 23% in the three months ended June 30,
2001 and increased 26% in the nine months ended June 30, 2001 as compared to the
prior year. The decrease in the three months ended June 30, 2001 resulted from
the adjustment in the current period of our estimates in prior periods of
certain maintenance costs. The increase in the nine months ended June 30, 2001
resulted from expenses associated with the operations of pipelines acquired,
including additional lease payments on compressors.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Continued)
Results of Operations: Energy (Continued)
Non-direct expenses were $2.9 million and $7.3 million in the three
month and nine month periods ended June 30, 2001, an increase of $103,000 (4%)
and $1.0 million (16%). These expenses include, among other things, non-direct
salaries and benefits, the costs of running the energy corporate office and
outside services. These expenses increased due to the increased operations of
our energy division including costs associated with our public pipeline
subsidiary, Atlas Pipeline.
Amortization of oil and gas properties as a percentage of oil and gas
revenues was 17% and 15% for the three month and nine month periods ended June
30, 2001 compared to 30% and 31% for the three month and nine month periods
ended June 30, 2000. The percentage reduction was directly attributable to
changes in our oil and gas reserve quantities, product prices and fluctuations
in the depletable cost basis of oil and gas.
Results of Operations: Real Estate Finance
The following table sets forth certain information relating to the
revenue recognized and costs and expenses incurred in our real estate finance
operations during the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(in thousands)
Revenues:
Interest received.................................... $ 2,237 $ 2,436 $ 6,916 $ 8,850
Accreted discount.................................... 1,427 1,507 4,579 3,995
Gains on sales of loans and loan payments in
excess of the carrying value of loans.............. 496 349 891 1,414
Net rental and fee income (expense).................. (189) (378) (124) 69
------------ ----------- ------------ -----------
$ 3,971 $ 3,914 $ 12,262 $ 14,328
=========== =========== =========== ===========
Cost and expenses...................................... $ 408 $ 628 $ 1,169 $ 2,083
=========== =========== =========== ===========
Quarter Ended June 30, 2001 as Compared to the Quarter Ended June 30, 2000
Revenues from our real estate finance operations increased $57,000 (1%)
to $4.0 million in the three months ended June 30, 2001 from $3.9 million in the
three months ended June 30, 2000. We attribute the increase to the following:
o A decrease of $279,000 (7%) in interest income resulting from the
following:
- The repayment by a borrower in July 2000 of approximately
$835,000 on one loan, which decreased interest income by
$79,000 in the three months ended June 30, 2001 as compared to
the three months ended June 30, 2000.
- The completion of accretion on six loans, which decreased
interest income by $200,000 in the three months ended June 30,
2001 as compared to the three months ended June 30, 2000.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Continued)
Results of Operations: Real Estate Finance (Continued)
o An increase of $147,000 (42%) in gains from sales of loans and loan
payments in excess of carrying value of loans primarily resulting from
the following:
- In June 2001 we sold a loan for $1.6 million in cash, having a book
value of $1.1 million resulting in a gain of $459,000. The loan was
sold to an unrelated individual who borrowed the proceeds from RAIT
Investment Trust.
- In May 2001, we received repayment in full of a loan in the amount of
$2.2 million having a book value of $2.2 million. Our repayment was
part of a transaction in which affiliates of ours arranged new
financing from an independent lender in order to repay the full
balance due to us.
- For the prior year period we sold one loan to RAIT Investment Trust
for $1.9 million in cash, having a book value of $1.6 million
resulting in a gain of $273,000.
- The increase was partially offset by a decrease of $23,000 resulting
from the repayment of a loan in the amount of $110,000, having a book
value of $74,000 resulting in a gain of $36,000 in the three months
ended June 30, 2001 as compared to the repayment of a loan in the
amount of $134,000, having a book value of $75,000 resulting in a gain
of $59,000 in the three months ended June 30, 2000.
o A decrease of $189,000 (50%) in net rental and fee expense resulting
primarily from a one-time fee of $190,000 received in the three months
ended June 30, 2001 from a real estate venture in which we own a 50%
equity interest. No such fee was received in the three months ended June
30, 2000.
Nine Months Ended June 30, 2001 as Compared to the Nine Months Ended June 30,
2000
Revenues decreased $2.1 million (14%) to $12.3 million in the nine
months ended June 30, 2001 from $14.3 million in the nine months ended June 30,
2000. We attribute the decrease to the following:
o A decrease of $1.4 million (11%) in interest income resulting from the
following:
- The repayment of two loans by two borrowers, one in October 1999 and
one in July 2000 of approximately $59.6 million which decreased
interest income by $1.8 million in the nine months ended June 30, 2001
as compared to the nine months ended June 30, 2000.
