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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission file number: 0-4408
RESOURCE AMERICA, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 72-0654145
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1845 Walnut Street, Suite 1000, Philadelphia, PA 19103
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip code)
(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:
17,446,320 Shares May 3, 2002
RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2002 (Unaudited)
and September 30, 2001.................................................................... 3
Consolidated Statements of Income (Unaudited)
Three Months and Six Months Ended March 31, 2002 and 2001................................. 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
Six Months Ended March 31, 2002........................................................... 5
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended March 31, 2002 and 2001.................................................. 6
Notes to Consolidated Financial Statements (Unaudited) March 31, 2002......................... 7 - 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................. 16 - 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 26 - 27
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................................................. 28
SIGNATURES.................................................................................................... 29
2
PART I
ITEM 1. FINANCIAL STATEMENTS
RESOURCE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, September 30,
2002 2001
---------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 31,130 $ 48,648
Accounts and notes receivable........................................................ 10,989 18,197
Prepaid expenses..................................................................... 2,498 762
----------- -----------
Total current assets............................................................. 44,617 67,607
Investments in real estate loans (less allowance for possible losses of $2,829 and $2,529) 176,124 189,734
Investments in real estate ventures..................................................... 18,294 16,666
Investment in RAIT Investment Trust..................................................... 28,934 20,909
Property and equipment:
Oil and gas properties and equipment (successful efforts)............................ 120,432 106,795
Gas gathering and transmission facilities............................................ 25,353 23,608
Other................................................................................ 7,838 7,310
----------- -----------
153,623 137,713
Less - accumulated depreciation, depletion and amortization............................. (39,120) (34,739)
----------- -----------
Net property and equipment........................................................... 114,503 102,974
Goodwill ............................................................................... 31,413 31,420
Other assets ........................................................................... 37,414 37,154
----------- -----------
Total assets..................................................................... $ 451,299 $ 466,464
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................................... $ 1,760 $ 8,560
Accounts payable..................................................................... 14,959 18,264
Accrued interest..................................................................... 1,661 1,721
Accrued liabilities.................................................................. 6,083 6,255
Estimated income taxes............................................................... - 288
Deferred revenue on drilling contracts............................................... 2,336 13,770
----------- -----------
Total current liabilities........................................................ 26,799 48,858
Long-term debt:
Senior............................................................................... 65,636 66,826
Non-recourse......................................................................... 51,897 62,159
Other................................................................................ 18,989 12,586
----------- -----------
136,522 141,571
Deferred revenue and other liabilities.................................................. 1,287 1,578
Deferred income taxes................................................................... 22,421 18,682
Minority interest in Atlas Pipeline Partners, L.P....................................... 19,928 20,316
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........................... 250 249
Additional paid-in capital........................................................... 223,702 223,712
Less treasury stock, at cost......................................................... (73,993) (74,080)
Less loan receivable from Employee Stock Ownership Plan ("ESOP")..................... (1,249) (1,297)
Accumulated other comprehensive income............................................... 5,594 1,657
Retained earnings.................................................................... 90,038 85,218
----------- -----------
Total stockholders' equity....................................................... 244,342 235,459
----------- -----------
Total liabilities and stockholders' equity....................................... $ 451,299 $ 466,464
=========== ===========
See accompanying notes to consolidated financial statements
3
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- ------------------------
2002 2001 2002 2001
---------- ----------- ----------- ----------
(in thousands, except per share data)
REVENUES
Energy................................................................. $ 26,670 $ 28,972 $ 55,427 $ 50,437
Real estate finance.................................................... 5,620 4,454 9,304 8,291
Interest and other..................................................... 1,972 1,301 3,313 3,203
--------- --------- --------- --------
34,262 34,727 68,044 61,931
COSTS AND EXPENSES
Energy................................................................. 20,260 17,889 40,861 29,893
Real estate finance.................................................... 464 371 987 761
General and administrative............................................. 1,574 1,340 2,840 2,542
Depreciation, depletion and amortization............................... 2,583 2,581 5,380 5,215
Interest............................................................... 3,077 3,664 6,392 7,691
Provision for possible losses.......................................... 650 150 800 656
Minority interest in Atlas Pipeline Partners, L.P...................... 642 1,591 1,395 2,610
Equity in loss of unconsolidated subsidiary............................ 269 440 401 960
--------- --------- --------- --------
29,519 28,026 59,056 50,328
--------- --------- --------- --------
Income from operations before income taxes............................. 4,743 6,701 8,988 11,603
Provision for income taxes............................................. 1,565 2,311 2,966 4,061
--------- --------- --------- --------
Income from operations before extraordinary item....................... 3,178 4,390 6,022 7,542
Extraordinary item, net of taxes of ($19), $18, ($19) and $96.......... (40) 21 (40) 179
--------- --------- --------- --------
Net income............................................................. $ 3,138 $ 4,411 $ 5,982 $ 7,721
========= ========= ========= ========
Net income per common share - basic:
From operations..................................................... $ .18 $ .25 $ .35 $ .41
Extraordinary item.................................................. - - - .01
--------- --------- --------- --------
Net income per common share - basic.................................... $ .18 $ .25 $ .35 $ .42
========= ========= ========= ========
Weighted average common shares outstanding............................. 17,444 17,429 17,438 18,445
========= ========= ========= ========
Net income per common share - diluted:
From operations..................................................... $ .18 $ .25 $ .34 $ .40
Extraordinary item.................................................. - - - .01
--------- --------- --------- --------
Net income per common share - diluted.................................. $ .18 $ .25 $ .34 $ .41
========= ========= ========= ========
Weighted average common shares......................................... 17,785 17,907 17,768 18,875
========= ========= ========= ========
See accompanying notes to consolidated financial statements
4
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 2002
(Unaudited)
(in thousands, except share data)
Common stock Additional Treasury Stock ESOP
---------------------------- Paid-In ----------------------------- Stockholders'
Shares Amount Capital Shares Amount Receivable
--------------------------------------------------------------------------------------
Balance, October 1, 2001.................. 24,940,037 $ 249 $ 223,712 (7,498,613) $ (74,080) $ (1,297)
Treasury shares issued.................... (330) 30,069 631
Issuance of common stock.................. 31,027 1 320
Purchase of shares for treasury........... (56,200) (544)
Other comprehensive income................
Cash dividends ($.066 per share)..........
Repayment of ESOP loan.................... 48
Net income................................
