-----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, QUPlxGNTKCwrWquXdN0IoI+XzzK7yxM7vl1sovWpXeDq+6rOX3wwdc8H8dgpa9yV CioxVjW4dTi9faoFf6L/Kg== 0000950116-03-002660.txt : 20030514 0000950116-03-002660.hdr.sgml : 20030514 20030514171649 ACCESSION NUMBER: 0000950116-03-002660 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030514 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: 03700125 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: RESOURCE EXPLORATION INC DATE OF NAME CHANGE: 19890214 FORMER COMPANY: FORMER CONFORMED NAME: SMTR CORP DATE OF NAME CHANGE: 19700522 10-Q 1 tenq.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission file number: 0-4408 RESOURCE AMERICA, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 72-0654145 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1845 Walnut Street Suite 1000 Philadelphia, PA 19103 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (215) 546-5005 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 17,089,700 Shares April 30, 2003
RESOURCE AMERICA, INC. AND SUBSIDIARIES INDEX TO QUARTERLY REPORT ON FORM 10-Q PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2003 (Unaudited) and September 30, 2002.......................................................... 2 Consolidated Statements of Income (Unaudited) Three Months and Six Months Ended March 31, 2003 and 2002....................... 3 Consolidated Statement of Changes in Stockholders' Equity (Unaudited) Six Months Ended March 31, 2003................................................. 4 Consolidated Statements of Cash Flows (Unaudited) Six Months Ended March 31, 2003 and 2002........................................ 5 Notes to Consolidated Financial Statements - March 31, 2003 (Unaudited)............. 6 - 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................... 17 - 26 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 27 - 28 Item 4. Controls and Procedures............................................................... 29 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K...................................................... 30 - 31 SIGNATURES.......................................................................................... 32
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RESOURCE AMERICA, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
March 31, September 30, 2003 2002 --------- --------- (unaudited) ASSETS Current assets: Cash and cash equivalents................................................. $ 27,583 $ 25,736 Accounts receivable....................................................... 16,670 16,060 Assets held for disposal.................................................. - 5,488 Prepaid expenses.......................................................... 4,599 2,696 --------- --------- Total current assets.................................................... 48,852 49,980 Investments in real estate loans and ventures................................. 201,425 202,423 Investment in RAIT Investment Trust........................................... 24,527 29,580 Property and equipment: Oil and gas properties and equipment (successful efforts)................. 140,482 126,983 Gas gathering and transmission facilities................................. 30,569 28,091 Other..................................................................... 8,715 8,390 --------- --------- 179,766 163,464 Less - accumulated depreciation, depletion and amortization................... (49,681) (44,287) --------- --------- Net property and equipment.............................................. 130,085 119,177 Goodwill...................................................................... 37,471 37,471 Intangible assets............................................................. 8,971 9,589 Other assets.................................................................. 18,763 19,278 --------- --------- $ 470,094 $ 467,498 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................................... $ 3,731 $ 4,320 Accounts payable.......................................................... 16,151 12,378 Accrued interest.......................................................... 1,628 1,760 Liabilities associated with assets held for disposal...................... - 11,317 Accrued liabilities....................................................... 11,029 9,808 Estimated income taxes.................................................... 812 893 Deferred revenue on drilling contracts.................................... 9,034 4,948 --------- --------- Total current liabilities............................................... 42,385 45,424 Long-term debt: Senior.................................................................... 65,336 65,336 Non-recourse.............................................................. 65,722 68,220 Other..................................................................... 23,283 17,634 --------- --------- 154,341 151,190 Liabilities associated with assets held for disposal.......................... - 3,144 Asset retirement obligations.................................................. 3,300 - Deferred revenue and other liabilities........................................ 802 1,074 Deferred income taxes......................................................... 15,943 13,733 Minority interest............................................................. 19,140 19,394 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................ 251 250 Additional paid-in capital................................................ 223,747 223,824 Less treasury stock, at cost.............................................. (77,651) (74,828) Less ESOP loan receivable................................................. (1,185) (1,201) Accumulated other comprehensive income.................................... 5,718 5,911 Retained earnings......................................................... 83,303 79,583 --------- --------- Total stockholders' equity.............................................. 234,183 233,539 --------- --------- $ 470,094 $ 467,498 ========= =========
See accompanying notes to consolidated financial statements 2 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended March 31, March 31, ------------------------ ------------------------ 2003 2002 2003 2002 --------- --------- --------- --------- (in thousands, except per share data) REVENUES: Energy..................................................... $ 36,336 $ 26,670 $ 54,296 $ 55,427 Real estate finance........................................ 3,489 5,620 6,648 9,304 Equity in earnings of unconsolidated investees............. 108 - 108 - Interest and other......................................... 1,736 1,913 4,004 3,254 --------- --------- --------- --------- 41,669 34,203 65,056 67,985 COSTS AND EXPENSES: Energy..................................................... 25,830 20,260 36,816 40,861 Real estate finance........................................ 937 464 1,783 987 General and administrative................................. 1,306 1,574 2,904 2,840 Provision for legal settlement............................. 1,185 - 1,185 - Depreciation, depletion and amortization................... 3,103 2,583 6,086 5,380 Interest................................................... 3,071 3,077 6,409 6,392 Provision for possible losses.............................. 800 650 1,173 800 Minority interest in Atlas Pipeline Partners, L.P.......... 884 642 1,529 1,395 --------- --------- --------- --------- 37,116 29,250 57,885 58,655 --------- --------- --------- --------- Income from continuing operations before income taxes......... 4,553 4,953 7,171 9,330 Provision for income taxes.................................... 1,458 1,640 2,295 3,087 --------- --------- --------- --------- Income from continuing operations............................. 3,095 3,313 4,876 6,243 Discontinued operations: Loss on discontinued operations, net of tax benefit of $94 and $448............................................. - (175) - (916) --------- --------- --------- --------- Net income.................................................... $ 3,095 $ 3,138 $ 4,876 $ 5,327 ========= ========= ========= ========= Net income per common share - basic: From continuing operations................................. $ .18 $ .19 $ .28 $ .36 From discontinued operations............................... - (.01) - (.05) --------- --------- --------- --------- Net income per common share - basic........................... $ .18 $ .18 $ .28 $ .31 ========= ========= ========= ========= Weighted average common shares outstanding.................... 17,118 17,444 17,245 17,438 ========= ========= ========= ========= Net income per common share - diluted: From continuing operations................................. $ .18 $ .19 $ .28 $ .35 From discontinued operations............................... - (.01) - (.05) --------- --------- --------- --------- Net income per common share - diluted......................... $ .18 $ .18 $ .28 $ .30 ========= ========= ========= ========= Weighted average common shares................................ 17,398 17,785 17,524 17,768 ========= ========= ========= =========
See accompanying notes to consolidated financial statements 3 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED MARCH 31, 2003 (Unaudited) (in thousands, except share data)
Common stock Additional Treasury Stock ESOP -------------------------- Paid-In --------------------------- Loan Shares Amount Capital Shares Amount Receivable - ----------------------------------------------------------------------------------------------------------------------------------- Balance, October 1, 2002 ........... 25,044,066 $ 250 $ 223,824 (7,623,198) $(74,828) $(1,201) Common shares issued ............... 38,510 1 176 177 Treasury shares issued ............. (253) 19,759 415 Purchase of treasury shares ........ (389,950) (3,238) Other comprehensive income ......... Cash dividends ($.066 per share) ... Repayment of ESOP Loan ............. 16 Net income ......................... ----------------------------------------------------------------------------------------------- Balance, March 31, 2003 ............ 25,082,576 $ 251 $ 223,747 (7,993,389) $(77,651) $(1,185) ========== ======= ========= ========== ======== =======
Accumulated Other Totals Comprehensive Retained Stockholders' Income Earnings Equity - -------------------------------------------------------------------------------- Balance, October 1, 2002 ........... $ 5,911 $79,583 $233,539 Common shares issued ............... Treasury shares issued ............. 162 Purchase of treasury shares ........ (3,238) Other comprehensive income ......... (193) (193) Cash dividends ($.066 per share) ... (1,156) (1,156) Repayment of ESOP Loan ............. 16 Net income ......................... 4,876 4,876 -------------------------------------------- Balance, March 31, 2003 ............ $ 5,718 $83,303 $234,183 ======= ======= ========