- The sale of three loans, one in December 1999, one in June 2000 and
one in March 2001, which decreased interest income by $893,000 in the
nine months ended June 30, 2001 as compared to the nine months ended
June 30, 2000.
- The completion of accretion of discount with respect to ten loans,
which decreased interest income by $838,000 in the nine months ended
June 30, 2001 as compared to the nine months ended June 30, 2000.
- These decreases were partially offset by an increase of $2.1 million
in accretion of discount on nine loans in the nine months ended June
30, 2001 as compared to the nine months ended June 30, 2000.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Continued)
Results of Operations: Real Estate Finance (Continued)
o A decrease of $523,000 (37%) in gains from sales of loan and loan
payments in excess of carrying value of loans primarily resulting from
the following:
- The sale of three loans having book values totalling $22.1 million in
the nine months ended June 30, 2001 for $22.9 million in cash
resulting in gains of $795,000 as compared to the sale of three loans
in the nine months ended June 30, 2000, of three loans having book
values of $11.1 million for $12.4 million in cash resulting in gains
of $1.3 million.
- The repayment in the nine months ended June 30, 2001 of two loans for
$225,000, having book values of $134,000 resulting in gains of $91,000
as compared to the repayment in the nine months ended June 30, 2000 of
three loans for $323,000 having a book value of $196,000, resulting
gains of $127,000 in the nine months ended June 30, 2000.
o An decrease of $193,000 (280%) in net rental and fee income (expense)
resulting primarily from an increase of $316,000 from a non-cash loss on
one real estate venture. This loss was attributable to depreciation and
other non-cash charges on an equity method investment. This loss was
partially offset by a one-time service fee of $190,000 received in the
nine months ended June 30, 2001 from a real estate venture in which we own
a 50% equity interest. No such fee was received in the nine months ended
June 30, 2000.
Gains on the sale of loans and senior lien interests in loans (if any)
and the amount of fees received (if any) vary from transaction to transaction
and there may be significant variations in our gain on sale and fee income from
period to period.
Costs and expenses of our real estate finance operations were $408,000
and $1.2 million in the three months and nine months ended June 30, 2001, a
decrease of $220,000 (35%) and $914,000 (44%) from $628,000 and $2.1 million in
the same periods of the prior fiscal year. The decrease was primarily a result
of a reduction in staff resulting from our determination in fiscal 2000 to
concentrate our real estate activities on managing our existing loan portfolio.
Results of Operations: Other Revenues, Costs and Expenses
Our interest and other income was $1.0 million and $4.3 million in the
three months and nine months ended June 30, 2001, a decrease of $1.5 million
(59%) and $2.9 million (40%) as compared to $2.5 million and $7.1 million during
the three months and nine months ended June 30, 2000. The decrease in the three
months and nine months ended June 30, 2001 as compared to the three months and
nine months ended June 30, 2000 primarily resulted from $2.3 million and $5.6
million in interest recorded in the three months and nine months ended June 30,
2000 on advances we made to our discontinued equipment leasing subsidiary. No
such interest income was recorded in the three and nine months ended June 30,
2001 since the subsidiary was sold on August 1, 2000 and the advances were
repaid. The decrease in such interest income was partially offset by an increase
in interest income of $274,000 and $1.8 million in the three months and nine
months ended June 30, 2001 from the temporary investment of cash received from
the sale of the subsidiary.
Our general and administrative expenses decreased $270,000 (14%) to
$1.6 million and $1.6 million (27%) to $4.2 million in the three months and nine
months ended June 30, 2001, from $1.9 million and $5.7 million in the three
month and nine month periods ended June 30, 2000. These decreases primarily
resulted from a reduction in pension expense and salary and benefits. In
addition, we redeployed certain personnel and their related payroll costs to
energy and real estate operations from general and administrative expense.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Continued)
Results of Operations: Other Revenues, Costs and Expenses (Continued)
Our interest expense was $3.6 million and $11.3 million for the three
month and nine month periods ended June 30, 2001, a decrease of $956,000 (21%)
and $2.5 million (18%) from $4.6 million and $13.8 million for the three month
and nine month periods ended June 30, 2000. This decrease primarily resulted
from our repurchase of $25.8 million of our 12% senior notes since June 30,
2000, which reduced interest by $624,000 and $2.1 million for the three month
and nine month periods ended June 30, 2001, respectively. In addition, a
reduction in borrowings and lower rates received by our energy operations on
funds borrowed decreased interest by $332,000 and $604,000 in the three month
and nine month periods ended June 30, 2001, respectively.