------------ ----------- ------------ ------------ ------------ ---------
Balance, March 31, 2002................... 24,971,064 $ 250 $ 223,702 (7,524,744) $ (73,993) $ (1,249)
============ ========= ========== ============ ============ ==========
[RESTUB]
Accumulated
Other Totals
Comprehensive Retained Stockholders'
Income (Loss) Earnings Equity
--------------------------------------------
Balance, October 1, 2001.................. $ 1,657 $ 85,218 $ 235,459
Treasury shares issued.................... 301
Issuance of common stock.................. 321
Purchase of shares for treasury........... (544)
Other comprehensive income................ 3,937 3,937
Cash dividends ($.066 per share).......... (1,162) (1,162)
Repayment of ESOP loan.................... 48
Net income................................ 5,982 5,982
----------- ------- -----------
Balance, March 31, 2002................... $ 5,594 $ 90,038 $ 244,342
========= ======== ===========
See accompanying notes to consolidated financial statements
5
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended March 31,
--------------------------------
2002 2001
----------- -------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................ $ 5,982 $ 7,721
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization............................................... 5,380 5,215
Amortization of discount on senior debt and deferred finance costs..................... 504 466
Provision for possible losses.......................................................... 800 656
Equity in loss of unconsolidated subsidiary............................................ 401 960
Minority interest in Atlas Pipeline Partners, L.P...................................... 1,395 2,610
Gain on asset dispositions............................................................. (2,169) (399)
Property impairments and abandonments.................................................. 12 12
Deferred income taxes.................................................................. 3,904 1,307
Accretion of discount.................................................................. (2,186) (3,152)
Collection of interest................................................................. 4,969 1,062
Non-cash compensation.................................................................. 303 139
Extraordinary loss (gain) on debt extinguishment....................................... 40 (179)
Changes in operating assets and liabilities:
Increase in accounts receivable and other assets....................................... (4,518) (3,244)
Decrease in accounts payable and other liabilities..................................... (12,846) (6,287)
----------- -----------
Net cash provided by operating activities ................................................ 1,971 6,887
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................................... (11,780) (6,817)
Asset acquisitions........................................................................ - (6,500)
Principal payments on notes receivable and proceeds from sales of assets ................. 20,824 22,396
Increase in other assets.................................................................. (3,519) (9,535)
Investments in real estate loans and ventures............................................. (9,121) (23,398)
Decrease in other liabilities............................................................. (98) (33)
----------- -----------
Net cash used in investing activities .................................................... (3,694) (23,887)
CASH FLOWS FROM FINANCING ACTIVITIES:
Non-recourse borrowings................................................................... 73,866 44,327
Principal payments on non-recourse borrowings............................................. (85,933) (57,982)
Dividends paid............................................................................ (1,162) (1,192)
Dividends paid to minority interests of Atlas Pipeline Partners........................... (1,913) (803)
Treasury stock purchased.................................................................. (493) (57,043)
Decrease in restricted cash............................................................... 33 12
Repayment of ESOP loan.................................................................... 48 32
Increase in other assets.................................................................. (241) (364)
Proceeds from issuance of stock........................................................... - 390
----------- -----------
Net cash used in financing activities..................................................... (15,795) (72,623)
----------- -----------
Decrease in cash and cash equivalents..................................................... (17,518) (89,623)
Cash and cash equivalents at beginning of period.......................................... 48,648 117,107
----------- -----------
Cash and cash equivalents at end of period................................................ $ 31,130 $ 27,484
=========== ===========
See accompanying notes to consolidated financial statements
6
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(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.
The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect (i) the
reported amounts of assets and liabilities, (ii) disclosure of contingent assets
and liabilities at the dates of the financial statements and (iii) the reported
amounts of revenues and expenses during the reporting periods. 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 and six months ended March 31, 2002 are
not necessarily indicative of the results that may be expected for the year
ending September 30, 2002. Certain reclassifications have been made in the
fiscal 2001 consolidated financial statements to conform to the fiscal 2002
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, 2001.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Other assets consist of the following:
March 31, September 30,
2002 2001
---------------- ---------------
(Unaudited)
(in thousands)
Contracts acquired (including syndication network) (net of accumulated
amortization of $5,621 and $4,716)............................................... $ 16,210 $ 16,851
Deferred financing costs............................................................ 1,635 1,921
Investments (net of allowance for possible losses of $677).......................... 11,295 10,743
Note and escrow received upon disposal of subsidiary
(net of allowance for possible losses of $10,549 and $10,704).................... 6,382 7,141
Other............................................................................... 1,892 498
----------- -----------
$ 37,414 $ 37,154
=========== ===========
Investments include $3.1 million at March 31, 2002 and $2.2 million at
September 30, 2001, which represent an investment in and net advances less the
Company's proportionate share of losses in Optiron, an energy technology
company, in which the Company owns a 50% interest and accounts for using the
equity method.
On October 1, 2001, the Company adopted Statement of Financial
Standards ("SFAS") 142 "Goodwill and Other Intangible Assets" issued by the
Financial Standards Board ("FASB"), which requires that goodwill no longer be
amortized, but instead tested for impairment at least annually. During the first
quarter of fiscal 2002, goodwill amortization was $22,000, all of which was
related to Atlas Pipeline Partners, L.P. ("Atlas Pipeline Partners") whose
fiscal year ended December 31, 2001, at which time it adopted SFAS 142. At March
31, 2002, accumulated amortization of goodwill, including Atlas Pipeline
Partners, was $4.1 million.
7
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2002
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Intangible assets with lives restricted by contractual, legal, or other
means are amortized over their useful lives. Goodwill and other intangible
assets not subject to amortization are tested for impairment annually or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. The adoption of this standard did not materially impact our
financial position, results of operations or cash flows.
For the three and six months ended March 31, 2001, the Company's
goodwill amortization expense was approximately $443,000 and $746,000,
respectively. Pro forma net income for the three months and six months ended
March 31, 2001 would have been $4.7 million and $8.2 million, respectively
excluding goodwill amortization, net of taxes using the Company's effective tax
rate in fiscal 2001 of 35%. Pro forma basic income per share for the three
months and six months ended March 31, 2001 would have been $.27 and $.44,
respectively. Pro forma diluted income per share for the three months and six
months ended March 31, 2001 would have been $.26 and $.43, respectively.
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.
The following table provides information for financial instruments as
of March 31, 2002:
Carrying Estimated
Amount Fair Value
----------- ----------
(in thousands)
Energy debt.......................................................................... $ 45,022 $ 45,022
Real estate finance debt............................................................. 22,400 22,400
Senior debt.......................................................................... 65,636 68,261
Other debt........................................................................... 5,224 5,224
----------- -----------
$ 138,282 $ 140,907
=========== ===========
8
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2002
(Unaudited)
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 Six Months Ended
March 31, March 31,
------------------------- ------------------------
2002 2001 2002 2001
---------- ----------- ----------- ----------
(in thousands)
Income from operations before extraordinary item....................... $ 3,178 $ 4,390 $ 6,022 $ 7,542
Extraordinary item, net of tax......................................... (40) 21 (40) 179
---------- --------- ---------- --------
Net income........................................................ $ 3,138 $ 4,411 $ 5,982 $ 7,721
========= ========= ========= ========
Basic average shares of common stock outstanding....................... 17,444 17,429 17,438 18,445
Dilutive effect of stock option and award plans........................ 341 478 330 430
--------- --------- --------- --------
Dilutive average shares of common stock................................ 17,785 17,907 17,768 18,875
========= ========= ========= ========
Comprehensive Income (Loss)
The following table presents comprehensive income (loss) for the periods
indicated:
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- ------------------------
2002 2001 2002 2001
---------- ----------- ----------- ----------
(in thousands)
Net income............................................................. $ 3,138 $ 4,411 $ 5,982 $ 7,721
Other comprehensive income (loss):
Unrealized gain on investment, net of taxes of $1,797, $492,
$1,994 and $412................................................... 3,648 949 4,048 795
Unrealized loss on natural gas futures contracts, net of tax benefits
of $91 and $55.................................................... (184) - (111) -
--------- --------- --------- --------
3,464 949 3,937 795
--------- --------- --------- --------
Comprehensive income................................................... $ 6,602 $ 5,360 $ 9,919 $ 8,516
========= ========= ========= ========
9
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2002
(Unaudited)
Recently Issued Financial Accounting Standards
Recently FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"), and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 143 establishes requirements
for the accounting for removal costs associated with asset retirements and SFAS
144 addresses financial accounting and reporting for the impairment or disposal
of long-lived assets. SFAS 143 is effective for fiscal years beginning after
June 15, 2002, and SFAS 144 is effective for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. We are
currently assessing the impact of these standards on our consolidated financial
statements.
