-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AzV64rkaWhlyvtO6bWoU8DGrCcawE4lm3y2VqqV2LB1fFuwPENE9GfTE4rdbPbU0 gitfiKl3CCH3+Xhvp7VuBQ== 0000950116-02-001889.txt : 20020814 0000950116-02-001889.hdr.sgml : 20020814 20020814150935 ACCESSION NUMBER: 0000950116-02-001889 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESOURCE AMERICA INC CENTRAL INDEX KEY: 0000083402 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 720654145 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-04408 FILM NUMBER: 02735455 BUSINESS ADDRESS: STREET 1: 1521 LOCUST ST STREET 2: 4TH FL CITY: PHILADELPHIA STATE: PA ZIP: 19102 BUSINESS PHONE: 2155465005 MAIL ADDRESS: STREET 1: 1521 LOCUST ST CITY: PHILADELPHIA STATE: PA ZIP: 19102 FORMER COMPANY: FORMER CONFORMED NAME: SMTR CORP DATE OF NAME CHANGE: 19700522 FORMER COMPANY: FORMER CONFORMED NAME: RESOURCE EXPLORATION INC DATE OF NAME CHANGE: 19890214 10-Q 1 ten-q.txt 10-Q 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, 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: 17,373,137 Shares August 9, 2002 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, 2002 (Unaudited) and September 30, 2001..................................................... 3 Consolidated Statements of Operations (Unaudited) Three Months and Nine Months Ended June 30, 2002 and 2001.................. 4 Consolidated Statement of Changes in Stockholders' Equity (Unaudited) Nine Months Ended June 30, 2002............................................ 5 Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended June 30, 2002 and 2001................................... 6 Notes to Consolidated Financial Statements - June 30, 2002 (Unaudited)......... 7 - 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 18 - 33 Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 34 - 36 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................................. 37 Item 4. Submission of Matters to a Vote of Security Holders............................ 37 Item 6. Exhibits and Reports on Form 8-K............................................... 38 SIGNATURES..................................................................................... 39
2 PART I ITEM 1. FINANCIAL STATEMENTS RESOURCE AMERICA, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
June 30, September 30, 2002 2001 ---------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents............................................................ $ 26,850 $ 48,648 Accounts and notes receivable........................................................ 12,158 18,197 Prepaid expenses..................................................................... 3,300 762 ----------- ----------- Total current assets............................................................. 42,308 67,607 Investments in real estate loans (less allowance for possible losses of $2,979 and $2,529).......................................................................... 184,198 189,734 Investments in real estate ventures..................................................... 17,676 16,666 Investment in RAIT Investment Trust..................................................... 34,075 20,909 Property and equipment: Oil and gas properties and equipment (successful efforts)............................ 122,698 106,795 Gas gathering and transmission facilities............................................ 27,036 23,608 Other................................................................................ 8,137 7,310 ----------- ----------- 157,871 137,713 Less - accumulated depreciation, depletion and amortization............................. (41,581) (34,739) ----------- ----------- Net property and equipment........................................................... 116,290 102,974 Goodwill ............................................................................... 37,802 31,420 Other assets ........................................................................... 31,863 37,154 ----------- ----------- Total assets..................................................................... $ 464,212 $ 466,464 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt.................................................... $ 3,096 $ 8,560 Accounts payable..................................................................... 11,028 18,264 Accrued interest..................................................................... 3,795 1,721 Accrued liabilities.................................................................. 6,282 6,255 Estimated income taxes............................................................... - 288 Deferred revenue on drilling contracts............................................... 6,509 13,770 ----------- ----------- Total current liabilities........................................................ 30,710 48,858 Long-term debt: Senior............................................................................... 65,636 66,826 Non-recourse......................................................................... 61,250 62,159 Other................................................................................ 18,078 12,586 ----------- ----------- 144,964 141,571 Deferred revenue and other liabilities.................................................. 1,171 1,578 Deferred income taxes................................................................... 21,460 18,682 Minority interest in Atlas Pipeline Partners, L.P. ..................................... 19,629 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........................................................... 223,858 223,712 Less treasury stock, at cost......................................................... (74,372) (74,080) Less loan receivable from Employee Stock Ownership Plan ("ESOP")..................... (1,241) (1,297) Accumulated other comprehensive income............................................... 8,976 1,657 Retained earnings ................................................................... 88,807 85,218 ----------- ----------- Total stockholders' equity....................................................... 246,278 235,459 ----------- ----------- Total liabilities and stockholders' equity....................................... $ 464,212 $ 466,464 =========== ===========
See accompanying notes to consolidated financial statements 3 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended June 30, June 30, ------------------------- ------------------------ 2002 2001 2002 2001 ---------- ----------- ----------- ---------- (in thousands, except per share data) REVENUES Energy................................................................. $ 19,024 $ 22,618 $ 74,451 $ 73,055 Real estate finance.................................................... 4,252 3,971 13,556 12,262 Interest and other..................................................... 1,359 1,037 4,612 4,518 --------- --------- --------- -------- 24,635 27,626 92,619 89,835 COSTS AND EXPENSES Energy................................................................. 13,378 14,398 54,239 44,291 Real estate finance.................................................... 693 408 1,680 1,169 General and administrative............................................. 2,177 1,620 5,017 4,162 Depreciation, depletion and amortization............................... 2,823 2,884 8,203 8,099 Interest............................................................... 3,098 3,601 9,490 11,292 Provision for possible losses.......................................... 93 150 893 806 Minority interest in Atlas Pipeline Partners, L.P. .................... 568 895 1,963 3,505 --------- --------- --------- -------- 22,830 23,956 81,485 73,324 --------- --------- --------- -------- Income from continuing operations before income taxes ................. 1,805 3,670 11,134 16,511 Provision for income taxes............................................. 484 1,284 3,563 5,780 --------- --------- --------- -------- Income from continuing operations ..................................... 1,321 2,386 7,571 10,731 Discontinued operations: Loss from discontinued Optiron Corporation (including $1,800 loss on classification as held for sale)........ (1,926) (238) (2,328) (1,198) Income tax benefit.................................................. 611 83 745 419 --------- --------- --------- -------- Loss on discontinued operations..................................... (1,315) (155) (1,583) (779) Cumulative effect of change in accounting principle, net of taxes of $308 ............................................................ - - (655) - --------- --------- --------- -------- Net income............................................................. $ 6 $ 2,231 $ 5,333 $ 9,952 ========= ========= ========= ======== Net income (loss) per common share - basic: Continuing operations............................................... $ .08 $ .14 $ .44 $ .59 Discontinued operations............................................. (.08) (.01) (.09) (.04) Cumulative effect of change in accounting principle................. - - (.04) - --------- --------- --------- -------- Net income per common share - basic................................. $ .00 $ .13 $ .31 $ .55 ========= ========= ========= ======== Weighted average common shares outstanding............................. 17,455 17,483 17,444 18,126 ========= ========= ========= ======== Net income (loss) per common share - diluted: Continuing operations............................................... $ .07 $ .13 $ .43 $ .58 Discontinued operations............................................. (.07) (.01) (.09) (.05) Cumulative effect of change in accounting principle................. - - (.04) - --------- --------- --------- -------- Net income per common share - diluted............................... $ .00 $ .12 $ .30 $ .53 ========= ========= ========= ======== Weighted average common shares......................................... 17,903 18,076 17,813 18,610 ========= ========= ========= ========