The minority interest in Atlas Pipeline is the interest of Atlas
Pipeline's common unitholders. The minority interest arose as a result of the
sale in February 2000 of our natural gas gathering operations to Atlas Pipeline
in connection with Atlas Pipeline's initial public offering. We retained a 53%,
now 52%, interest in Atlas Pipeline after the offering. Because we own more than
50% of Atlas Pipeline, it is included in our consolidated financial statements
and the ownership by the public is shown as a minority interest. The minority
interest in Atlas Pipeline's earnings was $895,000 and $3.5 million for the
three months and nine months ended June 30, 2001 as compared to $770,000 and
$1.1 million for the three month and nine month periods ended June 30, 2000, an
increase of $125,000 (16%) and $2.4 million (210%), respectively. The increase
was the result of an increase in net income of these gas gathering operations as
well as having the year to date fiscal period reflect operations for a full nine
months as compared to the prior fiscal period in which operations commenced on
January 28, 2000.
Our equity in the loss of an unconsolidated affiliate represents our
50% interest in the net loss of Optiron Corporation, an energy technology
company formed in fiscal 2000.
Our provision for possible losses was $806,000 and $450,000 in the nine
months ended June 30, 2001 and 2000, respectively, an increase of $356,000
(79%). This increase resulted from a provision for possible losses against
receivables associated with the Chapter 11 bankruptcy filing of an energy
customer during the current fiscal year.
Our effective tax rate increased to 35% in the nine months ended June
30, 2001 as compared to 31% in the nine months ended June 30, 2000 because the
higher earnings in the nine months ended June 30, 2001 were not accompanied by a
parallel increase in the constant level of tax credits and depletion generation.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Continued)
Liquidity and Capital Resources
Following the sale of our equipment leasing operations in August 2000,
our major sources of liquidity have been the proceeds from that sale, funds
generated by operations, funds raised from investor partnerships relating to our
energy operations, the sale of real estate loans and borrowings under our
existing energy and real estate finance credit facilities. We have employed
these funds principally for the expansion of our energy operations, the
repurchase of our senior notes and common stock and the acquisition of two
senior lien interests in loans in which we held junior positions. The following
table sets forth our sources and uses of cash for the nine months ended June 30,
2001 and 2000:
Nine Months Ended
-----------------------------
June 30,
-----------------------------
2001 2000
----------- -----------
(in thousands)
Provided by operations.......................... $ 11,990 $ 8,494
(Used in) provided by investing activities...... (22,939) 38,510
Used in financing activities.................... (52,390) (57,819)
Used in discontinued operations................. - (10,467)
----------- -----------
$ (63,339) $ (21,282)
=========== ===========
We had $53.8 million in cash and cash equivalents on hand at June 30,
2001, as compared to $117.1 million at September 30, 2000. Our ratio of earnings
to fixed charges was 1.2 to 1.0 in the quarter ended June 30, 2001 as compared
to .4 to 1.0 in the quarter ended June 30, 2000.
Our cash provided by operating activities for the nine months ended
June 30, 2001 increased $3.5 million (41%) as compared to the nine months ended
June 30, 2000. This increase was principally due to the following:
Net income from continuing operations, adjusted for non-cash items,
increased $9.1 million.
o In energy, income increased $9.0 million for the nine months ended
June 30, 2001 compared to June 30, 2000. The increase was primarily
due to increased earnings from our drilling activities and higher
natural gas prices. We drilled an additional 30 net wells compared to
the prior period. Average natural gas prices for the nine months ended
June 30, 2001 were $5.24 per mcf as compared to $2.94 for the prior
period.
o Other non-core business events increased income $7.9 million. This
increase was primarily due to decreased general and administrative and
interest expense. General and administrative expense decreased
primarily as a result of a reduction in pension expense, reduced
salary and benefits and the redeployment of certain personnel and
their related payroll costs to our energy and real estate divisions.
Interest expense decreased primarily as a result of the repurchase of
$25.8 million of our 12% senior notes during the nine months ended
June 30, 2001.
o Interest income decreased $5.4 million. The decrease was primarily due
to reduced interest income from our discontinued small-ticket leasing
subsidiary that we sold in August 2000.
o In real estate, income decreased $2.5 million. The decrease was
primarily due to reduced income related to two loan repayments and the
sale of three other loans during the nine months ending June 30, 2001.
Deferred income taxes decreased $6.7 million as a result of a reduction
in deferred taxes in the prior year due to sale of our pipeline in February
2000.