NOTE 3 - CASH FLOW STATEMENTS
Supplemental disclosure of cash flow information:
Six Months Ended
-----------------------------
March 31,
-----------------------------
2002 2001
----------- -----------
(in thousands)
Cash paid during the period for:
Interest........................................................................... $ 5,948 $ 7,168
Income taxes....................................................................... $ 1,499 $ 9,100
Six Months Ended
-----------------------------
March 31,
-----------------------------
2002 2001
----------- -----------
(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 facility............................................................ $ - $ (2,250)
Detail of asset acquisitions:
Fair value of assets acquired...................................................... $ - $ 9,180
Atlas Pipeline units issued in exchange for gas gathering and
transmission facility............................................................ - (2,250)
Liabilities assumed................................................................ - (430)
----------- -----------
Net cash paid.................................................................... $ - $ 6,500
=========== ===========
10
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2002
(Unaudited)
NOTE 4 - INVESTMENTS IN REAL ESTATE LOANS
The Company has primarily focused its real estate activities on
managing and enhancing the value of 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. The
Company 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. Cash received by the Company for payment on each real estate loan is
allocated between principal and interest. This accretion of discount amounted to
$1.0 million and $1.5 million during the three months ended March 31, 2002 and
2001, respectively, and $2.2 million and $3.2 million during the six months
ended March 31, 2002 and 2001, respectively. As the Company sells senior lien
interests or receives funds from refinancings of such loans, 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.
At March 31, 2002, the Company held real estate loans having an
aggregate face value of $605.2 million, which were being carried at an aggregate
cost of $176.1 million, including cumulative accretion and net of an allowance
for possible losses. 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 Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -------------
(in thousands)
Balance, beginning of period...................................... $ 197,046 $ 185,066 $ 189,734 $ 183,927
Additions to existing loans....................................... 1,087 22,790 7,348 23,398
Provision for possible losses..................................... (650) (150) (800) (300)
Accretion of discount (net of collection of interest)............. 985 1,483 2,186 3,152
Collection of principal........................................... - - - (988)
Cost of loans resolved............................................ (22,344) (19,854) (22,344) (19,854)
----------- ----------- ----------- -------------
Balance, end of period............................................ $ 176,124 $ 189,335 $ 176,124 $ 189,335
=========== =========== =========== =============
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 Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -------------
(in thousands)
Balance, beginning of period...................................... $ 2,679 $ 2,079 $ 2,529 $ 2,013
Provision for possible losses..................................... 650 150 800 300
Write-down........................................................ (500) - (500) (84)
------------ ----------- ------------ -------------
Balance, end of period............................................ $ 2,829 $ 2,229 $ 2,829 $ 2,229
=========== =========== =========== =============
11
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2002
(Unaudited)
NOTE 5 - DEBT
Total debt consists of the following:
March 31, September 30,
2002 2001
-------------- ----------------
(in thousands)
Senior debt..................................................................... $ 65,636 $ 66,826
Non-recourse debt:
Energy:
Revolving and term bank loans.............................................. 45,022 43,284
Real estate finance:
Revolving credit facilities................................................ 6,000 18,000
Other...................................................................... 875 875
------------ -------------
Total non-recourse debt.................................................... 51,897 62,159
Other debt...................................................................... 20,749 21,146
------------ -------------
138,282 150,131
Less current maturities......................................................... 1,760 8,560
------------ -------------
$ 136,522 $ 141,571
============= =============
NOTE 6 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company, through its energy subsidiaries, enters into natural gas
futures and option contracts to hedge its exposure to changes in natural gas
prices. At any point in time, such contracts may include regulated New York
Mercantile Exchange ("NYMEX") futures and options contracts and non-regulated
over-the-counter futures contracts with qualified counterparties. NYMEX
contracts are generally settled with offsetting positions, but may be settled by
delivery of natural gas.
The Company entered into 62 and 182 natural gas futures contracts,
during the three and six months ended March 31, 2002, respectively, in addition
to the 17 contracts that were open at the beginning of the fiscal year.
For the three and six months ended March 31, 2002, the Company settled
seventeen contracts at a loss of $25,000 (net to the Company). These contracts
covered a portion of natural gas production for the upcoming fiscal quarter and
these losses will appear as a component of production revenues at that time. At
March 31, 2002, the Company had 182 open contracts covering 509,600 dekatherms
("Dth") (net to the Company) which mature through September 2003 at a combined
average settlement price of $3.23 per Dth. For the current fiscal year ending
September 30, 2002, 62 of the 182 open contracts will mature covering 173,600
Dth (net to the Company) at a combined average settlement price of $3.08 per
Dth.
12
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2002
(Unaudited)
NOTE 6 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - (Continued)
As these contracts qualify and have been designated as cash flow
hedges, any gains or losses resulting from market price changes are deferred and
recognized as a component of production revenues in the month the gas is sold.
Gains or losses on futures contracts are determined as the difference between
the contract price and a reference price, generally prices on NYMEX. The
Company's net unrealized loss related to all open NYMEX contracts was
approximately $152,000 at March 31, 2002. The unrealized loss at March 31, 2002
has been recorded as a liability in the Company's March 31, 2002 Consolidated
Financial Statements and in Stockholders' Equity as a component of Other
Comprehensive Income, net of taxes of $55,000. As of March 31, 2002, $44,000 of
the net unrealized losses on derivative instruments included in accumulated
other comprehensive income are expected to be recognized in revenues during the
remainder of the current fiscal year. The Company assesses the effectiveness of
its hedges based on changes in the derivatives' intrinsic value. The Company
recognized no gains or losses during the three months or six months ended March
31, 2002 for hedge ineffectiveness or as a result of the discontinuance of cash
flow hedges.