See accompanying notes to consolidated financial statements 4 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NINE MONTHS ENDED JUNE 30, 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............... (387) 29,640 697 Issuance of common stock............. 103,360 1 289 Purchase of shares for treasury...... (97,927) (989) Other comprehensive income........... Cash dividends ($.099 per share)..... Tax benefit from employee stock option exercise.................. 244 Repayment of ESOP loan............... 56 Net income........................... ---------- --------- ---------- ------------ ------------ --------- Balance, June 30, 2002............... 25,043,397 $ 250 $ 223,858 (7,566,900) $ (74,372) $ (1,241) ========== ========= ========== ============ ============ ========= Accumulated Other Totals Comprehensive Retained Stockholders' Income Earnings Equity ----------------------------------------------- Balance, October 1, 2001............. $ 1,657 $ 85,218 $ 235,459 Treasury shares issued............... 310 Issuance of common stock............. 290 Purchase of shares for treasury...... (989) Other comprehensive income........... 7,319 7,319 Cash dividends ($.099 per share)..... (1,744) (1,744) Tax benefit from employee stock option exercise.................. 244 Repayment of ESOP loan............... 56 Net income........................... 5,333 5,333 ----------- -------- ----------- Balance, June 30, 2002............... $ 8,976 $ 88,807 $ 246,278 =========== ======== ===========
See accompanying notes to consolidated financial statements 5 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended June 30, -------------------------------- 2002 2001 ----------- ------------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................................................ $ 5,333 $ 9,952 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization............................................... 8,203 8,099 Amortization of discount on senior debt and deferred finance costs..................... 825 770 Provision for possible losses.......................................................... 893 806 Minority interest in Atlas Pipeline Partners, L.P...................................... 1,963 3,505 Loss on discontinued operations........................................................ 1,583 779 Cumulative effect of change in accounting principle.................................... 655 - Gain on dispositions................................................................... (2,846) (1,002) Property impairments and abandonments.................................................. 18 201 Deferred income taxes.................................................................. 3,022 (413) Accretion of discount.................................................................. (2,614) (4,579) Collection of interest................................................................. 5,244 1,330 Non-cash compensation.................................................................. 312 304 Changes in operating assets and liabilities............................................ (17,218) (5,066) ----------- ----------- Net cash provided by operating activities ................................................ 5,373 14,686 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................................................... (16,497) (9,988) Asset acquisitions........................................................................ - (6,500) Principal payments on notes receivable and proceeds from sales of assets ................. 24,190 26,396 Increase in other assets.................................................................. (6,279) (7,134) Investments in real estate loans and ventures............................................. (18,647) (23,408) Decrease in other liabilities............................................................. (25) (80) ----------- ----------- Net cash used in investing activities .................................................... (17,258) (20,714) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) on revolving lines of credit.................................. (2,289) 6,559 Dividends paid............................................................................ (1,744) (1,774) Dividends paid to minority interests of Atlas Pipeline Partners, L.P...................... (2,936) (2,696) Treasury stock purchased.................................................................. (989) (57,254) Repayment of ESOP loan.................................................................... 56 32 Increase in other assets.................................................................. (411) (343) Proceeds from issuance of stock........................................................... 17 390 ----------- ----------- Net cash used in financing activities..................................................... (8,296) (55,086) ----------- ----------- Net cash used in discontinued operations.................................................. (1,617) (2,225) ----------- ----------- Decrease in cash and cash equivalents..................................................... (21,798) (63,339) Cash and cash equivalents at beginning of period.......................................... 48,648 117,107 ----------- ----------- Cash and cash equivalents at end of period................................................ $ 26,850 $ 53,768 =========== ===========
See accompanying notes to consolidated financial statements 6 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 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 as of the dates of the financial statements and (iii) the reported amounts of revenues and costs 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 nine months ended June 30, 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 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 June 30, 2002: Carrying Estimated Amount Fair Value ----------- ---------- (in thousands) Energy debt................................ $ 46,578 $ 46,578 Real estate finance debt................... 29,428 29,428 Senior debt................................ 65,636 68,261 Other debt................................. 6,418 6,418 ----------- ----------- $ 148,060 $ 150,685 =========== =========== 7 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) June 30, 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 Nine Months Ended June 30, June 30, ------------------------- ------------------------ 2002 2001 2002 2001 ---------- ----------- ----------- ---------- (in thousands) Income from continuing operations ..................................... $ 1,321 $ 2,386 $ 7,571 $ 10,731 Loss from discontinued Optiron Corporation, net of taxes of $611, $83, $745 and $419........................... (1,315) (155) (1,583) (779) Cumulative effect of change in accounting principle, net of taxes of $308............................................... - - (655) - --------- --------- --------- -------- Net income........................................................ $ 6 $ 2,231 $ 5,333 $ 9,952 ========= ========= ========= ======== Basic average shares of common stock outstanding....................... 17,455 17,483 17,444 18,126 Dilutive effect of stock option and award plans........................ 448 593 369 484 --------- --------- --------- -------- Dilutive average shares of common stock................................ 17,903 18,076 17,813 18,610 ========= ========= ========= ========
For the three months and nine months ended June 30, 2002, the computation of diluted earnings per share excludes options for 861,000 shares of common stock that have exercise prices (ranging from $11.03 to $15.50 per share) greater than the per share average market price ($9.76) for the period. The effect of including these options in the computation of diluted per share amounts would be anti-dilutive. Comprehensive Income (Loss) The following table presents comprehensive income (loss) for the periods indicated:
Three Months Ended Nine Months Ended June 30, June 30, ------------------------- ------------------------ 2002 2001 2002 2001 ---------- ----------- ----------- ---------- (in thousands) Net income............................................................. $ 6 $ 2,231 $ 5,333 $ 9,952 Other comprehensive income (loss): Unrealized gain on investment, net of taxes of $1,748, $1,068, $3,742 and $1,480................................................. 3,394 2,078 7,442 2,873 Unrealized loss on natural gas futures contracts, net of tax benefits of $9 and $46........................................ (12) - (123) - --------- --------- --------- -------- 3,382 2,078 7,319 2,873 --------- --------- --------- -------- Comprehensive income................................................... $ 3,388 $ 4,309 $ 12,652 $ 12,825 ========= ========= ========= ========
8 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) June 30, 2002 (Unaudited) Recently Issued Financial Accounting Standards In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 establishes requirements for accounting for removal costs associated with asset retirements. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact of this standard on our consolidated financial statements. In October 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Live Assets" ("SFAS 144") was issued. SFAS 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the definition of what constitutes discontinued operations to include more disposal transactions. Under SFAS 144, assets held for sale that are a component of an entity are included in discontinued operation and cash flows will be eliminated from the ongoing operations if the entity does not have any significant continuing involvement in the operations prospectively. The adoption of SFAS 144 resulted in the classification of the Company's interest in its partially-owned energy technology subsidiary, Optiron Corporation ("Optiron"), as a discontinued operation (See Note 9). In May 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145") was issued. SFAS 145 rescinds the automatic treatment of gains and losses from extinguishments of debt as extraordinary unless they meet the criteria for extraordinary items as outlined in Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 145 also requires sale-leaseback accounting for certain lease modifications that have economic effects similar to a sale-leaseback transaction and makes various corrections to existing pronouncements. The adoption of SFAS 145 did not have a material effect on the Company's consolidated financial position or results of operations. In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146") was issued. SFAS 146 is effective for exit or Disposal activities initiated after December 31, 2002. The Company has not yet adopted SFAS 146 nor determined the effect of the adoption of SFAS 146 on its consolidated financial position or results of operations. NOTE 3 - OTHER ASSETS AND GOODWILL-CHANGE IN ACOUNTING PRINCIPLE Other assets consist of the following:
June 30, September 30, 2002 2001 ---------------- --------------- (Unaudited) (in thousands) Contracts acquired (net of accumulated amortization of $4,959 and $4,005)............... $ 9,531 $ 16,851 Deferred financing costs, net of amortization........................................... 1,517 1,921 Investments .......................................................................... 12,316 10,743 Assets held for sale.................................................................... 820 - Note receivable and amounts in escrow related to the disposal of subsidiary (net of allowance for possible losses of $10,522 and $10,704)........................ 5,862 7,141 Other................................................................................... 1,817 498 ----------- ---------- $ 31,863 $ 37,154 =========== ===========
9 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) June 30, 2002 (Unaudited) NOTE 3 - OTHER ASSETS AND GOODWILL - CHANGE IN ACOUNTING PRINCIPLE - (Continued) On October 1, 2001, the Company adopted SFAS 142 "Goodwill and Other Intangible Assets", which requires that goodwill no longer be amortized, but instead tested for impairment at least annually. At that time the Company had unamortized goodwill of $31.4 million. The Company has completed the transitional impairment test required upon adoption of SFAS 142. The transitional test, which involved the use of estimates related to the fair market value of the business operations associated with the goodwill did not indicate an impairment loss. The Company will continue to evaluate its goodwill, at least annually, and will reflect the impairment of goodwill, if any, in operating income in the income statement in the period in which is indicated. Changes in the carrying amount of goodwill for the nine months ended June 30, 2002 are as follows:
Nine Months Ended June 30, 2002 ----------------- (in thousands) Goodwill at September 30, 2001 (less accumulated amortization of $4,063)................................. $ 31,420 Additions to goodwill related to prior year asset acquisitions............... 15 Atlas Pipeline Partners goodwill amortization, whose fiscal year began January 1, 2002, at which time it adopted SFAS 142.................. (22) Syndication network reclassified from other assets in accordance with SFAS 142 (net of accumulated amortization of $711)........................ 6,389 ------------ Goodwill at June 30, 2002 (net of accumulated amortization of $4,796)............................... $ 37,802 ============
For the three months and nine months ended June 30, 2001, the Company's goodwill amortization expense was approximately $290,000 and $1.0 million, respectively. Pro forma net income from continuing operations for the three months and nine months ended June 30, 2001 would have been $2.6 million and $11.4 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 from continuing operations for the three months and nine months ended June 30, 2001 would have been $.15 and $.65, respectively. Pro forma diluted income per share from continuing operations for the three months and nine months ended June 30, 2001 would have been $.15 and $.63, respectively. Optiron, accounted for by the equity method, adopted SFAS 142 on January 1, 2002, the first day of its fiscal year. Optiron performed the evaluation of its goodwill required by SFAS 142 and determined that it was impaired due to uncertainty associated with the on-going viability of the product line with which the goodwill was associated. This impairment resulted in a cumulative effect adjustment on Optiron's books of $1.9 million before tax. The Company has recorded, in its second quarter which correlates to Optiron's first quarter, its 50% share of this cumulative effect adjustment in the same manner. 10 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) June 30, 2002 (Unaudited) NOTE 4 - CASH FLOW STATEMENTS Supplemental disclosure of cash flow information:
Nine Months Ended June 30, ----------------------------- 2002 2001 ----------- ----------- (in thousands) Cash paid during the period for: Interest........................................................................... $ 6,591 $ 8,219 Income taxes....................................................................... $ 3,499 $ 11,724 Nine Months Ended June 30, ----------------------------- 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 Partners units issued in exchange for gas gathering and transmission facility............................................................ $ - $ (2,250) Buyer's assumption of liabilities upon sale of loan................................ $ - $ 460 Tax benefit from employee stock option exercise.................................... $ 244 $ - Detail of asset acquisitions: Fair value of assets acquired...................................................... $ - $ 9,180 Atlas Pipeline Partners units issued in exchange for gas gathering and transmission facility............................................................ - (2,250) Liabilities assumed................................................................ - (430) ----------- ----------- Net cash paid.................................................................... $ - $ 6,500 =========== ===========
NOTE 5 - 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 their underlying properties. 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 $428,000 and $1.4 million during the three months ended June 30, 2002 and 2001, respectively, and $2.6 million and $4.6 million during the nine months ended June 30, 2002 and 2001, respectively. As the Company sells senior lien interests in or receives funds from refinancings of its loans, a portion of the cash received is applied to reduce the cumulative accretion of discount included in the carrying value of the Company's investments in real estate loans. 11 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) June 30, 2002 (Unaudited) NOTE 5 - INVESTMENTS IN REAL ESTATE LOANS - (Continued) At June 30, 2002, the Company held real estate loans having an aggregate face value of $600.3 million, which were being carried at an aggregate cost of $184.2 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 Nine Months Ended June 30, June 30, -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ------------- (in thousands) Balance, beginning of period...................................... $ 176,124 $ 189,335 $ 189,734 $ 183,927 Additions to existing loans....................................... 9,799 10 17,147 23,408 Provision for possible losses..................................... (210) (150) (1,010) (450) Accretion of discount (net of collection of interest)............. 428 1,427 2,614 4,579 Collection of principal........................................... - (75) - (1,063) Cost of loans resolved............................................ (1,943) (2,187) (24,287) (22,041) ----------- ----------- ----------- ------------- Balance, end of period............................................ $ 184,198 $ 188,360 $ 184,198 $ 188,360 =========== =========== =========== =============
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, -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ------------- (in thousands) Balance, beginning of period...................................... $ 2,829 $ 2,229 $ 2,529 $ 2,013 Provision for possible losses..................................... 210 150 1,010 450 Charges against allowance......................................... (60) - (560) (84) ----------- ----------- ----------- ------------- Balance, end of period............................................ $ 2,979 $ 2,379 $ 2,979 $ 2,379 =========== =========== =========== =============
12 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) June 30, 2002 (Unaudited) NOTE 6 - DEBT Total debt consists of the following:
June 30, September 30, 2002 2001 -------------- ---------------- (in thousands) Senior debt..................................................................... $ 65,636 $ 66,826 Non-recourse debt: Energy: Revolving and term bank loans.............................................. 46,578 43,284 Real estate finance: Revolving credit facilities................................................ 13,797 18,000 Other...................................................................... 875 875 ------------ ------------- Total non-recourse debt.................................................... 61,250 62,159 Other debt...................................................................... 21,174 21,146 ------------ ------------- 148,060 150,131 Less current maturities......................................................... 3,096 8,560 ------------ ------------- $ 144,964 $ 141,571 ============ =============
NOTE 7 - 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. 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 entered into 90 and 272 natural gas futures contracts, during the three and nine months ended June 30, 2002, respectively, in addition to the 17 contracts that were open at the beginning of the fiscal year. For the three months and nine months ended June 30, 2002, the Company settled 42 and 59 contracts at a loss of $37,000 and $62,000, respectively (net to the Company). A portion of these settled contracts cover natural gas production for the upcoming fiscal quarter and $7,000 of the $62,000 loss will appear as a component of production revenues at that time. At June 30, 2002, the Company had 230 open contracts covering 644,000 dekatherms ("Dth") (net to the Company) which mature through September 2003 at a combined average settlement price of $3.47 per Dth. For the current fiscal year ending September 30, 2002, 20 of the 230 open contracts will mature covering 56,000 Dth (net to the Company) at a combined average settlement price of $3.18 per Dth. 13 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) June 30, 2002 (Unaudited) NOTE 7 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - (Continued) The Company's net unrealized loss related to all open NYMEX contracts was approximately $169,000 at June 30, 2002. The unrealized loss at June 30, 2002 has been recorded as a liability in the Company's June 30, 2002 Consolidated Financial Statements and in Stockholders' Equity as a component of accumulated other comprehensive income, net of taxes of $46,000. As of June 30, 2002, $4,600 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 nine months ended June 30, 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 8 - 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 that is payable to the extent that payments are made on a pool of Fidelity Leasing lease receivables and refunds are received with respect to certain tax receivables. Through June 30, 2002, the Company received $6.8 million of payments on the note. In addition, $10.0 million of the sales proceeds were placed in an escrow account until July 31, 2004 as security for