See accompanying notes to consolidated financial statements 4 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended March 31, --------------------------- 2003 2002 ---------- ---------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................................ $ 4,876 $ 5,327 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization............................................ 6,086 5,380 Amortization of discount on senior debt and deferred finance costs.................. 650 504 Provision for possible losses....................................................... 1,173 800 Equity in earnings of equity investees.............................................. (108) - Minority interest in Atlas Pipeline Partners, L.P................................... 1,529 1,395 Loss on discontinued operations .................................................... - 916 Gain on asset dispositions.......................................................... (867) (2,108) Gain on sale of RAIT Investment Trust shares........................................ (2,119) - Property impairments and abandonments............................................... 12 12 Deferred income taxes............................................................... 2,250 3,904 Accretion of discount............................................................... (1,409) (2,186) Collection of interest.............................................................. 91 4,969 Non-cash compensation .............................................................. 162 303 Changes in operating assets and liabilities: Increase in accounts receivable and other assets.................................... (1,624) (844) Increase (decrease) in accounts payable and other liabilities....................... 6,708 (16,499) ---------- ---------- Net cash provided by operating activities............................................. 17,410 1,873 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.................................................................. (12,898) (11,780) Principal payments on notes receivable and proceeds from sales of assets.............. 4,578 20,824 Proceeds from (purchase of) RAIT Investment Trust shares.............................. 7,357 (1,890) Increase in other assets.............................................................. (2,824) (464) Investments in real estate loans and ventures......................................... (2,133) (9,121) Decrease in other liabilities......................................................... (29) - ---------- ---------- Net cash used in investing activities................................................. (5,949) (2,431) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings............................................................................ 64,139 73,866 Principal payments on borrowings...................................................... (61,253) (85,933) Dividends paid ....................................................................... (1,156) (1,162) Distributions paid to minority interests of Atlas Pipeline Partners, L.P.............. (1,751) (1,913) Purchase of treasury stock............................................................ (3,238) (493) Decrease in restricted cash........................................................... - 33 Repayment of ESOP loan................................................................ 16 48 Increase in other assets.............................................................. (772) (241) Proceeds from issuance of stock....................................................... 25 - ---------- ---------- Net cash used in financing activities................................................. (3,990) (15,795) ---------- ---------- Net cash used in discontinued operations.............................................. (5,624) (1,165) ---------- ---------- Increase (decrease) in cash and cash equivalents...................................... 1,847 (17,518) Cash and cash equivalents at beginning of period...................................... 25,736 48,648 ---------- ---------- Cash and cash equivalents at end of period............................................ $ 27,583 $ 31,130 ========== ==========
See accompanying notes to consolidated financial statements 5 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2003 (Unaudited) NOTE 1 - MANAGEMENT'S OPINION REGARDING INTERIM FINANCIAL STATEMENTS The consolidated financial statements of the Company and its wholly-owned subsidiaries as of March 31, 2003 and for the three months and six months ended March 31, 2003 and 2002 are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K/A for the fiscal year ended September 30, 2002. The results of operations for the three months and six months ended March 31, 2003 may not necessarily be indicative of the results of operations for the full fiscal year ending September 30, 2003. Certain reclassifications have been made to the consolidated financial statements as of and for the three months and six months ended March 31, 2002 to conform to the three months and six months ended March 31, 2003 presentation. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Comprehensive Income The following table presents comprehensive income for the periods indicated:
Three Months Ended Six Months Ended March 31, March 31, ------------------------ ------------------------ 2003 2002 2003 2002 --------- --------- --------- --------- (in thousands) Net income.................................................... $ 3,095 $ 3,138 $ 4,876 $ 5,327 Other comprehensive income (loss): Unrealized gain on investment in RAIT Investment Trust: Unrealized holding gain arising during the period, net of taxes of $322, $1,797, $729, and $1,994................................................. 615 3,648 1,481 4,048 Less: reclassification adjustment for gain realized in net income, net of taxes of $363 and $664........... (738) - (1,356) - --------- --------- --------- --------- (123) 3,648 125 4,048 Unrealized loss on natural gas futures and options contracts, net of taxes of $50, $91, $145 and $55......................................................... (106) (184) (318) (111) --------- --------- --------- --------- (229) 3,464 (193) 3,937 --------- --------- --------- --------- Comprehensive income.......................................... $ 2,866 $ 6,602 $ 4,683 $ 9,264 ========= ========= ========= =========
6 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) March 31, 2003 (Unaudited) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
At March 31, At September 30, 2003 2002 ----------- ----------- (in thousand) Accumulated other comprehensive income (loss) is related to the following items, net of taxes: Marketable securities - unrealized gains................................. $ 6,269 $ 6,144 Unrealized hedging losses................................................ (551) (233) ----------- ----------- $ 5,718 $ 5,911 =========== ===========
Investment in RAIT Investment Trust The Company accounts for its investment in RAIT Investment Trust ("RAIT") in accordance with Statement of Financial Accounting Standard ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). This investment is classified as available-for-sale and as such is carried at fair market value based on market quotes. Unrealized gains and losses, net of taxes, are reported as a separate component of stockholders' equity. The cost of securities sold is based on the specific identification method. The following table discloses the pre-tax unrealized gains relating to the Company's investment in RAIT at the dates indicated: At March 31, At September 30, 2003 2002 ----------- ---------- (in thousands) Cost............................... $ 15,029 $ 20,268 Unrealized gains................... 9,498 9,312 ----------- ---------- Estimated fair value............... $ 24,527 $ 29,580 =========== ========== 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 recoverable based upon the estimated value of the underlying collateral. 7 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) March 31, 2003 (Unaudited) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Fair Value of Financial Instruments - (Continued) The following table provides information about other financial instruments at the dates indicated:
March 31, 2003 September 30, 2002 ----------------------------- ---------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ----------- ------------ ---------- ------------ (in thousands) (in thousands) Energy non-recourse debt................... $ 47,722 $ 47,722 $ 49,345 $ 49,345 Real estate finance debt................... 31,480 31,480 33,214 33,214 Senior debt................................ 65,336 67,623 65,336 67,623 Other debt................................. 13,534 13,534 7,615 7,615 ----------- ------------ ---------- ------------ $ 158,072 $ 160,359 $ 155,510 $ 157,797 =========== ============ ========== ============
Earnings Per Share The following table presents a reconciliation of the components used in the computation of net income per common share-basic and net income per common share-diluted for the periods indicated:
Three Months Ended Six Months Ended March 31, March 31, ------------------------ ------------------------ 2003 2002 2003 2002 --------- --------- --------- --------- (in thousands) Income from continuing operations............................. $ 3,095 $ 3,313 $ 4,876 $ 6,243 Loss from discontinued operations, net of taxes of $94 and $448................................................... - (175) - (916) --------- --------- --------- --------- Net income................................................. $ 3,095 $ 3,138 $ 4,876 $ 5,327 ========= ========= ========= ========= Weighted average common shares outstanding-basic.............. 17,118 17,444 17,245 17,438 Dilutive effect of stock option and award plans............... 280 341 279 330 --------- --------- --------- --------- Weighted average common shares-diluted........................ 17,398 17,785 17,524 17,768 ========= ========= ========= =========
Asset Retirement Obligations SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), establishes requirements for the accounting for the removal costs associated with asset retirements. The adoption of SFAS 143 on October 1, 2002 resulted in the recording of an additional cost basis of $3.3 million to oil and gas properties and equipment representing the Company's share of estimated future well plugging costs (as discounted to the present value at the dates the wells began operations). In addition, the Company recorded a corresponding retirement obligation liability of $3.3 million (which includes accretion of the discounted present value to September 30, 2002). Accumulated depreciation and depletion did not change as the additional cost basis associated with the plugging liability was offset by the estimated salvage value to be realized upon the disposal of the wells. The cumulative and pro forma effects of initially applying SFAS 143 were not material to the Company's Consolidated Statements of Income. Except for the item above, the Company has determined that there are no other material retirement obligations associated with tangible long-lived assets. 8 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) March 31, 2003(Unaudited) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Supplemental Cash Flow Information The Company considers temporary investments with a maturity at the date of acquisition of 90 days or less to be cash equivalents. Supplemental disclosure of cash flow information:
Six Months Ended March 31, ------------------------ 2003 2002 --------- --------- (in thousands) Cash paid during the period for: Interest................................................................................ $ 5,891 $ 5,948 Income taxes............................................................................ $ - $ 1,500 Non-cash activities include the following: Receipt of a note in connection with the sale of a real estate loan..................... $ 1,350 $ - Leases transferred to LEAF's sponsored investment partnership........................... $ 3,550 $ - Debt transferred to LEAF's sponsored investment partnership............................. $ 3,550 $ -
Stock-Based Compensation In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 which is generally effective for fiscal years ending after December 15, 2002. SFAS 148 requires quarterly disclosure of the effects that would have occurred if the financial statements had applied the fair value recognition principles of SFAS 123, "Accounting for Stock-Based Compensation." The Company accounts for stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations. For certain grants, no stock-based employee compensation cost is reflected in net income, since each option granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table provides the pro forma effects of recognizing compensation expense in accordance with SFAS 123:
Three Months Ended Six Months Ended March 31, March 31, ------------------------ ------------------------ 2003 2002 2003 2002 --------- --------- --------- --------- (in thousands, except per share data) Net income as reported........................................ $ 3,095 $ 3,313 $ 4,876 $ 6,243 Stock-based employee compensation expense reported in net income, net of tax.......................................... - - - - Total stock-based employee compensation under fair value method for all grants, net of tax........................... (376) (528) (751) (1,056) --------- --------- --------- --------- Pro forma net income.......................................... $ 2,719 $ 2,785 $ 4,125 $ 5,187 ========= ========= ========= ========= Net income per common share: Basic - as reported........................................... $ .18 $ .18 $ .28 $ .31 Basic - proforma.............................................. $ .16 $ .16 $ .24 $ .30 Diluted - as reported......................................... $ .18 $ .18 $ .28 $ .30 Diluted - pro forma........................................... $ .16 $ .16 $ .24 $ .29
9 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) March 31, 2003 (Unaudited) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Recently Issued Financial Accounting Standards In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the requirements for a guarantor's accounting for and disclosure of certain guarantees issued and outstanding and requires a guarantor to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken. The objective of the initial measurement of that liability is the fair value of the guarantee at its inception. The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 by the Company did not have a material effect on its consolidated financial position or results of operations. In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which the Company is required to adopt on July 1, 2003. FIN 46's consolidation criteria are based on an analysis of risks and rewards, not control, and represent a significant and complex modification of previous accounting principles. FIN 46 represents an accounting change, not a change in the underlying economics of the applicable investment. Management is assessing the impact of the adoption of FIN 46. However, based on management's preliminary assessment, it is reasonably possible that the Company may be required to consolidate several entities in which it has an investment. Under FIN 46 certain real estate loans presently carried on the Company's books could be removed and replaced by real property and associated third-party debt. In the event the Company is required to consolidate any of these entities, the Company would not acquire any legal ownership of the property owned by the entity, nor would its legal rights and obligations change. The complexity of the new consolidation rules and their evolving clarification make forecasting their effect impracticable. NOTE 3 - GOODWILL, INTANGIBLE ASSETS AND OTHER ASSETS Goodwill On October 1, 2001, the Company early-adopted SFAS 142 "Goodwill and Other Intangible Assets," which requires that goodwill no longer be amortized, but instead tested for impairment at least annually. The Company evaluates its goodwill at each year end, and will reflect the impairment of goodwill, if any, in operating income in the income statement in the period in which the impairment is indicated. All goodwill recorded on the Company's balance sheets is related to the Company's energy segment. 10 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) March 31, 2003 (Unaudited) NOTE 3 - GOODWILL, INTANGIBLE ASSETS AND OTHER ASSETS - (Continued) Intangible Assets Partnership management and operating contracts and the Company's equipment leasing operating system, or leasing platform, were acquired through acquisitions and recorded at fair value on their acquisition dates. The Company amortizes contracts acquired on a declining balance method over their respective estimated lives, ranging from eight to thirteen years. The leasing platform is amortized on the straight-line method over its remaining life of six years. Amortization expense for the six months ended March 31, 2003 was $658,000. The aggregate estimated annual amortization expense is approximately $1.3 million for each of the succeeding five years.
At March 31, At September 30, 2003 2002 ----------- ----------- (in thousands) Partnership management and operating contracts............................ $ 14,383 $ 14,343 Leasing platform.......................................................... 918 918 ----------- ----------- 15,301 15,261 Accumulated amortization.................................................. (6,330) (5,672) ----------- ----------- Intangible assets, net.................................................... $ 8,971 $ 9,589 =========== ===========
Other Assets The following table provides information about other assets at the dates indicated.
At March 31, At September 30, 2003 2002 ----------- ----------- (in thousands) Deferred financing costs (net of accumulated amortization of $4,392 and $3,742)................................................... $ 2,244 $ 2,122 Equity method investments in and advances to Trapeza entities............... 3,972 3,085 Investments at lower of cost or market...................................... 6,137 6,137 Other....................................................................... 6,410 7,934 ----------- ----------- $ 18,763 $ 19,278 =========== ===========
Deferred financing costs are amortized over the terms of the related loans (two to seven years). Investments in Trapeza entities are accounted for by the equity method of accounting since the Company, as a 50% owner of the general partner of these entities, has the ability to exercise significant influence over its operating and financial decisions. The Company's combined general and limited partner interests in these entities range from 16% to 18%. Investments at the lower of cost or market include non-marketable investments in entities in which the Company has less than a 20% ownership interest, and in which it does not have the ability to exercise significant influence over their operating and financial decisions. These investments include approximately 10% of the outstanding shares of The Bancorp, Inc., a related party as disclosed in Note 4 in the Company's Annual Report on Form 10K/A for the fiscal year ended September 30, 2002. 11 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) March 31, 2003 (Unaudited) NOTE 4 - INVESTMENTS IN REAL ESTATE LOANS AND VENTURES The Company focuses its real estate activities on managing its existing real estate loan portfolio and one real estate partnership it sponsored which closed its initial transaction during the three months ended March 31, 2003. Real estate loans generally were acquired at discounts from both their face value and the appraised value of the properties underlying the loans. Cash received by the Company for payment on each real estate loan is allocated between principal and interest. The Company also records as income the accretion of a portion of the difference between its cost basis in a real estate loan and the sum of projected cash flows there from. This accretion of discount amounted to $714,000 and $985,000 during the three months ended March 31, 2003 and 2002 and $1.4 million and $2.2 million during the six months ended March 31, 2003 and 2002, respectively. As the Company sells senior lien interests or receives funds from refinancing of such loans by the borrower, a portion of the cash received is employed to reduce the cumulative accretion of discount included in the carrying value of the Company's investments in real estate loans. At March 31, 2003, the Company held real estate loans having an aggregate face value of $614.2 million. The investment in these loans at that date was carried at an aggregate cost of $187.7 million, including cumulative accretion. The following is a summary of the changes in the carrying value of the Company's investments in real estate loans for the periods indicated.
Three Months Ended Six Months Ended March 31, March 31, -------------------------- -------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- (in thousands) Loan balance, beginning of period............................. $ 186,354 $ 199,725 $ 187,542 $ 192,263 New loan...................................................... - - 1,350 - Additions to existing loans................................... 1,261 1,087 2,421 7,348 Accretion of discount (net of collection of interest)......... 714 985 1,409 2,186 Write-downs................................................... (393) (500) (393) (500) Collection of principal....................................... (208) - (4,601) - Cost of loans resolved........................................ - (22,344) - (22,344) ----------- ----------- ----------- ----------- Loan balance, end of period................................... $ 187,728 $ 178,953 $ 187,728 $ 178,953 Real estate ventures balance, end of period................... $ 17,957 $ 18,294 $ 17,957 $ 18,294 Allowance for possible losses................................. (4,260) (2,829) (4,260) (2,829) ----------- ----------- ----------- ----------- Balance, loans and ventures, end of period.................... $ 201,425 $ 194,418 $ 201,425 $ 194,418 =========== =========== =========== ===========
The following is a summary of activity in the Company's allowance for possible losses related to real estate loans for the periods indicated:
Three Months Ended Six Months Ended March 31, March 31, -------------------------- -------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- (in thousands) Balance, beginning of period.................................. $ 3,853 $ 2,679 $ 3,480 $ 2,529 Provision for possible losses................................. 800 650 1,173 800 Write-downs................................................... (393) (500) (393) (500) ----------- ----------- ----------- ----------- Balance, end of period........................................ $ 4,260 $ 2,829 $ 4,260 $ 2,829 =========== =========== =========== ===========