Although hedging provides the Company some protection against falling
prices, these activities could also reduce the potential benefits of price
increases, depending upon the instrument. The Company does not hold derivative
instruments for trading purposes.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
As a part of the consideration for the sale of our wholly-owned small
ticket equipment leasing subsidiary, Fidelity Leasing Inc. ("Fidelity Leasing")
in fiscal 2000, the Company received a non-interest bearing promissory note.
Through March 31, 2002, the Company received $6.2 million of payments on the
note. In addition, $10.0 million of the sales proceeds was placed in an escrow
account until March 31, 2004 as security for certain indemnification obligations
to the purchaser. Through March 31, 2002, $510,000 was paid out of the escrow to
satisfy indemnification claims. The note and escrow account are included in the
Company's consolidated financial statements as components of other assets. In
May 2001, the purchaser made an $8.0 million claim against the escrow account.
The Company disputed the claim. The purchaser has not responded to our
objection. Through March 31, 2002, the purchaser made additional indemnification
claims in the amount of $10.3 million which the Company has disputed. At March
31, 2002, the Company has a $10.5 million allowance recorded against the
promissory note and escrow account. The Company reviews the allowance
periodically and adjusts the allowance, as required, to a level that is
estimated by management to provide for possible losses against the promissory
note and indemnification obligations.
13
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2002
(Unaudited)
NOTE 8 - PENDING SALE OF SUBSIDIARY
On January 18, 2002, subsidiaries of the Company entered into an
agreement to sell their 100% membership interest in Atlas Pipeline Partners GP,
LLC to New Vulcan Coal Holdings, L.L.C. for $29.0 million in cash. Atlas
Pipeline Partners GP, LLC is the general partner of Atlas Pipeline Partners.
Concurrently, the Company, Atlas Pipeline Partners and Atlas Pipeline
Partners GP, LLC entered into an agreement under which Atlas Pipeline Partners
will acquire Triton Coal Company, LLC, owner and operator of two surface coal
mines located in the southern Powder River Basin in Wyoming, from New Vulcan
Coal Holdings and Vulcan Intermediary, L.L.C. in exchange for common,
subordinated and deferred participation units of Atlas Pipeline Partners. In
connection with the Triton transaction, the Company's 1.64 million subordinated
units of Atlas Pipeline Partners will convert into 1.48 million common units,
which will constitute 14.7% of Atlas Pipeline Partners' common units and 10.5%
of the common and subordinated units in the aggregate.
Additionally, Atlas Pipeline Partners' master gas gathering agreement
will be modified such that the Company will be reimbursed for certain costs and
collect fees as it would continue to have full control and responsibility to
manage, maintain and extend Atlas Pipeline Partners' gas gathering system. The
agreement will require the Company to drill and connect not more than 500 wells
to the gas gathering system by March 15, 2005, or be subject to specified
financial penalties. The Company will continue to sell interests in drilling
partnerships and, as in the past, when feasible, connect completed wells to
Atlas Pipeline Partners' gas gathering system.
The completion of the sale of Atlas Pipeline Partners GP, LLC will
occur simultaneously with the closing of Atlas Pipeline Partners' acquisition of
Triton Coal Company. The acquisition is contingent upon Atlas Pipeline Partners'
unit-holder approval and refinancing of Triton's debt. Both agreements may be
terminated if the transactions are not consummated by May 15, 2002, but are
subject to an extension to June 30, 2002, if specific conditions are met. At the
time of this filing, both the Company and New Vulcan intend to extend these
termination dates through July 30, 2002.
14
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2002
(Unaudited)
NOTE 9 - OPERATING SEGMENT INFORMATION
The Company operates in two principal industry segments - energy and
real estate finance. Segment data for the periods indicated are as follows:
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -------------
(in thousands)
Revenues:
Energy......................................................... $ 27,478 $ 28,972 $ 56,462 $ 50,437
Real estate finance............................................ 5,683 4,477 9,352 8,343
Corporate...................................................... 1,154 1,305 2,346 3,201
----------- ----------- ----------- -------------
$ 34,315 $ 34,754 $ 68,160 $ 61,981
=========== =========== =========== =============
Operating Profit (Loss):
Energy......................................................... $ 3,278 $ 6,825 $ 7,534 $ 11,557
Real estate finance............................................ 2,040 2,284 3,703 3,911
Corporate...................................................... (575) (2,408) (2,249) (3,865)
------------ ----------- ------------ --------------
$ 4,743 $ 6,701 $ 8,988 $ 11,603
=========== =========== =========== =============
March 31, September 30,
2002 2001
----------- ---------------
(Unaudited)
(in thousands)
Identifiable Assets:
Energy............................................................................. $ 178,811 $ 172,189
Real estate finance................................................................ 195,728 207,682
Corporate.......................................................................... 76,760 86,593
----------- -----------
$ 451,299 $ 466,464
=========== ===========
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 less depreciation, depletion and amortization. The information
presented does not eliminate intercompany transactions of $53,000 and $27,000 in
the three months ended March 31, 2002 and 2001, respectively, and $116,000 and
$50,000 in the six months ended March 31, 2002 and 2001, respectively.
15
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 risks and uncertainties more
particularly described in Item 1, under the caption "Risk Factors", in our
annual report on Form 10-K for fiscal 2001. 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.
Factors that might cause such a difference include:
In Energy:
o fluctuations in world-wide prices and demand for natural gas and
oil;
o fluctuations in the level of natural gas and oil exploration and
development activities;
o fluctuations in the demand for contract drilling and well
services;
o the existence of competitors, technological changes and other
developments in the industry;
o the existence of operating risks inherent in contract drilling
and well services; and
o general economic conditions and the existence of regulatory
uncertainties in addition to the other matters discussed herein.
In Real Estate Finance:
o fluctuations in real property values;
o fluctuations in interest rates;
o changes in current environmental factors; and
o changes in national economic conditions or in conditions in the
areas in which properties underlying our real estate loans are
located.
The following information is provided to assist in understanding our
financial condition and results of operations. It should be read in conjunction
with the consolidated financial statements and related notes appearing elsewhere
in this report.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Unaudited) - (Continued)
Overview of Second Quarter of Fiscal 2002
Our operating results and financial condition for the second quarter of
fiscal 2002 reflect the continuing growth in importance to us of our energy
operations, as shown in the following tables:
Revenues as a Percent of Total Revenues(1)
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -------------
Energy ........................................................... 78% 83% 81% 81%
Real estate finance............................................... 16% 13% 14% 13%
Assets as a Percent of Total Assets(2)
March 31, September 30,
2002 2001
---------------- ---------------
Energy ............................................................................... 40% 37%
Real estate finance................................................................... 43% 45%
- --------------------
(1) The balance (6% and 4%, and 5% and 6%, for the three and six months ended
March 31, 2002 and 2001, 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 (17% and 18% at March 31, 2002 and September 30, 2001,
respectively) is attributable to corporate assets not attributable to a
specific industry segment, as referred to in (1).