certain indemnification obligations to the purchaser. Through June 30, 2002, $510,000 had been 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. Through July 31, 2002, the purchaser of Fidelity Leasing and its assignees have made indemnification claims in the aggregate amount of $18.4 million, which the Company has disputed. The Company and the assignee have entered into discussions concerning the validity of these claims. At June 30, 2002, the Company has a $10.5 million allowance recorded against the promissory note and escrow account. The Company has reviewed the allowance and adjusted the allowance, as required, to a level that is estimated by management to provide for possible losses against the promissory note and indemnification obligations. In connection with the Supplemental Employee Retirement Plan established pursuant to the employment agreement with Edward E. Cohen, its chairman and chief executive officer, the Company entered into a "split-dollar" insurance arrangement under which the Company pays a portion of the premiums under a life insurance policy with respect to Mr. Cohen, with reimbursement of such premiums due upon the occurrence of specified events, including Mr. Cohen's death. Under the recently enacted Sarbanes-Oxley Act of 2002, the future payment of premiums by the Company under this arrangement may be deemed to be a prohibited loan by the Company to Mr. Cohen. Since the next premium payment under this arrangement is not due until April 2003, the Company has deferred any decision relating to this arrangement until the application of the Sarbanes-Oxley Act has been clarified. The Company cannot predict what effect, if any, the cancellation of the arrangement might entail. 14 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) June 30, 2002 (Unaudited) NOTE 9 - DISCONTINUED OPERATIONS In June 2002, the Company adopted a plan to dispose of Optiron. The Company has a verbal agreement in principle to reduce its 50% interest in Optiron to 10% through a sale to current management and anticipates that the sale will be completed by September 30, 2002. Accordingly, Optiron is reported as a discontinued operation for the three months and nine months ended June 30, 2002 and 2001. In connection with the sale, the Company anticipates that it will forgive $4.5 million out of the $5.9 million of indebtedness owed by Optiron. The remaining $1.4 million of indebtedness will be retained by the Company in the form of a promissory note which will be secured by all of Optiron's assets and by the common stock of Optiron's 90% shareholder. The Company anticipates that the note will bear interest at the prime rate plus 1% payable monthly; an additional 1% will accrue until the maturity date of the note in 2022. Closing of this transaction is subject to the signing of a definitive agreement. NOTE 10 - TERMINATION OF AGREEMENT TO SELL SUBSIDIARIES 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. On July 31, 2002, the Company announced that Atlas Pipeline Partners had exercised its right under the contribution agreement, dated January 18, 2002, to terminate the agreement with New Vulcan Coal Holdings, L.L.C. and Vulcan Intermediary, L.L.C. (collectively, "Vulcan") to acquire Triton Coal Company, L.L.C. ("Triton"). Since consummation of the contribution agreement was a condition for the consummation of the agreement to sell Atlas Pipeline Partners GP, LLC to Vulcan, that agreement was likewise terminated on July 31, 2002. Through June 30, 2002, Atlas Pipeline Partners had incurred approximately $1.4 million in costs in connection with the Triton transaction, subject to reimbursement by the Company and its affiliates for their allocable portion of these costs. The Company has advanced approximately $900,000 to Atlas Pipeline Partners through June 30, 2002 to pay for these costs. The Company anticipates that it will advance to Atlas Pipeline Partners the balance of these costs. Atlas Pipeline Partners and its affiliates have the right to reimbursement from Vulcan of up to $1.2 million of the transaction costs. Atlas Pipeline Partners has expensed transaction costs of $187,500, the difference between costs incurred and those reimbursable by Vulcan. The costs that are reimbursable by Vulcan are included on the Company's consolidated balance sheet as prepaid expenses. 15 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) June 30, 2002 (Unaudited) NOTE 11 - 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 Nine Months Ended June 30, June 30, -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ------------- (in thousands) Revenues: Energy......................................................... $ 19,145 $ 22,654 $ 74,625 $ 73,141 Real estate finance............................................ 4,252 3,971 13,556 12,262 Corporate...................................................... 1,359 1,037 4,612 4,518 ----------- ----------- ----------- ------------- $ 23,756 $ 27,662 $ 92,793 $ 89,921 =========== =========== =========== ============= Operating profit (loss): Energy......................................................... $ 2,153 $ 3,696 $ 10,087 $ 16,213 Real estate finance............................................ 1,626 1,465 5,329 5,376 Corporate...................................................... (1,974) (1,491) (4,282) (5,078) ----------- ----------- ----------- ------------- $ 1,805 $ 3,670 $ 11,134 $ 16,511 =========== =========== =========== ============= June 30, September 30, 2002 2001 ----------- ------------- (Unaudited) (in thousands) Identifiable assets: Energy............................................................................. $ 178,429 $ 172,189 Real estate finance................................................................ 203,178 207,682 Corporate.......................................................................... 82,605 86,593 ----------- ----------- $ 464,212 $ 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 $121,000 and $174,000 in the three months and nine months ended June 30, 2002, respectively, and $36,000 and $86,000 in the three months and nine months ended June 30, 2001, respectively. 16 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) June 30, 2002 (Unaudited) NOTE 12 - SUBSEQUENT EVENT In July 2002, Atlas America, the Company's energy subsidiary, entered into a $75.0 million credit facility led by Wachovia Bank. The revolving credit facility has an initial borrowing base of $45.0 million which may be increased subject to growth in the Company's oil and gas reserves. The facility permits draws based on the remaining proved developed non-producing and proved undeveloped natural gas and oil reserves attributable to the Atlas America's wells and the projected fees and revenues from operation of the wells and the administration of partnerships. Up to $10.0 million of the facility may be in the form of standby letters of credit. The facility is secured by Atlas America's assets. The revolving credit facility has a term ending in July 2005 and bears interest at one of two rates (elected at the borrower's option) which increase as the amount outstanding under the facility increases: (i) Wachovia prime rate plus between 25 to 75 basis points, or (ii) LIBOR plus between 175 and 225 basis points. The credit facility contains financial covenants, including covenants requiring the Company and Atlas America to maintain specified financial ratios, and imposes the following limits: (a) the amount of debt that can be incurred cannot exceed specified levels without the banks' consent; and (b) the energy affiliates may not sell, lease or transfer property without the banks' consent. This credit facility was used to pay off the existing energy revolving credit facility. 17 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; o uncertainties inherent in estimating quantities of gas and oil reserves, projecting futures rates of production and the timing of development expenditures; o the availability of capital; and o general economic conditions and the existence of regulatory uncertainties. In Real Estate Finance: o fluctuations in real property values; o fluctuations in interest rates; o changes in current environmental laws or the discovery of contamination on any properties underlying our loans; and o changes in national economic conditions or in conditions in the areas in which properties underlying our real estate loans are located. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Unaudited) - (Continued) Overview of Third Quarter of Fiscal 2002 Our operating results and financial condition for the third quarter of fiscal 2002 reflect the importance to us of our energy operations as shown in the following tables:
Revenues as a Percent of Total Revenues(1) Three Months Ended Nine Months Ended June 30, June 30, -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ------------- Energy ........................................................... 77% 82% 80% 81% Real estate finance............................................... 17% 14% 15% 14% Assets as a Percent of Total Assets(2) June 30, September 30, 2002 2001 ---------------- --------------- Energy ............................................................................... 38% 37% Real estate finance................................................................... 44% 45%
- --------------- (1) The balance (6% and 5%, and 4% and 5%, for the three and nine months ended June 30, 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 (18% at June 30, 2002 and September 30, 2001) is attributable to corporate assets not attributable to a specific industry segment, as referred to in (1). 19 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 Nine Months Ended June 30, June 30, -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ------------- (in thousands, except sales price and production volumes data) Revenues: Production.................................................... $ 7,304 $ 10,078 $ 21,200 $ 29,456 Well drilling................................................. 8,472 8,905 43,211 32,389 Well services................................................. 1,910 2,115 6,028 6,928 Transportation................................................ 1,338 1,520 4,012 4,282 ----------- ----------- ----------- ----------- $ 19,024 $ 22,618 $ 74,451 $ 73,055 =========== =========== =========== =========== Costs and expenses: Production.................................................... $ 1,631 $ 1,743 $ 4,931 $ 4,957 Exploration................................................... 580 644 1,236 1,203 Well drilling................................................. 7,597 7,718 38,405 26,646 Well services................................................. 1,085 989 2,993 2,963 Transportation................................................ 516 396 1,574 1,224 Non-direct.................................................... 1,969 2,908 5,100 7,298 ----------- ----------- ----------- ----------- $ 13,378 $ 14,398 $ 54,239 $ 44,291 =========== =========== =========== =========== Production revenues(1): Gas........................................................... $ 6,392 $ 8,784 $ 18,752 $ 25,669 Oil........................................................... $ 930 $ 1,187 $ 2,443 $ 3,586 Production volumes: Gas (thousands of cubic feet ("mcf")/day) (1)................. 19,239 19,521 19,535 17,944 Oil (barrels ("bbls")/day).................................... 466 574 463 507 Average sales prices: Gas (per mcf)................................................. $ 3.65 $ 4.94 $ 3.52 $ 5.24 Oil (per bbl)................................................. $ 21.96 $ 22.71 $ 19.34 $ 25.92 Average production costs: (per mcf equivalent unit)..................................... $ .81 $ .83 $ .81 $ .86