12 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) March 31, 2003 (Unaudited) NOTE 5 - DEBT Total debt consists of the following: At March 31, At September 30, 2003 2002 ----------- ----------- (in thousands) Senior debt.............................. $ 65,336 $ 65,336 Non-recourse debt: Energy: Revolving and term bank loans...... 47,722 49,345 Real estate finance: Revolving credit facilities........ 18,000 18,000 Other.............................. - 875 ----------- ----------- Total non-recourse debt......... 65,722 68,220 Other debt............................... 27,014 21,954 ----------- ----------- 158,072 155,510 Less current maturities.................. 3,731 4,320 ----------- ----------- $ 154,341 $ 151,190 =========== =========== NOTE 6 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company, through its energy subsidiaries, enters into natural gas futures and option contracts to hedge its exposure to changes in natural gas prices. At any point in time, such contracts may include regulated New York Mercantile Exchange ("NYMEX") futures and options contracts and non-regulated over-the-counter futures contracts with qualified counterparties. NYMEX contracts are generally settled with offsetting positions, but may be settled by the delivery of natural gas. The Company formally documents all relationships between hedging instruments and the items being hedged, including the Company's risk management objective and strategy for undertaking the hedging transactions. This includes matching the natural gas futures and options contracts to the hedged asset. The Company assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives are highly effective in offsetting changes in fair value of hedged items. When it is determined that a derivative is not highly effective as a hedge or it has ceased to be a highly effective hedge, due to the loss of correlation between changes in gas reference prices under a hedging instrument and actual gas prices, the Company will discontinue hedge accounting for the derivative and further changes in fair value for the derivative will be recognized immediately into earnings. Gains or losses on these instruments are accumulated in other comprehensive income (loss) to the extent that these hedges are deemed to be highly effective as hedges, and are recognized in earnings in the period in which the hedged item is recognized in earnings. 13 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) March 31, 2003 (Unaudited) NOTE 6 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - (Continued) At March 31, 2003, the Company had 172 open natural gas futures contracts related to natural gas sales covering 516,000 dekatherm ("Dth") (net to the Company) maturing through September 2003 at a combined average settlement price of $3.59 per Dth. Based on quoted market prices, the fair value of the Company's open natural gas futures contracts at March 31, 2003, is $8.8 million. 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 sales revenues in the month the gas is sold, unless the hedges are no longer "highly effective." Gains or losses on futures contracts are determined as the difference between the contract price and a reference price, generally prices on NYMEX. The Company's net unrealized loss related to open NYMEX contracts was approximately $780,000 at March 31, 2003 and $316,600 at September 30, 2002. The unrealized losses, net of applicable taxes, have been recorded as a liability in the Company's Consolidated Balance Sheets and in Stockholders' Equity as a component of Accumulated Other Comprehensive Income. The Company recognized a loss of $448,000 and $544,000 on settled contracts for the three months and six months ended March 31, 2003. The Company recognized no gains or losses during the three months and six months ended March 31, 2003 for hedge ineffectiveness or as a result of the discontinuance of cash flow hedges. As of March 31, 2003, all of the deferred net losses on derivative instruments included in accumulated other comprehensive income (loss) are expected to be reclassified to earnings during the next six months. 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. NOTE 7 - DISCONTINUED OPERATIONS In June 2002, the Company adopted a plan to dispose of Optiron Corporation ("Optiron"). The Company has reduced its 50% interest in Optiron to 10% through a sale to management which was completed in September 2002. In connection with the sale, the Company forgave $4.3 million of the $5.9 million of indebtedness owed by Optiron. The remaining $1.6 million was retained by the Company in the form of a promissory note which is secured by all of Optiron's assets and by the common stock of Optiron's 90% shareholder. The note bears interest at the prime rate plus 1% payable monthly; an additional 1% will accrue until the maturity date of the note in 2022. In accordance with SFAS No. 144, the results of operations have been prepared under the financial reporting requirements for discontinued operations, pursuant to which, all historical results of Optiron are included in the results of discontinued operations rather than the results of continuing operations for all periods presented. Summarized operating results of the discontinued Optiron operations are as follows:
Three Months Ended Six Months Ended March 31, March 31, ------------------------- --------------------- 2003 2002 2003 2002 --------- --------- -------- -------- (in thousands) Loss from discontinued operations before income taxes............................................. $ - $ (269) $ - $ (1,364) Income tax benefit........................................... - 94 - 448 --------- --------- -------- -------- Loss from discontinued operations............................ $ - $ (175) $ - $ (916) ========= ========= ======== ========
14 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) March 31, 2003 (Unaudited) NOTE 8 - OPERATING SEGMENT AND MAJOR CUSTOMER INFORMATION The Company operates in two principal industry segments: energy and real estate finance. Segment data for the periods indicated are as follows:
Three Months Ended Six Months Ended March 31, March 31, ------------------------ ---------------------- 2003 2002 2003 2002 --------- --------- --------- --------- (in thousands) Revenues: Energy.................................................... $ 36,336 $ 26,723 $ 54,296 $ 55,543 Real estate finance....................................... 3,489 5,620 6,648 9,304 Intercompany interest..................................... (32) (53) (119) (116) All other (1)............................................. 1,876 1,913 4,231 3,254 --------- --------- --------- --------- $ 41,669 $ 34,203 $ 65,056 $ 67,985 ========= ========= ========= ========= Operating profit (loss): Energy.................................................... $ 6,387 $ 3,546 $ 9,351 $ 7,934 Real estate finance....................................... 1,316 4,017 2,790 6,435 All other (1)............................................. (3,150) (2,610) (4,970) (5,039) --------- --------- --------- --------- $ 4,553 $ 4,953 $ 7,171 $ 9,330 ========= ========= ========= =========
At March 31, At September 30, 2003 2002 --------- ---------- (in thousands) Identifiable assets: Energy............................................................... $ 195,684 $ 183,693 Real estate finance.................................................. 202,518 204,327 All other (1)........................................................ 71,892 79,478 --------- ---------- $ 470,094 $ 467,498 ========= ==========
- --------------- (1) Revenue and assets of the Company's financial services subsidiaries are included in the "All other" categories along with corporate interest and dividend income and corporate assets. Financial services does not meet the criteria of an operating segment under SFAS 131. 15 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) March 31, 2003 (Unaudited) NOTE 8 - OPERATING SEGMENT AND MAJOR CUSTOMER INFORMATION - (Continued) Operating profit (loss) per segment represents total revenues less costs and expenses attributable thereto, including interest, provision for possible losses and depreciation, depletion and amortization, excluding general corporate expenses. The Company markets its production on a competitive basis. Gas is sold under various types of contracts ranging from life-of-the-well to short-term contracts. The Company is party to a ten-year agreement which expires March 2009 to sell the majority of its existing and future production to an affiliate of First Energy Corporation ("FEC"). Pricing under the contract is established by index-based formulas which the Company negotiates annually. Approximately 80% of the Company's current production was dedicated to the performance of this agreement for the six month period ended March 31, 2003. Payments from the affiliate are guaranteed by its parent, FEC, a publicly-traded company (NYSE:FE). The Company anticipates that it will negotiate mutually agreeable pricing terms for subsequent 12-month periods pursuant to the aforementioned agreement. Management believes that the loss of any one customer would not have a material adverse effect as it believes that, under current market conditions, the Company's production could readily be absorbed by other purchasers. NOTE 9 - LEGAL SETTLEMENT The Company settled an action filed in the U.S. District Court for the District of Oregon by the former chairman of TRM Corporation and his children. The Company's chief executive officer and a former director and officer also had been named as defendants. The plaintiffs' claims were for breach of contract and fraud. The Company recorded a charge of $1.2 million, including related legal fees in the three months ended March 31, 2003. NOTE 10 - SUBSEQUENT EVENTS On May 9, 2003, the Company's majority-owned subsidiary, Atlas Pipeline Partners, L.P., completed a public offering of 950,000 common units of limited partner interest. The net proceeds after underwriting discounts and commissions were approximately $22.2 million. These proceeds will reduce existing debt of $8.5 million and will fund future capital expenditures. On April 1, 2003, the Company filed registration statements on Forms S-4 and S-3 with respect to a proposed offer to exchange its outstanding 12% Senior Notes due 2004 for a like amount of 12% Senior Notes due 2008 and a proposed concurrent offering of $30.0 million original principal amount of 12% Senior Notes due 2008. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) When used in this Form 10-Q, the words "believes" "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties more particularly described in Item 1, under the caption "Risk Factors", in our annual report on Form 10-K/A for fiscal 2002. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. Overview of Three Months and Six Months Ended March 31, 2003 and 2002 Our operating results and financial condition for the second quarter of fiscal 2003 reflect the continuing growth in importance to us of our energy operations, as shown in the following tables: Revenues as a Percent of Total Revenues (1) Three Months Ended Six Months Ended March 31, March 31, ------------------- ----------------- 2003 2002 2003 2002 ---- ---- ---- ---- Energy....................... 87% 78% 83% 82% Real estate finance.......... 8% 16% 10% 14% Assets as a Percent of Total Assets (2) March 31, September 30, 2003 2002 --------- ------------- (in thousands) Energy...................................... 42% 39% Real estate finance......................... 43% 44% - -------------- (1) We attribute the balance (5% and 6%, and 7% and 4%, for the three and six months ended March 31, 2003 and 2002, respectively) to revenues derived from assets related to operations which do not meet the definition of a business segment and corporate assets such as cash, common shares held in RAIT Investment Trust and other corporate investments. (2) We attribute the balance (15% and 17% at March 31, 2003 and September 30, 2002, respectively) to assets related to operations which do not meet the definition of a business segment, as referred to in footnote (1) above. 17 Results of Operations: Energy The following tables set forth information relating to revenues recognized and costs and expenses incurred, daily production volumes, average sales prices and production costs per equivalent unit in our energy operations during the periods indicated:
Three Months Ended Six Months Ended March 31, March 31, ------------------------ ---------------------- 2003 2002 2003 2002 -------- --------- -------- -------- (in thousands, except sales price and production cost data) Revenues: Production................................................ $ 9,416 $ 6,570 $ 17,485 $ 13,896 Well drilling............................................. 23,366 16,758 29,949 34,739 Well services............................................. 2,152 2,020 4,052 4,118 Transportation............................................ 1,402 1,322 2,810 2,674 -------- --------- -------- -------- $ 36,336 $ 26,670 $ 54,296 $ 55,427 ======== ========= ======== ======== Costs and expenses: Production................................................ $ 1,644 $ 1,676 $ 3,179 $ 3,300 Exploration............................................... 958 238 1,009 656 Well drilling............................................. 20,318 14,775 26,043 30,395 Well services............................................. 1,085 991 1,940 1,908 Transportation............................................ 612 491 1,203 1,058 Non-direct................................................ 1,213 2,089 3,442 3,544 -------- --------- -------- -------- $ 25,830 $ 20,260 $ 36,816 $ 40,861 ======== ========= ======== ======== Production revenues: Gas (1)................................................... $ 8,231 $ 5,947 $ 15,281 $ 12,360 Oil....................................................... $ 1,187 $ 605 $ 2,203 $ 1,513 Production volume: Gas (mcf/day) (1) (2)..................................... 17,933 18,771 18,648 19,684 Oil (bbls/day) (2)........................................ 410 388 429 461 Average sales prices: Gas (per mcf) (3)........................................ $ 5.10 $ 3.52 $ 4.50 $ 3.45 Oil (per bbl)............................................. $ 32.17 $ 17.32 $ 28.24 $ 18.03 Average production costs (4): As a percent of production revenues....................... 17% 26% 18% 24% Per mcf equivalent unit (2)............................... $ .90 $ .88 $ .82 $ .81
- ------------- (1) Excludes sales of residual gas and sales to landowners. (2) As used in this discussion, "mcf" and mmcf" means thousand cubic feet and million cubic feet; "mcfe" and mmcfe" means thousand cubic feet equivalent and million cubic feet equivalent, and "bbls" means barrels. Bbls are converted to mcfs equivalent using the ratio of six mcfs to one bbl. (3) Our average sales price per mcf before the effects of hedging was $5.38 and $4.66 for the three months and six months ended March 31, 2003. No contracts were settled during the six months ended March 31, 2002. (4) Production costs include labor to operate the wells and related equipment, repairs and maintenance, materials and supplies, property taxes, severance taxes, insurance, gathering charges and production overhead. 18 Our natural gas revenues were $8.2 million and $15.3 million in the three months and six months ended March 31, 2003, an increase of $2.3 million (38%) and $2.9 million (24%) from $5.9 million and $12.4 million in the three months and six months ended March 31, 2002, respectively. The increases were due to increases in the average sales price of natural gas of 45% and 31% for the three months and six months ended March 31, 2003, which were partially offset by decreases of 4% and 5% in the volume of natural gas we produced in the three months and six months ended March 31, 2003, respectively. The $2.3 million increase in gas revenues in the three months ended March 31, 2003 as compared to the prior period consisted of a $2.7 million increase attributable to increases in natural gas sales prices, partially offset by a $384,000 decrease attributable to decreased production volumes. The $2.9 million increase in natural gas revenues in the six months ended March 31, 2003 as compared to the prior period consisted of a $3.8 million increase attributable to an increase in natural gas sales prices, partially offset by an $849,000 decrease attributable to decreased production volumes. If current market conditions continue, we believe that our natural gas production revenues will be higher in the remainder of fiscal 2003 than in fiscal 2002. There was a decline in our natural gas volumes caused by the curtailment of natural gas deliveries during the completion of the extension to our Crawford County, PA system; also, unusually cold weather constrained production from some of our wells and increased landowner gas usage. We expect volumes to rebound in subsequent periods. Our oil revenues were $1.2 million and $2.2 million in the three months and six month periods ended March 31, 2003, an increase of $582,000 (96%) and $690,000 (46%) from $605,000 and $1.5 million in the three months and six months ended March 31, 2002, primarily due to increases in the average sales price of oil of 86% and 57%, for the respective periods. Oil production volume increased 6% during the three months and decreased 7% during the six months ended March 31, 2003 and 2002, respectively. The $582,000 increase in oil revenues in the three months ended March 31, 2003 as compared to the prior period consisted of increases of $518,000 attributable to increases in oil sales prices and $64,000 attributable to increased production volumes. The $690,000 increase in oil revenues for the six months ended March 31, 2003 as compared to the prior period consisted of increases of $857,000 attributable to increases in oil sales prices partially offset by $167,000 attributable to decreased production volumes. Oil prices were higher in the first six months of fiscal 2003 than in fiscal 2002. The decrease in oil volumes is a result of the natural production decline inherent in the life of a well. This decline was not offset by new wells added, as the majority of the wells we have drilled during the past several years have targeted gas reserves. Our well drilling revenues and expenses represent the billing and costs associated with the completion of 123 and 160 net wells for partnerships sponsored by Atlas America, Inc. in the three months and six months ended March 31, 2003 as compared to 86 and 177 net wells in the three months and six months ended March 31,2002, respectively. Our well drilling gross margin was $3.0 million and $3.9 million in the three months and six months ended March 31, 2003, an increase of $1.1 million and decrease of $438,000 from $2.0 million and $4.3 million in the three months and six months ended March 31, 2002, respectively. In the three month ended March 31, 2003, the increase of $1.1 million was attributable to an increase in the number of wells drilled ($917,000) and an increase in the gross margin per well ($148,000). In the six months ended March 31, 2003, the decrease of $438,000 was attributable to a decrease in the number of wells drilled ($415,000) and a decrease in the gross margin per well ($23,000). Demand for drilling equipment and services increased in the fiscal year ended September 30, 2002, resulting in an increase in the cost to us of obtaining such equipment and services in the three months and six months ended March 31, 2002. These costs have decreased slightly in fiscal 2003. In fiscal 2002, we changed the structure of our drilling contracts to a cost-plus basis from a turnkey basis. Cost-plus contracts protect us in an inflationary environment while limiting our profit margin. We continue to enter into drilling contracts with gross margin rates of 13% and expect to maintain that margin through fiscal 2003. 19 Our exploration costs were $958,000 and $1.0 million in the three months and six months ended March 31, 2003, an increase of $720,000 and $353,000 from the three months and six months ended March 31, 2002, respectively. These increases were attributable to expenditures for lease costs of $275,000 in the three months ended March 31, 2003, which were charged to operations upon our decision to discontinue drilling in the area of these leases. In addition, delay rentals increased $100,000 in the six months March 31, 2003 as compared to the six months ended March 31, 2002. Our transportation expenses increased 25% and 14% in the three months and six months ended March 31, 2003, respectively, as compared to the prior periods. These increases resulted from higher compressor expenses due to increased compressor lease rates and the addition of more compressors to increase the capacity of our gathering systems. Our non-direct expenses were $1.2 million and $3.4 million in the three months and six months ended March 31, 2003, a decrease of $876,000 (42%) and $102,000 (3%), respectively. These expenses include, among other things, salaries and benefits not allocated to a specific energy activity, costs of running our energy corporate office, partnership syndication activities and outside services. These expenses are partially offset by reimbursements we receive from our partnership drilling and management activities. These reimbursements increased $1.0 million for the three months ended March 31, 2003 as compared to the previous year period as a result of more net wells drilled in the three months ended March 31, 2003 than in the three months ended March 31, 2002. This increase in reimbursements was partially offset by increases in the cost of running our energy corporate office as a result of continued growth in our energy operations. Results of Operations: Real Estate Finance The following table sets forth certain information relating to the revenues recognized and costs and expenses incurred in our real estate finance operations during the periods indicated:
Three Months Ended Six Months Ended March 31, March 31, ------------------------ ---------------------- 2003 2002 2003 2002 -------- --------- -------- -------- (in thousands) Revenues: Interest.................................................. $ 1,799 $ 2,677 $ 3,730 $ 5,005 Accreted discount......................................... 714 985 1,409 2,186 Gains on resolution of loans ............................. - 1,641 813 1,641 Equity in earnings of equity investees.................... 387 181 39 268 Net rental and fee income................................. 589 136 657 204 -------- --------- -------- -------- $ 3,489 $ 5,620 $ 6,648 $ 9,304 ======== ========= ======== ======== Costs and expenses............................................ $ 937 $ 464 $ 1,783 $ 987 ======== ========= ======== ========
Revenues - Three Months Ended March 31, 2003 as Compared to the Three Months Ended March 31, 2002 Revenues decreased $2.1 million (38%) from $5.6 million in the three months ended March 31, 2002 to $3.5 million in the three months ended March 31, 2003. We attribute the decrease to the following: o A decrease in interest and accreted discount income of $1.1 million (31%) resulting from the following: - The sale or repayment of four loans which decreased interest income by $345,000 in the three months ended March 31, 2003 as compared to the three months ended March 31, 2002. - The completion of accretion of discount on four loans, which decreased interest income by $675,000 in the three months ended March 31, 2003 as compared to the three months ended March 31, 2002. - A decrease in our average rate of accretion, resulting in a decrease in interest income of $117,000 in the three months ended March 31, 2003 as compared to the three months ended March 31, 2002. 20 o A decrease of $1.6 million in gains on resolutions of loans and loan payments in excess of carrying value in the three months ended March 31, 2003 compared to the three months ended March 31, 2002. In the three months ended March 31, 2002, we sold one loan having a book value of $22.4 million for $24.0 million recognizing a gain of $1.6 million. No loans were sold in the three months ended March 31, 2003. o An increase of $206,000 from our share of the operating results of our unconsolidated real estate investments accounted for on the equity method in the three months ended March 31, 2003 as compared to the three months ended March 31, 2002. The increase was the result of higher earnings from one of our investments. o An increase in net rental and fee income of $453,000 in the three months ended March 31, 2003, as compared to the three months ended March 31, 2002, to $589,000 from $136,000. The increase resulted primarily from fees we earned for services provided to the real estate investment partnership which we sponsored in connection with its purchase and third party financing of a property. We anticipate earning additional fees from this partnership and any future real estate investment partnerships which we may sponsor. Revenues - Six Months Ended March 31, 2003 as Compared to the Six Months Ended March 31, 2002 Revenues decreased $2.7 million (29%) to $6.6 million in the six months ended March 31, 2003 from $9.3 million in the six months ended March 31, 2002. We attribute the decrease to the following: o A decrease in interest and accreted discount income of $2.1 million resulting from the following: - The sale or repayment of four loans, which decreased interest income by $1.2 million in the six months ended March 31, 2003 as compared to the six months ended March 31, 2002. - The completion of accretion of discount on four loans, which decreased interest income by $1.2 million in the six months ended March 31, 2003 as compared to the six months ended months ended March 31, 2002. - These decreases were partially offset by an increase of $285,000 in our average rate of accretion on nine loans in the six months ended March 31, 2003 as compared to the six months ended March 31, 2002. o A decrease of $828,000 in gains on resolutions of loans. In the six months ended March 31, 2003, we sold one loan, having a book value of $4.2 million, for $5.0 million, recognizing a gain of $813,000, as compared to the sale of one loan in the six months ended March 31, 2002 having a book value of $22.4 million for $24.0 million, recognizing a gain of $1.6 million. o A decrease of $229,000 from our share of the operating results of our unconsolidated real estate investments accounted for on the equity method in the six months ended March 31, 2003 as compared to the six months ended March 31, 2002. The decrease was the result of an increase in depreciation and an operating loss on a property in which we acquired an interest in March 2002. o An increase in net rental and fee income of $453,000 in the six months ended March 31, 2003 as compared to the six months ended March 31, 2002 to $657,000 from $204,000. The increase resulted primarily from fees we earned for our services relating to the purchase and financing of a property acquired by one real estate investment partnership which we sponsored. Gains on resolutions 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. 21 Costs and Expenses Costs and expenses of our real estate finance operations were $937,000 and $1.8 million in the three months and six months ended March 31, 2003, respectively, an increase of $473,000 (102%) and $796,000 (81%) from $464,000 and $987,000 in the same periods of the prior fiscal year. The increase resulted from approximately $183,000 and $433,000 in non-recoverable payments which we charged to earnings. These payments were made to protect our interests in certain properties underlying our investments in real estate loans in the three months and six months ended March 31, 2003, respectively. In addition, wages and benefits increased $199,000 and $275,000 in the in the three months and six months ended March 31, 2003, respectively, as compared to the prior year periods as a result of the addition of a new president and other personnel in our real estate subsidiary in anticipation of the expansion of our real estate operations through the sponsorship of real estate investment partnerships as well as the on-going management of our existing portfolio of commercial loans and real estate ventures. Results of Operations: Other Revenues, Costs and Expenses Our interest and other income was $1.7 million and $4.0 million in the three months and six months ended March 31, 2003, respectively, a decrease of $177,000 (9%) and increase of $750,000 (23%) as compared to $1.9 million and $3.3 million during the three months and six months ended March 31, 2002, respectively. The following table sets forth information relating to interest and other income during the periods indicated: Three Months Ended Six Months Ended March 31, March 31, --------------------- -------------------- 2003 2002 2003 2002 -------- -------- -------- -------- (in thousands) Interest income.............. $ 131 $ 322 $ 382 $ 669 Dividend income.............. 672 763 1,461 1,567 Gains on sale of assets...... 1,200 516 2,174 512 Other........................ (267) 634 (13) 506 -------- -------- -------- -------- $ 1,736 $ 1,913 $ 4,004 $ 3,254 ======== ======== ======== ======== Interest income decreased $191,000 and $287,000 to $131,000 and $382,000 for the three months and six months ended March 31, 2003 from $322,000 and $669,000 for the three months and six months ended March 31, 2002, respectively. The decreases were primarily due to lower funds invested and lower average rates earned on those funds invested. Gains on sale of assets for the three months and six months ended March 31, 2003 were $1.2 million and $2.2 million as compared to $516,000 and $512,000 for the three months and six months ended March 31, 2002, respectively. This primarily reflects the sale of 189,100 and 352,600 shares in RAIT Investment Trust from which we received net proceeds of $4.0 million and $7.4 million and realized gains of $1.2 million and $2.1 million in the three and six months ended March 31, 2003, respectively. In the three months and six months ended March 31, 2002, we realized gains of $524,000 and $529,000 associated with sales of property and equipment in our energy segment. Other revenues decreased $901,000 and $519,000 to a net expense of $267,000 and $13,000 for the three months and six months ended March 31, 2003 from a net income of $634,000 and $506,000 for the three months and six months ended March 31, 2002, respectively. The three months and six months ended March 31, 2003 include net expenses from our financial services operations of $312,000 and $93,000 compared to a net income of $263,000 and $462,000 in the three months and six months ended March 31, 2002, respectively. The net expenses in our financial services operations reflect the startup phase of our equipment leasing operations. These leasing operations do not meet the qualifications of an operating segment at this time but are expected to in the near future. Our general and administrative expenses decreased $268,000 (17%) in the three months ended March 31, 2003 to $1.3 million from $1.6 million in the three months ended March 31, 2002. This decrease primarily resulted from an increase in reimbursements of expenses previously incurred by investment partnerships we sponsor in connection with our syndication activities. Our provision for legal settlement represents the estimated costs associated with the settlement of an action filed by the former chairman of TRM Corporation as described in Note 9 of our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2002. To the extent that our actual cost (because of insurance recovery) is less than the provision, it will be recorded as a reduction to our expenses in the period so determined. 22 Our depletion, depreciation and amortization consist mainly of depletion of oil and gas properties and amortization of contracts acquired. Our depletion as a percentage of oil and gas production revenues was 22% and 23% in the three months and six months ended March 31, 2003 compared to 26% in the three months and six months ended March 31, 2002, respectively. 