17
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 costs per equivalent unit in our energy operations
during the periods indicated:
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -------------
(in thousands, except
sales price and production cost data)
Revenues:
Production.................................................... $ 6,570 $ 10,490 $ 13,896 $ 19,378
Well drilling................................................. 16,758 14,171 34,739 23,484
Well services................................................. 2,020 2,637 4,118 4,813
Transportation................................................ 1,322 1,674 2,674 2,762
----------- ----------- ----------- -----------
$ 26,670 $ 28,972 $ 55,427 $ 50,437
=========== =========== =========== ===========
Costs and expenses:
Production.................................................... $ 1,676 $ 1,601 $ 3,300 $ 3,214
Exploration................................................... 238 175 656 559
Well drilling................................................. 14,963 11,687 30,808 18,928
Well services................................................. 991 1,077 1,908 1,974
Transportation................................................ 491 392 1,058 828
Non-direct.................................................... 1,901 2,957 3,131 4,390
----------- ----------- ----------- -----------
$ 20,260 $ 17,889 $ 40,861 $ 29,893
=========== =========== =========== ===========
Production revenues(1):
Gas........................................................... $ 5,947 $ 9,414 $ 12,360 $ 16,885
Oil........................................................... $ 605 $ 984 $ 1,513 $ 2,399
Production volumes:
Gas (thousands of cubic feet ("mcf")/day) (1)................. 18,771 17,100 19,684 17,156
Oil (barrels (`bbls")/day).................................... 388 443 461 473
Average sales prices:
Gas (per mcf)................................................. $ 3.52 $ 6.12 $ 3.45 $ 5.41
Oil (per bbl)................................................. $ 17.32 $ 24.70 $ 18.03 $ 27.87
Average production costs:
(per mcf equivalent unit)..................................... $ .88 $ .90 $ .81 $ .88
- -----------------
(1) Excludes sales of residual gas and sales to landowners.
Our natural gas revenues were $5.9 million and $12.4 million in the
three month and six month periods ended March 31, 2002, a decrease of $3.5
million (37%) and $4.5 million (27%) from $9.4 million and $16.9 million in the
three month and six month periods ended March 31, 2001. The decreases were due
to decreases in the average sales price of natural gas of 42% and 36% for the
three month and six month periods ended March 31, 2002, respectively, which were
partially offset by increases in the volume of natural gas we produced of 10%
and 15% in the three month and six month periods ended March 31, 2002,
respectively. The $3.5 million decrease in gas revenues in the three months
ended March 31, 2002 as compared to the prior period consisted of a $4.0 million
decrease attributable to prices decreases, partially offset by a $529,000
increase attributable to volume increases. The $4.5 million decrease in gas
revenues in the six months ended March 31, 2002 as compared to the prior period
consisted of a $6.1 million decrease attributable to price decreases, partially
offset by a $1.6 million increase attributable to volume increases.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Unaudited) - (Continued)
Results of Operations: Energy (Continued)
Our oil revenues were $605,000 and $1.5 million in the three month and
six month periods ended March 31, 2002, a decrease of $379,000 (39%) and
$886,000 (37%) from $984,000 and $2.4 million in the three month and six month
periods ended March 31, 2001, primarily due to decreases in the average sales
price of oil of 30% and 35%, for the respective periods. Oil production volume
decreased 12% during the three months and 3% during the six month ended March
31, 2002 and 2001, respectively. The $379,000 decrease in oil revenues in the
three months ended March 31, 2002 as compared to the prior period consisted of
$294,000 attributable to price decreases $85,000, attributable to volume
decreases. The $886,000 decrease in oil revenues for the six months ended March
31, 2002 as compared to the prior period consisted of $847,500 attributable to
prices decreases and $38,500 attributable to volume decreases.
Our well drilling revenues and expenses represent the billings and
costs associated with the drilling of wells for partnerships sponsored by Atlas
America. The gross profit from drilling operations was $1.8 million and $3.9
million in the three months and six months ended March 31, 2002, respectively, a
decrease of $689,000 and $625,000 from $2.5 million and $4.6 million in the
three months and six months ended March 31, 2001. The decrease in our gross
profit margin from 18% and 19% in the three months and six months ended March
31, 2001 to 11% in both the three months and six months ended March 31, 2002
arose from an increase in the average cost per well and a change in the
structure of our drilling contracts to a cost-plus basis from a turnkey basis.
Cost-plus contracts protect us in an inflationary environment while limiting our
profit margin. Additionally, the first quarter of the prior fiscal year included
the benefit of a downward adjustment to our previous estimates of certain costs
in connection with a completed drilling program.
Our well services revenues decreased $617,000 and $695,000 in the three
months and six months ended March 31, 2002, respectively. This decrease was
primarily a result of a decrease in gas marketing activities of $494,000 and
$939,000 in the three months and six months ended March 31, 2002, respectively.
In the six months ended March 31, 2002, these decreases were partially offset by
increases in well operating revenues due to an increase in the number of wells
we operate as a result of new partnership wells drilled during fiscal 2002 and
2001.
Our transportation revenues, which are derived from our natural gas
transportation agreements with partnerships we sponsor, decreased 21% in the
three months and 3% in the six months ended March 31, 2002 as compared to the
prior period. These decreases are a result of a decrease in prices received for
natural gas transported by our pipelines, as some of our transportation
contracts are based on the price of the gas transported.
Our transportation expenses increased 25% and 28% in the three months
and six months ended March 31, 2002, respectively, as compared to the prior
period. These increases resulted from higher compressor expenses and costs
associated with two small pipelines acquired in fiscal 2001 by Atlas Pipeline
Partners.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Unaudited) - (Continued)
Results of Operations: Energy (Continued)
Non-direct expenses were $1.9 million and $3.1 million in the three
month and six month periods ended March 31, 2002, a decrease of $1.1 million
(36%) and $1.3 million (29%). These expenses include, among other things,
non-direct salaries and benefits, the costs of running the energy corporate
office and outside services. These decreases were due to the reallocation of
certain costs to our production, drilling, well services and well operations
functions rather than to non-direct costs.
Amortization of oil and gas properties as a percentage of oil and gas
revenues was 26% in the three months and six months ended March 31, 2002
compared to 15% and 16% for the three month and six month periods ended March
31, 2001. The variance from period to period is directly attributable to changes
in our oil and gas reserve quantities, product prices and fluctuations in the
depletable cost basis of oil and gas.