- ---------------- (1) Excludes sales of residual gas and sales to landowners. Our natural gas revenues were $6.4 million and $18.8 million in the three months and nine months ended June 30, 2002, a decrease of $2.4 million (27%) and $6.9 million (27%) from $8.8 million and $25.7 million in the three months and nine months ended June 30, 2001. The decreases were due to decreases in the average sales price of natural gas of 26% and 33% for the three months and nine months ended June 30, 2002, respectively. Additionally, volumes decreased 1% and increased 9% in the three months and nine months ended June 30, 2002, respectively. The $2.4 million decrease in gas revenues in the three months ended June 30, 2002 as compared to the prior period consisted of $2.3 million attributable to price decreases and $94,000 attributable to volume decreases. The $6.9 million decrease in gas revenues in the nine months ended June 30, 2002 as compared to the prior period consisted of an $8.4 million decrease attributable to price decreases, partially offset by a $1.5 million increase attributable to volume increases. 20 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 $930,000 and $2.4 million in the three months and nine month periods ended June 30, 2002, a decrease of $257,000 (22%) and $1.1 million (32%) from $1.2 million and $3.6 million in the three months and nine months ended June 30, 2001, due to decreases in production volumes of 19% and 9% in the three months and nine months ended June 30, 2002. In addition, the average sales prices received for oil decreased 3% and 25% in the three months and nine months ended June 30, 2002, as compared to the prior fiscal periods. The $257,000 decrease in oil revenues in the three months ended June 30, 2002 as compared to the prior period consisted of decreases of $218,000 attributable to price decreases and $39,000 attributable to volume decreases. The $1.1 million decrease in oil revenues for the nine months ended June 30, 2002 as compared to the prior period consisted of decreases of $910,000 attributable to price decreases and $233,000 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 $875,000 and $4.8 million in the three months and nine months ended June 30, 2002, a decrease of $312,000 (26%) and $937,000 (16%) from $1.2 million and $5.7 million in the three months and nine months ended June 30, 2001. The decrease in our gross profit margin from 13% and 18% in the three months and nine months ended June 30, 2001 to 10% and 11% in the three months and nine months ended June 30, 2002 arose from an increase in the average cost per well and a change, during the first quarter of fiscal 2002, in the structure of our drilling contracts effective December 2000 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 $205,000 and $900,000 in the three months and nine months ended June 30, 2002, respectively. This decrease was primarily a result of a decrease in gas marketing activities of $288,000 and $983,000 in the three months and nine months ended June 30, 2002, respectively. 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 12% in the three months and 6% in the nine months ended June 30, 2002 as compared to the prior periods. 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 30% and 29% in the three months and nine months ended June 30, 2002, respectively, as compared to the prior periods. These increases resulted from higher compressor expenses and costs associated with two small pipelines acquired in fiscal 2001 by Atlas Pipeline Partners. Non-direct expenses were $2.0 million and $5.1 million in the three months and nine months ended June 30, 2002, a decrease of $939,000 (32%) and $2.2 million (30%). 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 costs to our production, drilling, well services and well operations functions. Amortization of oil and gas properties as a percentage of oil and gas revenues was 26% in both the three months and nine months ended June 30, 2002 compared to 17% and 15% for the three months and nine months ended June 30, 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. 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Unaudited) - (Continued) 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 Nine Months Ended June 30, June 30, -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ------------- (in thousands) Revenues: Interest..................................................... $ 2,583 $ 2,237 $ 7,588 $ 6,916 Accreted discount............................................ 428 1,427 2,614 4,579 ----------- ----------- ----------- ----------- 3,011 3,664 10,202 11,495 Gains on resolutions of loans and loan payments in excess of the carrying value of loans...................... 757 496 2,398 891 Net rental and fee income.................................... 484 (189) 956 (124) ----------- ----------- ----------- ----------- $ 4,252 $ 3,971 $ 13,556 $ 12,262 =========== =========== =========== =========== Cost and expenses.............................................. $ 693 $ 408 $ 1,680 $ 1,169 =========== =========== =========== ===========
Revenues from our real estate finance operations increased $281,000 (7%) from $4.0 million in the three months ended June 30, 2001 to $4.3 million in the three months ended June 30, 2002. Revenues increased $1.3 million (11%) from $12.3 million in the nine months ended June 30, 2001 to $13.6 million in the nine months ended June 30, 2002. We attribute these changes to the following: o An increase of $261,000 (53%) and $1.5 million (169%) in gains from resolution of loans and loan repayments in excess of carrying values in the three and nine months ended June 30, 2002 as compared to the same prior periods. In the three months ended June 30, 2002, we sold one loan having a book value of $1.0 million to RAIT Investment Trust for $1.8 million, resulting in a gain of $757,000. We also sold a loan which had been written down by $500,000 in the previous quarter and by an additional $60,000 in the current quarter, resulting in no gain or loss on the sale of this loan. In the nine months ended June 30, 2002, we sold a total of three loans having book values of $24.2 million for $26.6 million, resulting in gains of $2.4 million. In the three and nine months ended June 30, 2001, we sold two loans having book values of $2.2 million and $22.1 million, respectively, which were resolved for $2.6 million and $23.0 million, respectively, resulting in gains of $460,000 and $795,000, respectively. There was also the repayment of one loan in the three months and two loans in the nine months ended June 30, 2001 in the amounts of $110,000 and $225,000, respectively, having book values of $74,000 and $130,000, respectively, resulting in gains of $36,000 and $96,000. o A decrease in interest and accreted discount of $653,000 (18%) and $1.3 million (11%) in the three months and nine months ended June 30, 2002, respectively, primarily resulting from the following: - The sale of seven loans, which decreased interest income by $746,000 and $2.8 million in the three months and nine months ended June 30, 2002, respectively, as compared to the three months and nine months ended June 30, 2001. - The completion of accretion on eight loans, which decreased interest income by $351,000 and $617,000 in the three months and nine months ended June 30, 2002, respectively, as compared to the three months and nine months ended June 30, 2001. 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Unaudited) - (Continued) Results of Operations: Real Estate Finance - (Continued) - These decreases were partially offset by an increase in our accretion amount due to increases in our estimated cash flows relating to several properties resulting in an increase in interest income of $241,000 and $666,000 in the three months and nine months ended June 30, 2002, respectively, as compared to the three months and nine months ended June 30, 2001. - These decreases were partially offset by an increase in interest income resulting from the purchase of two senior lien interests in two loans in March 2001 in which we previously held subordinated interests, increasing interest income by $203,000 and $1.4 million in the three months and nine months ended June 30, 2002, respectively, as compared to the three months and nine months ended June 30, 2001. o An increase in net rental and fee income of $673,000 and $1.1 million to $484,000 and $956,000 in the three months and nine months ended June 30, 2002, respectively. This compared to an expense of $189,000 and $124,000 in the three months and nine months ended June 30, 2001, respectively. These increases resulted from an increase in our equity earnings in one real estate joint venture in which we own a 50% equity interest and a consulting fee of $300,000 received from another real estate joint venture in which we own a 25% equity interest. 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 $693,000 and $1.7 million in the three months and nine months ended June 30, 2002, respectively, an increase of $285,000 (70%) and $511,000 (44%) from $408,000 and $1.2 million in the same periods of the prior fiscal year. The increase was primarily a result of an increase in professional fees of $317,000 in the nine months ended June 30, 2002, associated with ongoing litigation regarding one of our real estate loans. In addition, wages and benefits increased $139,000 in the nine months ended June 30, 2002 as a result of the addition of a new president and other personnel 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 $1.4 million and $4.6 million in the three months and nine months ended June 30, 2002, respectively, an increase of $322,000 (31%) and $94,000 (2%) as compared to $1.0 million and $4.5 million during the three months and nine months ended June 30, 2001, respectively. Increases for the three months and nine months ended June 30, 2002 as compared to the three months and nine months ended June 30, 2001 are as follows:
Three Months Ended Nine Months Ended June 30, 2002 June 30, 2002 as compared to as compared to Three Months Ended Nine Months Ended June 30, 2001 June 30, 2001 -------------------- ------------------- (in thousands) Interest income................................... $ (175) $ (1,539) Dividend income................................... 220 926 Gains on sale of property and equipment........... 149 316 Other............................................. 128 391 ----------- ---------- $ 322 $ 94 =========== ==========
23 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) Interest income decreased due to decreases in our cash balances from the sale of our small ticket leasing subsidiary for the three months and nine months ended June 30, 2002 from those in the comparable prior fiscal year periods, as well as to lower rates on those funds invested. Gains on sales of property and equipment increased primarily due to the sale of certain assets which were not located within the Appalachian basin. Dividend income increased primarily from our additional share ownership in RAIT Investment Trust. Our general and administrative expenses increased $557,000 (34%) to $2.2 million, and $855,000 (21%) to $5.0 million, in the three months and nine months ended June 30, 2002, from $1.6 million and $4.2 million in the three and nine month periods ended June 30, 2001, respectively. These increases primarily resulted from increases in salaries and benefits including health insurance, increases in our donations and professional services. Our interest expense was $3.1 million and $9.5 million in the three months and nine months ended June 30, 2002, respectively, a decrease of $503,000 (14%) and $1.8 million (16%) from $3.6 million and $11.3 million for the three months and nine months ended June 30, 2001, respectively. These decreases primarily resulted from our purchase of $7.7 million of our 12% senior subordinated notes since June 30, 2001, which reduced interest by $226,000 and $584,000 for the three months and nine months ended June 30, 2002, respectively. In addition, a reduction in borrowings and lower rates received by our real estate finance division decreased interest expense by $379,000 and $846,000 in the three months and nine months ended June 30, 2002, respectively. The minority interest in Atlas Pipeline Partners owned by unitholders other than ourselves represents approximately 48% of the net earnings of Atlas Pipeline Partners. Because we own more than 50% of Atlas Pipeline Partners, it is included in our consolidated financial statements and the ownership by the other unitholders is shown as a minority interest. The minority interest in Atlas Pipeline Partners earnings was $568,000 and $2.0 million for the three months and nine months ended June 30, 2002, respectively, as compared to $895,000 and $3.5 million for the three months and nine months ended June 30, 2001, a decrease of $327,000 (37%) and $1.5 million (44%), respectively. These decreases were the result of a decrease in net income of these gas gathering operations principally due to decreases in the transportation fees received by Atlas Pipeline Partners as a result of reductions in natural gas prices upon which many of those fees are based. Our provision for possible losses decreased $57,000 to $93,000 in the three months ended June 30, 2002 from $150,000 in the three months ended June 30, 2002, as a result of the realization of amounts previously written off due to the bankruptcy filing of an energy customer, partially offset by an increase in our provision for possible losses of $60,000 in our real estate segment, associated with the write-down and subsequent disposal during the current fiscal quarter, of one real estate loan. Our provision for possible losses increased $87,000 to $893,000 in the nine months ended June 30, 2002 from $806,000 in the nine months ended June 30, 2001 as a result of a $560,000 increase in the provision for possible losses associated with the write-down of one real estate loan which was sold during the current fiscal quarter, offset by the realization of $117,000 which was previously written off due to the bankruptcy filing of an energy customer who filed for bankruptcy in the nine months ended June 30, 2001 which resulted in a charge to the provision for possible losses of $356,000. Our effective tax rate decreased to 32% in the nine months ended June 30, 2002 as compared to 35% in the nine months ended June 30, 2001 as a result of a decrease in the amortization of goodwill in the nine months ended June 30, 2002 as compared to the nine months ended June 30, 2001. 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Unaudited) - (Continued) Discontinued Operations and Cumulative Effective of Change in Accounting Principle In accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long Lived Assets", our decision to dispose of Optiron is shown as discontinued operations for both the three months and nine months ended June 30, 2002 and 2001. Optiron is an energy technology company in which we hold a 50% equity interest and account for using the equity method. The cumulative effect of change in accounting principle relates to our equity method of accounting for Optiron which adopted SFAS 142 on January 1, 2002. This adoption resulted in an impairment and write down of goodwill on their books associated with the on-going viability of their product with which the goodwill was associated. 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 periods indicated: Nine Months Ended -------------------------- June 30, -------------------------- 2002 2001 ----------- ----------- (in thousands) Provided by operations......................... $ 5,373 $ 14,686 Used in investing activities................... (17,258) (20,714) Used in financing activities................... (8,296) (55,086) Used by discontinued operations................ (1,617) (2,225) ----------- ----------- $ (21,798) $ (63,339) =========== =========== Our working capital at June 30, 2002 was $11.6 million, a decrease of $7.2 million from $18.7 million at September 30, 2001. Our long-term debt (including current maturities) to total capital ratio at June 30, 2002 was 38% as compared to 39% at September 30, 2001. We had $26.9 million in cash and cash equivalents on hand at June 30, 2002, as compared to $48.6 million at September 30, 2001. Our ratio of earnings to fixed charges was 2.4 to 1.0 in the nine months ended June 30, 2002 as compared to 2.8 to 1.0 in the nine months ended June 30, 2001. Operating activities. Cash provided by operating activities decreased $9.3 million to $5.4 million for the nine months ended June 30, 2002 as compared to $14.7 million for the nine months ended June 30, 2001. The decrease is primarily related to the following: o A decrease of $12.1 million in deferred revenue on drilling contracts primarily attributable to the timing of our receipt of investor funds from our drilling partnership syndication and subsequent use of those funds in our drilling activities. This decrease was substantially the result of the following: - An increase in deferred revenue on drilling contracts for the nine months ended June 30, 2001 of $4.5 million, and - a decrease in deferred revenue on drilling contracts for the nine months ended June 30, 2002 of $7.3 million. 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Unaudited) - (Continued) Liquidity and Capital Resources - (Continued) o Decreases of $5.5 million in accounts payable primarily due to a difference in the timing of our receipt of cash for gas and oil production which was subsequently distributed to well interest owners in the first quarter of the next fiscal year at September 30, 2001 compared to September 30, 2000. o Increases of $8.2 million due to greater amounts owed and paid for income taxes through the nine months ended June 2001 as a result of our higher income in the period as compared to the nine months ended June 2002. Investing activities. Cash used in investing activities decreased $3.4 million for the nine months ended June 30, 2002 to $17.3 million compared to $20.7 million for the nine months ended June 30, 2001, principally as a result of the following: o Investments in real estate loans and ventures decreased $4.8 million. We purchased two loan participations in loans where we previously held junior interests in the second quarter of fiscal 2001 for $21.6 million as compared to the purchase of five participations in loans where we previously held junior interests for $12.9 million in the current fiscal period. We also invested $4.2 million in existing loans in the nine months ended June 30, 2002, while investing $1.8 million in these loans in fiscal 2001. In addition, in fiscal 2002, we invested $1.5 million in one real estate joint venture. There were no such investments in fiscal 2001. o Payments on notes receivable and proceeds from assets sales decreased $2.2 million primarily due to an expected decrease in principal payments of $2.4 million on our note receivable related to the disposal of our leasing subsidiary o Investments in other assets deceased $855,000. In the nine months ended June 30, 2002, we purchased $1.9 million in RAIT shares as compared to $4.9 million in RAIT shares in the nine months ended June 30, 2001, resulting in a decrease of $3.0 million. This decrease was partially offset by increased investments by our small equipment leasing group in the current year and a final payment of $2.3 million under the purchase agreement relating to Viking Resources in the prior year. Financing activities. Cash used in financing activities decreased $46.8 million to $8.3 million in the nine months ended June 30, 2002. This decrease was primarily due to our "Dutch Auction" tender offer in the prior fiscal period, in which we repurchased 6.3 million common shares for $57.0 million whereas in the nine months ended June 30, 2002, we repurchased 102,400 shares for $989,000. 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 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Unaudited) - (Continued) Contractual Obligations and Commercial Commitments The following tables set forth our obligations and commitments as of June 30, 2002.