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 properties. We own 51% of the partnership interest in Atlas Pipeline Partners, L.P. through both our general partner's interest and the subordinated units we received at the closing of Atlas Pipeline Partners' public offering. The minority interest in Atlas Pipeline Partners is the interest of Atlas Pipeline Partners' common unit holders. Because we own more than 50% of the partnership interest and, as general partner, control Atlas Pipeline Partners, we include it in our consolidated financial statements and show the ownership by the public as a minority interest. The minority interest in Atlas Pipeline Partners earnings was $884,000 and $1.5 million in the three months and six months ended March 31, 2003, as compared to $642,000 and $1.4 million in the three months and six months ended March 31, 2002, an increase of $242,000 (38%) and $134,000 (10%), respectively. This increase was the result of an increase in Atlas Pipeline Partners' net income principally caused by increases in transportation fees received. These fees vary with the price of natural gas, which on average was higher in fiscal 2003 than 2002. Our provision for possible losses increased $150,000 and $373,000 to $800,000 and $1.2 million in the three months and six months ended March 31, 2003, respectively, as compared to $650,000 and $800,000 in the three months and six months ended March 31, 2002, respectively. These increases resulted primarily from certain payments for operating expenses of a property underlying one of our loans that we anticipate making in order to protect our interest in the underlying property. Our effective tax rate decreased to 32% in the six months ended March 31, 2003 as compared to 33% in the six months ended March 31, 2002 as a result of a decrease in certain unfavorable permanent differences, partially offset by a decrease in tax credits utilized. Discontinued Operations In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets," our decision in fiscal 2002 to dispose of Optiron Corporation, our former energy technology subsidiary, resulted in the presentation of Optiron as a discontinued operation. We had held a 50% interest in Optiron; as a result of the disposition, we currently hold a 10% interest in Optiron. Liquidity and Capital Resources General. Our major sources of liquidity have been 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, real estate finance and corporate credit facilities and the sale of our RAIT Investment Trust shares. We have employed these funds principally in the expansion of our energy operations, the repurchase of our common stock and the acquisition of senior lien interests relating to our real estate loans. The following table sets forth our sources and uses of cash for the periods indicated: Six Months Ended March 31 ----------------------------- 2003 2002 --------- --------- (in thousands) Provided by operations................... $ 17,410 $ 1,873 Used in investing activities............. (5,949) (2,431) Used in financing activities............. (3,990) (15,795) Used in discontinued operations.......... (5,624) (1,165) --------- --------- $ 1,847 $ (17,518) ========= ========= 23 We had $27.6 million in cash and cash equivalents on hand at March 31, 2003, as compared to $25.7 million at September 30, 2002. Our ratio of earnings from continuing operations before income taxes, minority interest and interest expense to fixed charges was 2.4 to 1.0 in the six months ended March 21, 2003 as compared to 2.6 to 1.0 in the six months ended March 31, 2002. Our working capital at March 31, 2003 was $6.5 million compared to $4.6 million at September 30, 2002. The increase was primarily due to a decrease in net liabilities associated with assets held for disposal, partially offset by increases in accounts payable and deferred revenue on drilling contracts as a result of our sponsored investment drilling programs. Our long-term debt (including current maturities) to total capital was 67% at March 31, 2003 and 64% at September 30, 2002. Cash flows from operating activities. Cash provided by operations is an important source of short-term liquidity for us. It is directly affected by changes in the price of natural gas and oil, interest rates, our ability to raise funds for our drilling investment partnerships and the strength of the market for rentals of the types of properties secured by our real estate loans. Net cash provided by operating activities increased $15.5 million in the six months ended March 31, 2003 to $17.4 million from $1.9 million in the six months ended March 31, 2002, substantially as a result of the following: o Changes in operating assets and liabilities increased operating cash flow by $22.4 million in the six months ended March 31, 2003, compared to the six months ended March 31, 2002, primarily due to decreases at March 31, 2002 and subsequent increases at March 31, 2003 in the level of accounts payable and accrued liabilities. These levels of liabilities are dependent upon the remaining amount of our drilling obligations at any balance sheet date, which is dependent upon the timing of funds raised through our investment partnerships. o Collection of interest on our real estate loans decreased $4.9 million due to payment in full of one real estate loan in the six months ended March 31, 2002. o A decrease in our deferred tax provision of $1.7 million. Cash flows from investing activities. Net cash used in our investing activities increased $3.5 million in the six months ended March 31, 2003 as compared to the six months ended March 31, 2002 as a result of the following: o Other assets increased $2.4 million due to investments in direct financing leases that were subsequently transferred to our sponsored equipment leasing investment partnership. o Principal payments on notes receivable and proceeds from sales of assets net of investments in real estate loans and ventures decreased by $9.3 million in the six months ended March 31, 2003 as compared to the six months ended March 31, 2002. o Changes in proceeds and purchases of RAIT Investment Trust shares increased cash flow by $9.2 million in the six months ended March 31, 2003 as compared to the six months ended March 31, 2002. Cash flows from financing activities. Net cash used in our financing activities decreased $11.8 million in the six months ended March 31, 2003 as compared to the six months ended March 31, 2002, as a result of the following: o Principal payments on borrowings decreased $15.0 million, reflecting a pay down of debt in our real estate segment in the prior year as a result of the payment in full of one real estate loan. o Purchases of treasury shares increased cash used by $2.7 million. 24 Capital Requirements During the six months ended March 31, 2003 and 2002, our capital expenditures related primarily to our investments in our drilling partnerships and pipeline expansions, in which we invested $12.7 million and $11.5 million, respectively. For the six months ended March 31, 2003 and the remaining quarters of fiscal 2003, we funded and expect to continue to fund these capital expenditures through cash on hand, borrowings under our credit facilities, and from operations. Through our energy subsidiaries, we have established two credit facilities to facilitate the funding of our capital expenditures. In July 2002, we obtained an increase in our borrowing base on our energy credit facility administered by Wachovia Bank to $52.5 million. In addition, we replaced our $10.0 million PNC Bank credit facility with a new $15.0 million credit facility with Wachovia Bank. The level of capital expenditures we must devote to our energy operations are dependent upon the level of funds raised through our drilling investment partnerships. We have budgeted to raise up to $60.0 million in fiscal 2003 through drilling partnerships. We believe cash flow from operations and amounts available under our credit facilities will be adequate to fund our contributions to these partnerships. However, the amount of funds we raise and the level of our capital expenditures will vary in the future depending on market conditions for natural gas and other factors. We continuously evaluate acquisitions of gas and oil and pipeline assets. In order to make any acquisition, we believe we will be required to access outside capital either through debt or equity placements or through joint venture operations with other energy companies. There can be no assurance that we will be successful in our efforts to obtain outside capital. Contractual Obligations and Commercial Commitments The following tables set forth our obligations and commitments as of March 31, 2003.
Payments Due By Period (in thousands) ---------------------------------------------------------------- Less than 1 - 3 4 - 5 After 5 Contractual cash obligations: Total 1 Year Years Years Years ----------- ----------- ----------- ----------- --------- Long-term debt........................... $ 158,072 $ 3,731 $ 153,183 $ 1,158 $ - Capital lease obligations................ - - - - - Operating leases......................... 4,791 1,396 2,295 1,065 35 Unconditional purchase obligations....... - - - - - Other long-term obligations.............. - - - - - ----------- ----------- ----------- ----------- --------- Total contractual cash obligations....... $ 162,863 $ 5,127 $ 155,478 $ 2,223 $ 35 =========== =========== ============ ========== ========== Amount of Commitment Expiration Per Period (in thousands) ---------------------------------------------------------------- Less than 1 - 3 4 - 5 After 5 Contractual cash obligations: Total 1 Year Years Years Years ----------- ----------- ----------- ----------- --------- Standby letters of credit................ $ 275 $ - $ 275 $ - $ - Guarantees............................... 2,791 1,284 1,507 - - Standby replacement commitments.......... 10,483 4,899 5,584 - - Other commercial commitments............. 193,872 2,933 60,894 3,822 126,223 ----------- ----------- ----------- ----------- --------- Total commercial commitments............. $ 207,421 $ 9,116 $ 68,260 $ 3,822 $ 126,223 =========== =========== ============ ========== ==========
25 Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to provision for possible losses, deferred tax assets and liabilities, goodwill and identifiable intangible assets, and certain accrued liabilities. We base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion on the application of policies critical to our business operations and other accounting policies, see Note 2 of the "Notes to Consolidated Financial Statements" in our Annual Report on Form 10-K/A. Recently Issued Financial Accounting Standards In December 2002, the Financial Accounting Standards Board, which we refer to as the FASB, issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS 148 is generally effective for fiscal years ending after December 15, 2002 and, as to certain disclosure requirements, for interim periods beginning after December 15, 2002. The adoption of SFAS 148 did not have a material effect on our consolidated financial position or results of operations. In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 clarifies the requirements for a guarantor's accounting for and disclosure of certain guarantees issued and outstanding and requires a guarantor to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken. The objective of the initial measurement of that liability is the fair value of the guarantee at its inception. The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material effect on our financial position or results of operations. In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable Interest Entities", which we are required to adopt on July 1, 2003. FIN 46's consolidation criteria are based on analysis of risks and rewards, not control, and represent a significant and complex modification of previous accounting principles. FIN 46 represents an accounting change, not a change in the underlying economics of the applicable investment. We are assessing the impact of the adoption of FIN 46. However, based on management's preliminary assessment, it is reasonably possible that we may be required to consolidate several entities in which we have an investment. Under FIN 46, certain real estate loans presently carried on our books could be removed and replaced by real property and associated third-party debt. In the event we are required to consolidate any of these entities, we would not acquire any legal ownership of the property owned by the entity, nor would our legal rights and obligations change. The complexity of the new consolidation rules and their evolving clarification make forecasting their effect impracticable. 