Results of Operations: Real Estate Finance
The following table sets forth certain information relating to the
revenues recognized and costs and expenses incurred in our real estate finance
operations during the periods indicated:
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -------------
(in thousands)
Revenues:
Interest..................................................... $ 2,677 $ 2,504 $ 5,005 $ 4,679
Accreted discount............................................ 985 1,483 2,186 3,152
Gains on resolutions of loans and loan payments in
excess of the carrying value of loans...................... 1,641 395 1,641 395
Net rental and fee income.................................... 317 72 472 65
----------- ----------- ----------- -----------
$ 5,620 $ 4,454 $ 9,304 $ 8,291
=========== =========== =========== ===========
Cost and expenses.............................................. $ 464 $ 371 $ 987 $ 761
=========== =========== =========== ===========
Revenues from our real estate finance operations increased $1.1 million
(26%) from $4.5 million in the three months ended March 31, 2001 to $5.6 million
in three months ended March 31, 2002. Revenues increased $1.0 million (12%) from
$8.3 million in the six months ended March 31, 2001 to $9.3 million in the six
months ended March 31, 2002. We attribute these increases to the following:
o An increase of $1.2 million in gains on resolutions of loans and loan
payments in excess of carrying value resulting from the repayment of
one loan, having a book value of $22.3 million, for $24.0 million on
which we recognized a gain of $1.6 million as compared to the
resolution of two loans having book values of $20.0 million, for
$20.4 million, recognizing a gain of $395,000 in the six months ended
March 31, 2001.
o A decrease in interest income of $325,000 (8%) and $640,000 (8%) in
the three months and six months ended March 31, 2002, respectively,
primarily resulting from the following:
- The sale of six loans, one in March 2001, two in June 2001, one in
July 2001, one in September 2001 and one in January 2002, which
decreased interest income by $818,000 and $2.0 million, in the
three and six months ended March 31, 2002, respectively as compared
to the three and six months ended March 31, 2001, respectively.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Unaudited) - (Continued)
Results of Operations: Real Estate Finance (Continued)
- The completion of accretion of discount on six loans which
decreased interest income by $217,000 and $328,000 in the three and
six months ended March 31, 2002, respectively, as compared to the
three and six months ended March 31, 2001, respectively.
- These decreases were partially offset by an increase in our rate of
accretion, resulting in an increase in interest income of $710,000
and $1.7 million in the three and six months ended March 31, 2002,
respectively.
o An increase in net rental and fee income of $245,000 and $407,000 in
the three months and six months ended March 31, 2002, respectively,
as compared to the three months and six months ended March 31, 2001,
respectively, to $317,000 and $472,000 from $72,000 and $65,000,
respectively. These increases resulted primarily from an increase in
our equity earnings in one real estate joint venture.
Gains on resolutions of loans and loan payments in excess of the
carrying value of loans (if any) and the amount of fees received (if any) vary
from transaction to transaction and there may be significant variations in our
gains on resolutions and fee income from period to period.
Costs and expenses of our real estate finance operations were $464,000
and $987,000 in the three months and six months ended March 31, 2002, an
increase of $93,000 (25%) and $226,000 (30%) from $371,000 and $761,000 in the
same periods of the prior fiscal year. The increase was primarily a result of an
increase in wages and benefits, including the addition of a new president in our
real estate subsidiary to manage our existing portfolio of commercial loans and
real estate joint ventures and to direct the resolution of these mortgages and
the disposition of the underlying properties.
Results of Operations: Other Revenues, Costs and Expenses
Our interest and other income was $2.0 million and $3.3 million in the
three months and six months ended March 31, 2002, an increase of $671,000 (52%)
and $110,000 (3%) as compared to $1.3 million and $3.2 million during the three
months and six months ended March 31, 2001. The increases in the three months
and six months ended March 31, 2002 as compared to the three months and six
months ended March 31, 2001 were primarily a result of increases in gains on
sales of property and equipment, most of which occurred during the three months
ended March 31, 2002 and increases in dividend income resulting primarily from
our additional share ownership in RAIT Investment Trust. Offsetting these
increases were a decrease in interest income, primarily related to interest
earned in the prior year on remaining proceeds from the sale of our small-ticket
leasing subsidiary at the end of fiscal 2000.
Our general and administrative expenses increased $234,000 (17%) to
$1.6 million and $298,000 (12%) to $2.8 million in the three months and six
months ended March 31, 2002, from $1.3 million and $2.5 million in the three and
six month periods ended March 31, 2001. These increases primarily resulted from
normal increases in salaries and benefits including pension expense, increases
in our rent expense and donations, partially offset by decreases in our costs
for legal and professional services.
Our interest expense was $3.1 million and $6.4 million in the three
months and six month periods ended March 31, 2002, a decrease of $587,000 (16%)
and $1.3 million (17%) from $3.7 million and $7.7 million for the three month
and six month periods ended March 31, 2001. These decreases primarily resulted
from our purchase of $7.8 million of our 12% senior subordinated notes, which
reduced interest by $157,000 and $705,000 for the three month and six month
periods ended March 31, 2002, respectively. In addition, a reduction in
borrowings and lower rates received by our real estate finance division
decreased interest by $311,000 and $469,000 in the three month and six month
periods ended March 31, 2001, respectively.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Unaudited) - (Continued)
Results of Operations: Other Revenues, Costs and Expenses - (Continued)
The minority interest in Atlas Pipeline represents approximately 47% of
the net earnings of Atlas Pipeline. 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 earnings was $642,000 and $1.4 million for the three months
and six months ended March 31, 2002 as compared to $1.6 million and $2.6 million
for the three month and six month periods ended March 31, 2001, a decrease of
$949,000 (60%) and $1.2 million (47%), respectively. These decreases were the
result of a decrease in net income of these gas gathering operations due to
decreases in the transportation rates received by Atlas Pipeline.
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 increased $500,000 and $144,000 to
$650,000 and $800,000 in the three months and six months ended March 31, 2002,
respectively, as compared to $150,000 and $656,000 in the three months and six
months ended March 31, 2001, respectively. These increases resulted from a write
down in the current quarter, associated with one real estate loan which is
expected to be resolved in the next fiscal quarter for approximately $500,000
less than book value. In the prior fiscal year we recorded a provision for
possible losses against receivables associated with the Chapter 11 bankruptcy
filing in January 2001 of an energy customer in the amount of $356,000.
Our effective tax rate decreased to 33% in the six months ended March
31, 2002 as compared to 35% in the six months ended March 31, 2001 as a result
of a decrease in state taxes and the benefit of tax credits related to our real
estate investments in the six months ended March 31, 2002.
Liquidity and Capital Resources
General. Following the sale of our equipment leasing operations, 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, resolutions of real estate loans and borrowings under our
existing energy and real estate finance credit facilities. We have employed
these funds principally in the expansion of our energy operations and the
repurchase of our senior notes and common stock. The following table sets forth
our sources and uses of cash for the period indicated as follows:
Six Months Ended
--------------------------
March 31,
--------------------------
2002 2001
----------- -----------
(in thousands)
Provided by operations........................................................................... $ 1,971 $ 6,887
Used in investing activities..................................................................... (3,694) (23,887)
Used in financing activities..................................................................... (15,795) (72,623)
----------- -----------
$ (17,518) $ (89,623)
=========== ===========
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Unaudited) - (Continued)
Liquidity and Capital Resources (Continued)
Our working capital at March 31, 2002 was $17.8 million, a decrease of
$931,000 from $18.7 million at September 30, 2001. Our debt-to-total capital
ratio at March 31, 2002 was 57% as compared to 64% at September 30, 2001. We had
$31.1 million in cash and cash equivalents on hand at March 31, 2002, as
compared to $48.6 million at September 30, 2001. Our ratio of earnings to fixed
charges was 2.69 to 1.0 in the six months ended March 31, 2002 as compared to
2.97 to 1.0 in the six months ended March 31, 2001.