Payments Due By Period (in thousands) --------------------------------------------------------------------- Contractual cash obligations: Less than 1 - 3 4 - 5 After 5 Total 1 Year Years Years Years -------------- ------------- ---------------- ------------- --------------- Long-term debt...................... $ 148,060 $ 3,096 $ 142,319 $ 2,633 $ 12 Capital lease obligations........... - - - - - Operating leases.................... 5,287 1,757 2,120 1,410 - Unconditional purchase obligations.. - - - - - Other long-term obligations......... - - - - - ----------- ----------- ----------- ----------- --------- Total contractual cash obligations.. $ 153,347 $ 4,853 $ 144,439 $ 4,043 $ 12 =========== =========== =========== =========== ========= Amount of Commitment Expiration Per Period (in thousands) --------------------------------------------------------------------- Other commercial commitments: Less than 1 - 3 4 - 5 After 5 Total 1 Year Years Years Years ------------- ------------- ---------------- ------------ ---------------- Lines of credit..................... $ - $ - $ - $ - $ - Standby letter of credit............ 2,165 2,165 - - - Guarantees.......................... 2,426 132 2,294 - - Standby replacement commitments..... 10,591 2,742 7,849 - Other commercial commitments........ 198,039 2,415 64,189 4,162 127,273 ----------- ----------- ------------ ---------- ----------- Total commercial commitments........ $ 213,221 $ 7,454 $ 74,332 $ 4,162 $ 127,273 =========== =========== ============ ========== ===========
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 and included above. We also have contingent liabilities in connection with senior lien financing with respect to five of our loans included in "Other Commercial Commitments" on the above table. The senior lien loans are with recourse only to properties securing them subject to certain standard exceptions, which we have guaranteed. These exceptions relate principally to the following: o fraud or intentional misrepresentation in connection with the loan documents; o misapplication or misappropriation of rents, insurance proceeds or condemnation awards during continuance of any event of default or, at any time, of tenant security deposits or advance rents; o payments of fees or commissions to various persons related to borrower or us during an event of default, except as permitted by the loan documents; o failure to pay taxes, insurance premiums or specific other expenses, failure to use property revenues to pay property expenses, and commission of criminal acts or waste with respect to the property; o environmental violations; and o the undismissed or unstayed bankruptcy or insolvency of borrower. We believe that none of the guarantees must be included in our consolidated financial statements based on our assessment that the likelihood of our being required to pay any claims under any of them is remote under the facts and circumstances pertaining to each of them. 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Unaudited) - (Continued) Transactions with Related Parties We have invested in three limited partnerships which in March 2002 purchased for $18.9 million three properties adjacent to the office building and garage in which our executive offices are located and in which we own a 50% interest. Initial financing was provided by RAIT Investment Trust ("RAIT") which retains a $4.6 million mezzanine loan at 14% per annum, maturing in July 2004. RAIT's remaining loan, which is in the process of being repaid by additional borrowings from unaffiliated institutions, is subordinate to a $9.0 million first mortgage loan provided by an unaffiliated bank. Our investment represents a 25% interest in the venture, purchased for $1.5 million in cash. In connection with the financing of this transaction, we received a $300,000 consulting fee. In June 2002, we sold a mortgage loan having a book value of $1.0 million to RAIT for $1.8 million, recognizing a gain of $757,000. We, along with an unaffiliated co-venturer, have organized a venture to acquire approximately $300.0 million of Trust Preferred Securities issued by financial institutions. The equity portion of this program closed in June 2002 and raised $27.4 million from a group of limited partner investors (including $2.8 million invested by us). We will receive administrative and collateral management fees for co-managing the venture, and will earn and receive a return on our limited partner investment. We will also receive a carried interest in the venture. The venture was originated and developed in large part by Daniel Cohen, whose company will continue to provide consulting services to us in connection with the venture and will receive 10% of the cash received by us. In addition, Mr. Cohen's company will be reimbursed for expenses, including salaries and overhead, incurred on behalf of the venture (of which $250,000 has already been paid, and an additional $150,000 was reimbursed by the venture). Daniel Cohen is a director of the Company, the son of the Company's chief executive officer and the brother of the Company's chief operating officer. In connection with the Supplemental Employee Retirement Plan established pursuant to our employment agreement with Edward E. Cohen, our chairman and chief executive officer, we entered into a split-dollar insurance arrangement under which we pay a portion of the premiums under a life insurance policy with respect to Mr. Cohen, with reimbursement of such premiums due upon the occurrence of specified events, including Mr. Cohen's death. Under the recently enacted Sarbanes-Oxley Act of 2002, the future payment of premiums by us under this arrangement may be deemed to be a prohibited loan by us to Mr. Cohen. Since the next premium payment under this arrangement is not due until April 2003, we have deferred any decision relating to this arrangement until the application of the Sarbanes-Oxley Act has been clarified. We cannot predict the effect, if any, that cancellation of the arrangement might entail. 28 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Unaudited) - (Continued) Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, deferred tax assets and liabilities, goodwill and identifiable intangible assets, and certain accrued liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the policies below as critical to our business operations and the understanding of our results of operations. For a detailed discussion on the application of these and other accounting policies, see Note 1 of the "Notes to the Consolidated Financial Statements" in Item 8 of our 10-K Report for the fiscal year ended September 30, 2001. Accounts Receivable and Investments in Real Estate Loans and Allowance for Possible Losses Credit extension, monitoring, and collection are performed by each of our business segments. In energy, we also perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of our customer's credit information. We extend credit on an unsecured basis to many of our energy customers. We continuously monitor collections and payments from our borrowers/customers and maintain a provision for estimated losses based upon our historical experience and any specific borrower/customer collection issues that we have identified. Accounts and loans receivable are reduced by an allowance for amounts that may become uncollectible in the future. Such allowances can be either specific to a particular borrower/customer or general to all borrowers/customers in each of our two business segments. As of June 30, 2002 and September 30, 2001, we had accounts and notes receivable and investments in real estate loans of $197.3 million and $207.9 million, net of allowance for possible losses of $ $3.0 million and $2.6 million, respectively. We believe our allowance for possible losses is adequate at June 30, 2002. However, an adverse change in the facts and circumstances with regard to one of our larger loans could cause us to experience a loss in excess of our allowance. At June 30, 2002, our credit evaluations have indicated that we had no need for an allowance for possible losses for our oil and gas receivables. We believe the level of our allowance for possible losses is reasonable based on our experience and our analysis of the net realizable value of our receivables at June 30, 2002. We cannot guarantee that we will continue to experience the same loss rates that we have experienced in the past since adverse changes in the oil and gas and real estate markets, or changes in the liquidity or financial position of our borrowers/customers, could have a material adverse effect on the collectibility of our receivables and our future operating results. If losses exceed established allowances, our results of operation and financial condition may be adversely affected. 29 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Unaudited) - (Continued) Critical Accounting Policies - (Continued) Successful Efforts Method Of Accounting We account for our oil and gas exploration and development activities utilizing the successful efforts method of accounting. Under this method, costs of productive exploratory wells, development dry holes and productive wells and undeveloped leases are capitalized. Oil and gas lease acquisition costs are also capitalized. Exploration costs, including personnel costs, certain geological and geophysical expenses and delay rentals for oil and gas leases, are charged to expense as incurred. Exploratory drilling costs are initially capitalized, but such costs are charged to expense if and when the well is determined not to have found reserves in commercial quantities. In most cases, a gain or loss is recognized for sales of producing properties. The application of the successful efforts method of accounting requires management's judgment to determine the proper designation of wells as either developmental or exploratory, which will ultimately determine the proper accounting treatment of the costs incurred. The results from a drilling operation can take considerable time to analyze, and the determination that commercial reserves have been discovered requires both judgment and industry experience. Wells may be completed that are assumed to be productive and actually deliver oil and gas in quantities insufficient to be economic, which may result in the abandonment of the wells at a later date. The evaluation of oil and gas leasehold acquisition costs requires management's judgment to estimate the fair value of exploratory costs related to drilling activity in a given area. Drilling activities in an area by other companies may also effectively impair leasehold positions. Reserve Estimates Our estimates of our proved natural gas and oil reserves and future net revenues from them are based upon reserve analyses that rely upon various assumptions, including those required by the SEC, as to natural gas and oil prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Any significant variance in these assumptions could materially affect the estimated quantity of our reserves. As a result, our estimates of our proved natural gas and oil reserves are inherently imprecise. Actual future production, natural gas and oil prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas and oil reserves may vary substantially from our estimates or estimates contained in the reserve reports and may affect our ability to pay the notes. Our properties also may be susceptible to hydrocarbon drainage from production by other operators on adjacent properties. In addition, our proved reserves may be subject to downward or upward revision based upon production history, results of future exploration and development, prevailing natural gas and oil prices, mechanical difficulties, governmental regulation and other factors, many of which are beyond our control. 