Changes in operating assets and liabilities decreased cash flow by $9.0
million, primarily due to a $9.6 million payment to retire our 12% senior notes
that was accrued at September 30, 2000. A similar payment was not made for the
nine months ended June 30, 2000.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Continued)
Liquidity and Capital Resources (Continued)
In real estate, collection of interest decreased $3.2 million. This
decrease was primarily due to the repayment of two loans and the sale of three
other loans during the nine months ended June 30, 2001.
Investing activities used cash of $22.9 million in the nine months ended
June 30, 2001 compared to providing $38.5 million in the nine months ended June
30, 2000. This $61.4 million reduction is due primarily to the following:
- In energy, capital expenditures and asset acquisitions increased $7.5
million. This increase was mostly due to the purchase of certain
assets from Kingston Oil Inc. and American Refining and Exploration
Co. and the addition of 30 net wells. In addition, increases in other
assets include $1.2 million in advances to our unconsolidated
subsidiary.
- In real estate, principal payments and proceeds from loan sales
decreased $49.1 million (68%). This was primarily due to the repayment
of a loan associated with a building in which we held a mortgage
during the nine months ended June 30, 2000. Investments in real estate
loans and ventures increased $20.9 million as a result of the purchase
of two loan participations during the nine months ended June 30, 2001.
- The increase in other assets includes the purchase of 370,000 shares
in RAIT Investment Trust for $4.9 million and a final payment of $2.3
million in accordance with the purchase agreement of Viking Resources
Corporation. For the nine months ended June 30, 2000, no transactions
of this nature occurred.
- Net assets of our discontinued operations changed by $17.4 million in
the nine months ended June 30, 2000. Our small ticket equipment
leasing company was sold in August 2000. In addition, principal
payments on notes increased $3.7 million as a result of payments
received on a note issued as part of the August 2000 sale.
- Other assets also decreased cash flow of $1.8 million due to certain
investments made during the nine months ended June 30, 2000.
Cash used in our financing activities decreased $5.4 million (9%) for the
nine months ended June 30, 2001 compared to the nine months ended June 30, 2000.
This was due primarily to the following:
- In real estate, principal payments on borrowings decreased $62.5
million. This was due to the repayment of a loan in the nine months
ended June 30, 2000. No similar repayment occurred in the nine months
ended June 30, 2001.
- In energy, net borrowings for the same period decreased $26.4 million.
This increase was due to additional working capital requirements,
primarily due to our increased drilling activities.
- These decreases in principal payments were offset by a $12.3 million
increase in payments on other debt which includes the retirement of
$17.1 million of our 12% senior notes, $10.0 million of which was
accrued at September 30, 2000.
- Net proceeds from the initial public offering of Atlas Pipeline were
$14.0 million during the nine months ended June 30, 2000.
- Cash used to purchase treasury shares increased $57.1 million as a
result of our Dutch Tender offer which was completed in October 2000.
During the nine months ended June 30, 2001, we invested $10.0 million in
the development of wells for partnerships we sponsor. Additionally, we spent
$6.5 million on energy acquisitions. At June 30, 2001 we have a drilling backlog
of approximately 60 wells. We believe that our capital resources are adequate to
meet our capital requirements for the next twelve months. Our principal sources
of cash are operating cash flow and availability to draw on our credit facility.
However, future cash flows are subject to a number of variables. There can be no
assurances that internal cash flow and existing credit facilities will provide
sufficient funds to maintain planned capital expenditures.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of the following information is to provide
forward-looking quantitative and qualitative information about our potential
exposure to market risks. The term "market risk" refers to the risk of loss
arising from adverse changes in interest rates and oil and gas prices. The
disclosures are not meant to be precise indicators of expected future losses,
but rather indicators of reasonable possible losses. This forward-looking
information provides indicators of how we view and manage our ongoing market
risk exposures. All of our market risk sensitive instruments were entered into
for purposes other than trading.
General. During the nine months ended June 30, 2001, our investments in
real estate loans did not undergo material change other than changes resulting
from normally recurring debt service payments received except for the sale of
three loans having book values totalling $22.1 million and the purchase of
senior positions in two loans in which we held junior positions at a cost of
$21.6 million. Our long-term debt generally did not undergo material change
other than changes resulting from normally recurring debt service payments. We
entered into a $10.0 million term loan facility secured by certain mortgage
loans, as discussed in "Real Estate Finance", below.