Operating activities. Cash provided by operating activities decreased
$4.9 million to $2.0 million for the six months ended March 31, 2002 as compared
to $6.9 million for the six months ended March 31, 2001. The decrease is
primarily related to the following:
o In energy, the timing related to the receipt of investor funds raised
coupled with billings and payments of drilling work performed reduced
operating cash flows by $8.1 million.
o In real estate finance, the collection of interest increased cash
flow from operations by $3.9 million as compared to the prior period
due to the payment in full of one real estate loan.
Investing activities. Cash used in investing activities decreased $20.2
million for the six months ended March 31, 2002 to $3.7 million compared to
$23.9 for the six months ended March 31, 2001, principally as a result of the
following:
o In real estate finance, investments in real estate loans and ventures
decreased $14.3 million. In the prior fiscal period, we acquired
senior participation interests in loans in which we held junior
interests at a cost of $21.6 million. The remaining increase of $1.8
million related to additions to existing loans. In the current fiscal
period we made additions to existing loans of $7.3 million and
invested $1.5 million in one new real estate venture.
o We also purchased 125,000 shares of RAIT Investment Trust for $1.9
million during the six months ending March 31, 2002, as compared to
370,000 shares for $4.9 million during the six months ended March 31,
2001. Additionally, in the prior fiscal period, we made a final
payment of $2.3 million in accordance with the purchase agreement of
Viking Resources.
Financing activities. Cash used in finance activities decreased $56.8
million to $15.8 million in the six months ended March 31, 2002 as compared to
$72.6 million in the six months ended March 31, 2001. In connection with our
"Dutch Auction" tender offer in the prior fiscal period, we repurchased 6.3
million common shares for $57.0 million and in the six months ended March 31,
2002 we repurchased 56,200 shares for $493,000.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Unaudited) - (Continued)
Liquidity and Capital Resources (Continued)
We believe that our cash on hand, anticipated funds from operations,
and the amounts available under our revolving credit facilities will be
sufficient to cover our working capital needs, capital expenditures, debt
service requirements and tax obligations for at least the next 12 months. Our
ability to fund operations, make capital expenditures and make scheduled
principal and interest payments or to refinance our indebtedness will depend
upon future financial and operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors, some
of which are beyond our control
Contractual Obligations and Commercial Commitments
The following tables sets forth our commitments as of March 31, 2002:
Payments Due By Period (in thousands)
---------------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Contractual cash obligations: Total 1 Year Years Years Years
-------------- ------------- ------------ ------------- ---------------
Long-term debt.................... $ 138,282 $ 1,760 $ 133,142 $ 3,380 $ -
Capital lease obligations......... - - - - -
Operating leases.................. 5,339 1,970 2,129 1,240 -
Unconditional purchase obligations - - - - -
Other long-term obligations....... - - - - -
----------- ----------- ----------- --------- ---------
Total contractual cash obligations $ 143,621 $ 3,730 $ 135,271 $ 4,620 $ -
=========== =========== =========== ========= =========
Amount of Commitment Expiration Per Period
---------------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Other commercial commitments: Total 1 Year Years Years Years
-------------- ------------- ------------ ------------ ----------------
Lines of credit................... $ - $ - $ - $ - $ -
Standby letter of credit.......... 2,795 2,795 - - -
Guarantees........................ 2,553 184 2,369 - -
Standby repurchase commitments.... 21,788 1,538 9,991 7,779 2,480
Other commercial commitments...... - - - - -
----------- ----------- ------------ --------- -----------
Total commercial commitments...... $ 27,136 $ 4,517 $ 12,360 $ 7,779 $ 2,480
=========== =========== ============ ========= ===========
Transactions with Related Parties: Investments in Real Estate Joint Ventures
We are equal partners with affiliates of Frankel Enterprises in two
partnerships which own an office building and adjacent garage, respectively, in
Philadelphia, Pennsylvania. Our corporate headquarters are located in the
building. In order to protect the value of the office building and garage, we
and Frankel Enterprises, through three separate partnerships, acquired three
adjoining properties in March 2002 for approximately $18.9 million. A subsidiary
of RAIT Investment Trust ("RAIT") provided 100% of the financing, on a bridge
loan basis. Such financing bears interest at 10% per annum and matures in June
2002. In March 2002, we and Frankel Enterprises each invested $1.5 million in
cash in the three partnerships, which used the proceeds to pay down the RAIT
loan. We are pursuing new financing, along with RAIT, to further pay down the
RAIT loan and extend its due date.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Unaudited) - (Continued)
Critical Accounting Policies
We follow certain significant accounting policies when preparing our
consolidated financial statements. We provide a complete summary of these
policies in Note 2 to the consolidated financial statements included in our
Annual Report on Form 10-K.
Certain of the policies require management to make significant and
subjective estimates which are sensitive to deviations of actual results from
management's assumptions. In particular, management makes estimates regarding
the fair value of our reporting units in assessing potential impairment of
goodwill. In addition, we make estimates regarding future undiscounted cash
flows from the future use of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of a long-lived asset may not be
recoverable.
In assessing impairment of goodwill, we use estimates and assumptions
in estimating the fair value of reporting units. If under these estimates and
assumptions, we determine that the fair value of a reporting unit has been
reduced, the reduction directly realized as "impairs," goodwill. However, future
results could differ from the estimates and assumptions we use. Events or
circumstances which might lead to an indication of impairment of goodwill would
include, but might not be limited to, prolonged decreases in expectations of
long-term well servicing and/or drilling activity or rates brought about by
prolonged decreases in natural gas or oil prices, changes in government
regulation of the natural gas and oil industry or other events which could
affect the level of activity of exploration and production companies.
In assessing impairment of long-lived assets other than goodwill, where
there has been a change in circumstances indicating that the carrying amount of
a long-lived asset may not be recoverable, we have estimated future undiscounted
net cash flows from the use of the asset based on actual historical results and
expectations about future economic circumstances, including natural gas and oil
prices and operating costs. Our estimate of future net cash flows from the use
of an asset could change if actual prices and costs differ due to industry
conditions or other factors affecting our performance.
We have in the past sold participations in real estate loans which were
structured to meet the criteria for sale under generally accepted accounting
principles. As such, these amounts were removed from our balance sheet. The
amount of participations owed at March 31, 2002, which are not on our balance
sheet amounted to $21.8 million. These participations mature through June 2005
and require annual payments of principal and interest of approximately $2.5
million.
Recently Issued Financial Accounting Standards
Recently the Financial Accounting Standards Boards ("FASB") issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), and Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 143 establishes requirements for the accounting for
removal costs associated with asset retirements and SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 143 is effective for fiscal years beginning after June 15, 2002, with
earlier adoption encouraged, and SFAS 144 is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
We are currently assessing the impact of these standards on our consolidated
financial statements.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. We are exposed to various market risk factors such as
fluctuating interest rates and changes in commodity prices. These risk factors
can impact results of operations, cash flows and financial position. We manage
these risks through regular operating and financing activities and periodically
use derivative financial instruments such as forward contracts and interest rate
cap and swap agreements.