30 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Unaudited) - (Continued) Critical Accounting Policies - (Continued) Impairment of Oil and Gas Properties We review our producing oil and gas properties for impairment on an annual basis and whenever events and circumstances indicate a decline in the recoverability of their carrying value. We estimate the expected future cash flows from our oil and gas properties and compares such future cash flows to the carrying amount of the oil and gas properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, we will adjust the carrying amount of the oil and gas properties to their fair value in the current period. The factors used to determine fair value include, but are not limited to, estimates of reserves, future production estimates, anticipated capital expenditures, and a discount rate commensurate with the risk associated with realizing the expected cash flows projected. Given the complexities associated with oil and gas reserve estimates and the history of price volatility in the oil and gas markets, events may arise that will require us to record an impairment of our oil and gas properties and there can be no assurance that such impairments will not be required in the future. Business Combinations Our energy operations have grown substantially through the acquisition of several companies. These acquisitions were accounted for using the purchase method of accounting, and recent accounting pronouncements require that all future acquisitions be accounted for using the purchase method. Under the purchase method, the acquiring company adds to its balance sheet the estimated fair values of the acquired company's assets and liabilities. Any excess of the purchase price over the fair values of the tangible and intangible net assets acquired is recorded as goodwill. As of January 1, 2002, the accounting for goodwill has changed. In prior years, goodwill was amortized. As of January 1, 2002, goodwill and other intangibles with an indefinite useful life are no longer amortized, but instead are assessed for impairment at least annually. We have recorded goodwill in connection with several acquisitions of assets. There can be no assurance that we may not do so in the future. There are various assumptions made by us in determining the fair values of an acquired company's assets and liabilities. The most significant assumptions, and the ones requiring the most judgment, involve the estimated fair values of the oil and gas properties acquired. To determine the fair values of these properties, we prepare estimates of oil and natural gas reserves. These estimates are based on work performed by our engineers and outside petroleum reservoir consultants. The judgments associated with the estimation of reserves are described earlier in this section. The fair value of the estimated reserves acquired in a business combination is then calculated based on our estimates of future oil and natural gas prices. Our estimates of future prices are based on our analysis of pricing trends. Our estimates of future prices are applied to the estimated reserve quantities acquired to arrive at estimates of future net revenues. For estimated proved reserves, the future net revenues are then discounted to derive a fair value for such reserves. We also apply these same general principles in arriving at the fair value of unproved reserves acquired in a business combination. These unproved reserves are generally classified as either probable or possible reserves. Because of their very nature, probable and possible reserve estimates are less precise than those of proved reserves. Generally, in our business combinations, the determination of the fair values of oil and gas properties requires more judgment than the estimates of fair values for other acquired assets and liabilities. 31 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Unaudited) - (Continued) Critical Accounting Policies - (Continued) Future Development and Abandonment Costs Future development costs include costs incurred to obtain access to proved reserves, including drilling costs and the installation of production equipment. Future abandonment costs include costs to dismantle and relocate or dispose of our wells and related structures and restoration costs of land. We develop estimates of these costs for each of our properties based upon the type of production structure, depth of water, reservoir characteristics, depth of the reservoir, market demand for equipment, currently available procedures and consultations with construction and engineering consultants. Because these costs typically extend many years into the future, estimating these future costs is difficult and requires management to make estimates and judgments that are subject to future revisions based upon numerous factors, including changing technology and the political and regulatory environment. Goodwill and Other Long-Lived Assets We make 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 other 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 is realized as an "impairment" of 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. 32 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Unaudited) - (Continued) Recently Issued Financial Accounting Standards Recently FASB issued SFAS 143 and 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 SFAS 143 on our consolidated financial statements. The adoption of SFAS 144 resulted in the classification of our investment in Optiron as a discontinued operation. In May 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" as issued. SFAS 145 rescinds the automatic treatment of gains and losses from extinguishments of debt as extraordinary unless they meet the criteria for extraordinary items as outlined in Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 145 also requires sale-leaseback accounting for certain lease modifications that have economic effects similar to a sale-leaseback transaction and makes various corrections to existing pronouncements. The adoption of SFAS 145 did not have a material effect on our consolidated financial position or results of operations. In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" was issued. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. We have not yet adopted SFAS 146 nor determined the effect of the adoption of SFAS 146 on our consolidated financial position or results of operations. 33 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 June 30, 2002. Only the potential impacts of hypothetical assumptions are analyzed. The analysis does not consider other possible effects that could impact the business. Energy. At June 30, 2002, the amount outstanding under a revolving loan attributable to our energy operations increased to $42.8 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 4.6% at June 30, 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%, our net income would change by approximately $200,000. 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 nine months ended June 30, 2002, we drew $1.7 under this facility. The balance outstanding as of June 30, 2002 is $3.7 million. At June 30, 2002, the weighted average interest rate was 3.4%. A hypothetical 10% change in the average interest rate applicable to this debt would result in an immaterial change in our earnings, cash flow and financial position. 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. 34 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 June 30, 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 June 30, 2002 would not have a material impact on our net assets, net earnings or cash flows as derived from commodity option contracts.
Weighted Average Volumes Settlement Natural Gas Settlement Date Price Unrealized Open contracts (Dth) Quarter Ended Per Dth Gains (Losses) -------------- ----------- ------------------------ ------------ -------------- 20 56,000 September 2002 $ 3.18 $ (4,600) 19 53,200 December 2002 $ 3.30 (18,100) 27 75,600 March 2003 $ 3.51 (30,500) 83 232,400 June 2003 $ 3.48 (58,200) 81 226,800 September 2003 $ 3.56 (57,600) --- ----------- ----------- 230 644,000 $ 3.47 $ (169,000) === =========== =========== ===========
Real Estate Finance. The following information is based on our loans that are not interest rate sensitive. During the nine months ended June 30, 2002, our outstanding loans receivable (to our interest) decreased $437,000 (.15%) to $291.9 million in the aggregate and the carried cost of our loans decreased $5.5 million (3%) to $184.2 million in the aggregate. The principal balance of related senior lien interests decreased $18.4 million (8%) to $202.3 million in the aggregate. These changes were principally attributable to the repayment of two senior lien interests and the resolution of two loans. 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, we pay only the 8.8% locked-in rate. If the effective rate for a particular payment period is greater than the locked-in rate, we receive the benefit of this difference. The interest rates on our real estate revolving lines of credit, which are at the prime rate minus 1% for the outstanding $6.4 million line at Hudson United Bank and at prime for the outstanding $13.8 million and $5.0 million lines of credit at Sovereign Bank, decreased during the period ended June 30, 2002 because there were three decreases in the defined prime rate. This defined rate was the "prime rate" as reported in The Wall Street Journal (4.75% at June 30, 2002). A hypothetical 10% change in the average interest rate applicable to these lines of credit would change our net income by approximately $130,000. 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 June 30, 2002, $8.3 million was outstanding on this loan at an interest rate of 5.6%. A hypothetical 10% change in the average interest rate applicable to this loan would change our net income by approximately $50,000. In June 2002, we established a $5.0 million revolving line of credit with Commerce Bank. The facility has a term of two years and bears interest at one of two rates (elected at the borrower's option); (i) the prime rate, or (ii) LIBOR plus 250 basis points; both of which are subject to a floor of 5.5% and a ceiling of 9.0%. As of June 30, 2002, we had no outstanding borrowings under this facility. 35 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (Continued) In June 2002, LEAF Financial Corporation, our equipment-leasing subsidiary, entered into a $10.0 million secured revolving credit facility with National City Bank. The facility is guaranteed by us and has a term of 364 days. Outstanding loans will bear interest at one of two rates (elected at borrower's option); (i) the lender's prime rate plus 200 basis points, or (ii) LIBOR plus 300 basis points. As of June 30, 2002, the balance outstanding was $1.2 million at an average interest rate of 4.75%. A hypothetical 10% change in the average interest rate on this facility would have an immaterial effect on our earnings, cash flow and financial position. 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 nine months ended June 30, 2002, we have negotiated interest rate reductions with three of our senior participants. 36 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are a defendant, together with certain of our officers and directors and our independent auditor, Grant Thornton LLP, in consolidated actions that were instituted on October 14, 1998 in the U.S. District Court for the Eastern District of Pennsylvania by stockholders, putatively on their own behalf and as class actions on behalf of similarly situated stockholders, who purchased shares of our common stock between December 17, 1997 and February 22, 1999. The consolidated amended class action complaint seeks damages in an unspecified amount for losses allegedly incurred as the result of misstatements and omissions allegedly contained in our periodic reports and a registration statement filed with the SEC. We have agreed in principle to settle this matter for a maximum of $7.0 million, of which $5.0 million will be paid by two of our directors' and officers' liability insurers. We will seek to obtain the balance of $2.0 million through an action against a third insurer who has not agreed to participate in the settlement. Plaintiffs have agreed in principle to reduce the settlement amount by 50% of the amount by which the $2.0 million exceeds the net recovery from the insurer. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Stockholders of the Company held on April 29, 2002, the stockholders elected certain directors to serve until the 2005 Annual Meeting of Stockholders and ratified the adoption of the Company's 2002 Key Employee Stock Option Plan and 2002 Non-Employee Director Deferred Stock and Deferred Compensation Plan.
For Against Abstained Withheld ------------ ------- --------- -------- Election as a director of the Company of: Carlos Campbell............................................... 15,250,148 - - 964,416 Edward E. Cohen............................................... 14,590,082 - - 1,624,482 Scott F. Schaeffer............................................ 15,252,676 - - 961,888 Approval of the 2002 Key Employee Stock Option Plan.............. 12,645,870 3,513,527 55,166 - Approval of the 2002 Non-Employee Director Deferral and Deferred Compensation Plan................................ 12,999,468 3,158,753 56,342 -
37 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) 10.1 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) 99.1 Certification Pursuant to 18 U.S.C., Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 99.2 Certification Pursuant to 18 U.S.C., Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- --------------- (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: None 38 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, 2002 By: /s/ Steven J. Kessler --------------- --------------------- STEVEN J. KESSLER Senior Vice President and Chief Financial Officer Date: August 14, 2002 By: /s/ Nancy J. McGurk --------------- ------------------- NANCY J. McGURK Vice President-Finance and Chief Accounting Officer 39 EX-99 3 ex99-1.txt EXHIBIT 99.1 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Resource America, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward E. Cohen, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Edward E. Cohen Edward E. Cohen Chief Executive Officer August 14, 2002 EX-99 4 ex99-2.txt EXHIBIT 99.2 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Resource America, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven J. Kessler, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Steven J. Kessler Steven J. Kessler Chief Financial Officer August 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----