Energy. At June 30, 2001, the amount outstanding under a revolving loan
attributable to our energy operations increased to $37.9 million from $23.2
million at September 30, 2000. The weighted average interest rate for this
facility decreased from 8.54% at September 30, 2000 to 7.34% at June 30, 2001,
due to a decrease in market index rates used to calculate the facility's
interest rates.
In October 2000, a $10.0 million revolving credit facility was obtained
to fund the expansion of Atlas Pipeline's existing gathering systems and the
acquisitions of other gas gathering systems. In the nine months ended June 30,
2001, $2.1 million was drawn under this facility to fund two acquisitions of gas
gathering systems and to fund certain capital expenditures. This balance is
outstanding as of June 30, 2001. At the borrower's option, the facility bears
interest at either the lending institution's prime rate plus 50 basis points or
the Euro Rate, which is defined as an average of specified London InterBank
Offered Rate ("LIBOR") rates plus 150 to 200 basis points, depending upon Atlas'
leverage ratio. At June 30, 2001, the weighted average interest rate was 7.5%.
Commodity Price Risk. Our major market risk exposure in commodities is
the pricing applicable to our oil and gas production. Realized pricing is
primarily driven by the prevailing worldwide price for crude oil and spot market
prices applicable to U.S. natural gas production. Pricing for oil and gas
production has been volatile and unpredictable for many years. We periodically
enter into financial hedging activities with respect to a portion of our
projected gas production. These financial hedging activities are intended to
reduce the impact of oil and gas price fluctuations. Realized gains and losses
from the settlement of these hedges are recognized in gas revenues when the
associated production occurs. The gains and losses realized as a result of
hedging are substantially offset in the market when the commodity is delivered.
We do not hold or issue derivative instruments for trading purposes.
As of June 30, 2001, we had no gas hedges in place. Gains or losses on
hedging transactions are the difference between the contract price and the
reference price, generally closing prices on the New York Mercantile Exchange.
Transaction gains and losses are determined monthly and are included in oil and
gas revenues in the period the hedged production is sold. Net losses incurred
relating to our hedging activity for the three months and nine months ended June
30, 2001 were approximately $62,000 and $829,000, respectively.
Real Estate Finance. The following information is with respect to our
loans that are not interest rate sensitive. During the nine months ended June
30, 2001, our outstanding loans receivable (to our interest) decreased $869,000
(.3%) to $295.6 million in the aggregate and the carried cost of our loans
increased $4.4 million (2%) to $188.4 million in the aggregate. The principal
balance of related senior lien interests decreased $66.8 million (23%) to $224.9
million in the aggregate. These changes were principally attributable to the
sale or repayment of three loans.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (Continued)
The interest rate payable with respect to the senior lien interest
underlying one loan in our portfolio that may be deemed to be interest rate
sensitive remained unchanged due to the purchase of an interest rate swap by the
borrower which locked in the interest pay rate at 8.8%. Although the stated
interest rate on the loan continues to fluctuate over LIBOR, the borrower pays
only the 8.8% locked-in rate. If the effective rate for a particular pay period
is greater than the locked-in rate, the borrower receives the benefit of this
difference.
The interest rate on our real estate revolving lines of credit, which
was prime rate (as defined below) plus .75% for the outstanding $6.8 million
line at Hudson United Bank, and the prime rate (as defined below) for the $18.0
million and $5.0 million lines of credit at Sovereign Bank, decreased during the
period ended June 30, 2001 because there were three decreases in the defined
prime rate. The prime rate, as defined in each of these lines of credit, is the
"prime rate" as reported in The Wall Street Journal (6.75% at June 30, 2001).
During the nine months ended June 30, 2001, we entered into a $10.0
million term loan agreement. The loan bears interest at a rate equal to LIBOR
plus 350 basis points, adjusted annually, and matures October 31, 2006. At June
30, 2001, $9.0 million of the loan had been drawn with an interest rate of
10.26%.
25
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)
4.1 Indenture, dated as of July 22, 1997,
between Resource America and The Bank of
New York, as Trustee, with respect to
Resource America's 12% Senior Notes due 2004 (2)
- ---------------
(1) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 and by this reference incorporated herein.
(2) Filed previously as an exhibit to our Registration Statement on Form S-4
(Registration No. 333-40231) and by this reference incorporated herein.
(b) Reports on Form 8-K:
None
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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: August 14, 2001 By: /s/ Steven J. Kessler
--------------- --------------------------
STEVEN J. KESSLER
Senior Vice President and
Chief Financial Officer
Date: August 14, 2001 By: /s/ Nancy J. McGurk
--------------- --------------------------
NANCY J. McGURK
Vice President-Finance and
Chief Accounting Officer
27