The following analysis presents the effect on our earnings, cash flows
and financial position as if the hypothetical changes in market risk factors
occurred on March 31, 2002. Only the potential impacts of hypothetical
assumptions are analyzed. The analysis does not consider other possible effects
that could impact the business.
If interest rates hypothetically increased or decreased by 10% at March
31, 2002, with all other variables held constant, the fair market value of our
$65.6 million 12% Senior Notes would increase or decrease by approximately $1.5
million.
Energy. At March 31, 2002, the amount outstanding under a revolving
loan attributable to our energy operations increased to $42.2 million from $41.2
million at September 30, 2001. The weighted average interest rate for this
facility decreased from 5.67% at September 30, 2001 to 4.4% at March 31, 2002
due to a decrease in market index rates used to calculate the facility's
interest rates. Holding all other variables constant, if interest rates
hypothetically increased or decreased by 10%, for the six months ended March 31,
2002, the impact on earnings, cash flow and financial position would not be
material.
We have a $10.0 million revolving credit facility to fund the expansion
of Atlas Pipeline Partners' existing gathering systems and the acquisitions of
other gas gathering systems. In the six months ended March 31, 2002, we drew
$728,500 under this facility. The balance outstanding as of March 31, 2002 is
$2.8 million. At March 31, 2002, the weighted average interest rate was 3.0%. A
hypothetical 10% change in the average interest rate applicable to this debt
would result in an immaterial change in our net income and the market value of
this debt.
Commodity Price Risk. Our major market risk exposure in commodities is
the pricing applicable to our gas and oil production. Realized pricing is
primarily driven by the prevailing worldwide prices for crude oil and spot
market prices applicable to U.S. natural gas production. Pricing for gas and oil
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. We recognize gains and losses from the settlement of
these hedges in gas revenues when the associated production occurs. The gains
and losses realized as a result of hedging are substantially offset in the
market when we deliver the associated natural gas. We do not hold or issue
derivative instruments for trading purposes. Through our hedges, we seek to
provide a measure of stability in the volatile environment of natural gas
prices. Our risk management objective is to lock in a range of pricing for
expected production volumes. This allows us to forecast future earnings within a
predictable range.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (Continued)
We set forth in the following table our natural gas hedge transactions
in place as of March 31, 2002. The total fiscal 2002 hedged natural gas volumes
represent approximately 8% of our fiscal 2001 total gas production. A 10%
variation in the market price of natural gas from its levels at March 31, 2002
would not have a material impact on our net assets, net earnings or cash
flows as derived from commodity option contracts.
Volumes Weighted
Natural Gas Settlement Date Average Unrealized
Open contracts (Dth) Quarter Ended Per Dth Gains(Losses)
-------------- ----------- ------------------------ ------------ --------------
32 89,600 June 2002 $ 3.06 $ (25,000)
30 84,000 September 2002 $ 3.15 (19,000)
19 53,200 December 2002 $ 3.30 (21,000)
27 75,600 March 2003 $ 3.51 (28,000)
38 106,400 June 2003 $ 3.21 (31,000)
36 100,800 September 2003 $ 3.29 (28,000)
-- ------- -----------
182 509,600 $ 3.23 $ (152,000)
=== ======= =========== ============
Real Estate Finance. The following information is based on the
Company's loans that are not interest rate sensitive. During the six months
ended March 31, 2002, our outstanding loans receivable (to our interest)
decreased $9.3 million (3%) to $283.0 million in the aggregate and the carried
cost of our loans decreased $12.8 million (8%) to $140.9 million in the
aggregate. The principal balance of related senior lien interests decreased $4.2
million (2%) to $216.5 million in the aggregate. These changes were principally
attributable to the repayment of one senior lien interest and the resolution of
one loan.
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 our purchase of an interest rate swap which
locked in the interest pay rate at 8.8%. Although the stated interest rate on
the loan continues to fluctuate over LIBOR, the Company pays only the 8.8%
locked-in rate. If the effective rate for a particular payment period is greater
than the locked-in rate, the Company receives the benefit of this difference.
The interest rates on our real estate revolving lines of credit, which
is at the prime rate minus 1% (as defined) for the outstanding $6.8 million line
at Hudson United Bank, and at prime for the outstanding $6.0 million and $5.0
million lines of credit at Sovereign Bank, decreased during the period ended
March 31, 2002 because there were three decreases in the defined prime rate.
This rate was the "prime rate" as reported in The Wall Street Journal (4.75% at
March 31, 2002). A hypothetical 10% change in the average interest rate
applicable to these rates would change our net income by approximately $90,000
and would have an immaterial effect on the market value of these debt
instruments.
We also have a $10.0 million term loan agreement. The loan bears
interest at the three month LIBOR rate plus 350 basis points adjusted annually.
Principal and interest is payable monthly based on a five year amortization
schedule maturing on October 31, 2006. At March 31, 2002, $8.7 million was
outstanding on this loan at an interest rate of 5.6%. A hypothetical 10% change
in the average interest rate applicable to these rates would change our net
income by approximately $50,000 and would have an immaterial effect on the
market value of this debt.
Due to the current interest rate environment, we have been negotiating
with our senior lienholders to reduce the interest rates on our senior liens. In
the six months ended March 31, 2002, we have negotiated interest rate reductions
with three of our senior participants.
27
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
----------- -----------
2.0 Purchase Agreement among New Vulcan Coal Holdings,
L.L.C., AIC, Inc., Viking Resources Corporation,
Resource Energy, Inc., Atlas Energy Group, Inc.,
Atlas Resources, Inc. and REI-NY, Inc. (1)
3.1 Restated Certificate of Incorporation of Resource
America (2)
3.2 Amended and Restated Bylaws of Resource America (2)
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 (3)
99.1 Contribution Agreement among Vulcan Intermediary,
L.L.C., New Vulcan Coal Holding, L.L.C., Atlas
Pipeline Partners GP, LLC, Atlas Pipeline Partners,
L.P. and Resource America, Inc. (1)
99.2 Press Release, dated January 18, 2002. (1)
- ---------------
(1) Filed previously as an exhibit to our current report on Form 8-K dated
January 22, 2002 and by this reference incorporated herein.
(2) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 and by this reference incorporated herein.
(3) 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:
During the quarter for which this report is being filed, the Company
filed a current report on Form 8-K dated January 22, 2002 regarding
the sale of its general partner's interest in Atlas Pipeline Partners
GP, LLC to New Vulcan Coal Holdings, LLC.
28
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 15, 2002 By: /s/ Steven J. Kessler
------------ ---------------------
STEVEN J. KESSLER
Senior Vice President and
Chief Financial Officer
Date: May 15, 2002 By: /s/ Nancy J. McGurk
------------ -------------------
NANCY J. McGURK
Vice President-Finance and
Chief Accounting Officer
29