26 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term "market risk" refers to the risk of loss arising from adverse changes in interest rates and oil and gas prices. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonable possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk sensitive instruments were entered into for purposes other than trading. General We are exposed to various market risks, principally fluctuating interest rates and changes in commodity prices. These risks can impact our results of operations, cash flows and financial position. We manage these risks through regular operating and financing activities and periodically use derivative financial instruments. The following analysis presents the effect on our earnings, cash flows and financial position as if the hypothetical changes in market risk factors occurred on March 31, 2003. Only the potential impacts of hypothetical assumptions are analyzed. The analysis does not consider other possible effects that could impact our business. Energy Interest Rate Risk. At March 31, 2003, the amount outstanding under a revolving loan attributable to our energy operations had decreased to $39.0 million from $43.7 million at September 30, 2002. The weighted average interest rate for this facility decreased from 3.9% at September 30, 2002 to 3.7% at March 31, 2003 due to a decrease in interest rates. Holding all other variables constant, if interest rates hypothetically increased or decreased by 10%, our net annual income would change by approximately $98,000. We have a $15.0 million revolving credit facility to fund the expansion of Atlas Pipeline Partners' existing gathering systems and the acquisitions of other gas gathering systems. In the six months ended March 31, 2003, we drew $2.9 million under this facility. The balance outstanding as of March 31, 2003 was $8.5 million. The weighted average interest rate was 2.9% and 3.27% at March 31, 2003 and September 30, 2002, respectively. 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 fluctuations in the pricing of our gas and oil production. Realized pricing is primarily driven by the prevailing worldwide prices for crude oil and spot market prices applicable to United States natural gas production. Pricing for gas and oil production has been volatile and unpredictable for many years. To hedge exposure to changing natural gas prices, we use financial hedges. Through our hedges, we seek to provide a measure of stability in the volatile environment of natural gas prices. Our risk management objective is to lock in a range of pricing for a portion of expected production volumes, allowing us to forecast future earnings within a more predictable range. Our contract with an affiliate of First Energy Corporation allows us from time to time to "lock in" the sales price for some of our natural gas production volumes to be delivered in either the current month or in future months, rather than selling those same production volumes at contract prices in the month produced. Annually, we negotiate with certain other purchasers to deliver a portion of natural gas produced for the upcoming twelve months. Most of these contracts are index-based and the price we receive for our gas changes as the underlying index changes. Through the year, at our discretion, we are permitted to designate a portion of our negotiated production volumes to be purchased at the prevailing contract price at that time, for delivery in either the current month or in future production months. For the fiscal year ended September 30, 2002, approximately 38% of produced volumes were sold in this manner. For the fiscal year ending September 30, 2003, we estimate in excess of 64% of our produced natural gas volumes will be sold in this manner, leaving the remaining 36% of our produced volumes to be sold at contract prices in the month produced or at spot market prices. Considering those volumes already designated for the fiscal year ending September 30, 2003 and current indices, a theoretical 10% upward or downward change in the price of natural gas would result in approximately a 2% change in our natural gas revenues. 27 Energy - (Continued) 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. As of March 31, 2003, we had gas hedges in place covering 516,000 dekatherms or dths, maturing through September 30, 2003. We include an adjustment of $2.6 million on our balance sheet to mark these hedges to their fair value. "Fair value" represents the amount that we estimate we would have realized if we had terminated the hedges on that date. As these contracts qualify and have been designated as cash flow hedges, we determine gains and losses on them resulting from market price changes monthly and reflect them in accumulated other comprehensive income (loss) until the month in which we sell the hedged production. At that time, the amount included in accumulated other comprehensive income (loss) related to the production sold is included in production revenues. We determine gains or losses on open and closed hedging transactions as the difference between the contract price and a reference price, generally closing prices on NYMEX. Net losses relating to these hedging contracts in the three and six months ended March 31, 2003 were $448,000 and $544,000, respectively. We set forth in the following table our natural gas hedge transactions in place as of March 31, 2003. A 10% variation in the market price of natural gas from its levels at March 31, 2003 would not have a material impact on our net assets, net earnings or cash flows.
Volumes of Settlement Date Weighted Average Unrealized Open Contracts Natural Gas (Dth) Quarter Ended Price Per Dth Losses - -------------- ----------------- --------------- ---------------- ----------- 105 315,000 June 2003 $ 3.57 $ 480,000 67 201,000 September 2003 3.63 300,000 --- ------- ------- ----------- 172 516,000 $ 3.59 $ 780,000 === ======= ======= ===========
Real Estate Finance Portfolio Loans and Related Senior Liens. The following information is based on our loans that are not interest rate sensitive. During the six months ended March 31, 2003, our outstanding loans receivable (to our interest) increased $8.2 million (3%) to $305.5 million in the aggregate and the carried cost of our loans decreased $328,000 (.2%) to $148.2 million in the aggregate. The principal balance of related senior lien interests decreased $2.4 million (1%) to $19.9 million in the aggregate. Debt. The interest rates on our real estate and corporate revolving lines of credit and term loans are at the prime rate minus 1% for the outstanding $6.4 million under our term loan at Hudson United Bank and at the prime rate for the outstanding $18.0 million and $5.0 million lines of credit at Sovereign Bank. These interest rates decreased during the six months ended March 31, 2003 because the defined prime rate decreased. This defined rate was the "prime rate" as reported in The Wall Street Journal (4.25% at March 31, 2003). A hypothetical 10% change in the average interest rate applicable to these lines of credit would change our net income by approximately $80,000. 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 March 31, 2003, $7.0 million was outstanding on this loan at an interest rate of 4.9%. A hypothetical 10% change in the average interest rate applicable to this loan would change our net income by approximately $23,000. 28 Financial Services 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 bear interest at one of two rates, elected at LEAF's option: the lender's prime rate plus 200 basis points, or LIBOR plus 300 basis points. As of March 31, 2003, the balance outstanding was $298,000 at an average interest rate of 4.3%. 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. Other We have 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; the prime rate, or LIBOR plus 250 basis points. Each rate is subject to a floor of 5.5% and a ceiling of 9.0%. As of March 31, 2003, the balance outstanding was $5.0 million at an average rate of 5.5%. A hypothetical 10% change in the average interest rate on this facility would change our net income by approximately $19,000. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)) within 90 days prior to the filing of this report. Based upon this evaluation, these officers believe that our disclosure controls and procedures are effective. Changes in Internal Controls There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the last evaluation of our internal controls by our Chief Executive Officer and Chief Financial Officer. 29 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
Exhibit No. Description ----------- ----------- 3.1 Restated Certificate of Incorporation of Resource America. (1) 3.2 Amended and Restated Bylaws of Resource America. (1) 10.1 Employment Agreement between Edward E. Cohen and Resource America, dated March 11, 1997.(2) 10.2 Indenture, dated as of July 22, 1997, between Resource America and The Bank of New York.(3) 10.3 Revolving Credit Loan Agreement dated July 27, 1999 by and between Resource America, Inc. and Sovereign Bank. (4) 10.4 Revolving Credit Loan and Security Agreement, dated July 27, 1999, among Resource Properties, Inc., Resource Properties 53, Inc., Resource Properties XXIV, Inc. Resource Properties, XL, Inc. and Sovereign Bank. (4) 10.4(a) Modification of Revolving Credit Loan and Security Agreement dated March 30, 2000. (4) 10.5 Employment Agreement between Steven J. Kessler and Resource America, dated October 5, 1999. (1) 10.6 Employment Agreement between Nancy J. McGurk and Resource America, dated October 5, 1999.(1) 10.7 Employment Agreement between Jonathan Z. Cohen and Resource America, dated October 5, 1999. (4) Amended and Restated Loan Agreement, dated December 14, 1999, among Resource Properties 10.8 XXXII, Inc., Resource Properties XXXVIII, Inc., Resource Properties II, Inc., Resource Properties 51, Inc., Resource Properties, Inc., Resource America and Jefferson Bank (now known as Hudson United Bank). (4) 10.9 Term Loan Agreement between Resource Properties, Inc. and Miller & Schroeder Investments Corporation, dated November 15, 2000. (4) 10.10 Revolving Credit Agreement and Assignment between LEAF Financial Corporation and National City Bank, and related guaranty from Resource America, Inc., dated June 11, 2002.(4) 10.11 Credit Agreement among Atlas America, Inc., Resource America, Inc., Wachovia Bank, National Association, and other banks party thereto, dated July 31, 2002. (5) 10.12 Agreement between Resource Financial Fund Management, Inc. and 9 Henmar LLC, dated October 23, 2002. (5) 10.13 Credit Agreement among Atlas Pipeline Partners, L.P., Wachovia Bank, National Association, and the other parties thereto, dated December 27, 2002.(7) 10.13(a) Second Amendment to Credit Agreement, dated March 28, 2003. 10.14 Settlement Agreement between Resource America, Inc., FLI Holdings, Inc., AEL Leasing Co., Inc. and Citibank, N.A., dated December 31, 2002.(7) 10.15 Agreement between Resource Financial Fund Management, Inc. and 9 Henmar LLC, dated January 30, 2003. 10.16 1997 Key Employee Stock Option Plan.(8) 10.17 1997 Non-Employee Director Deferred Stock and Deferred Compensation Plan.(8) 10.17(a) Amendment to Plan.(9) 10.18 1999 Key Employee Stock Option Plan.(10) 10.19 2002 Non-Employee Director Deferred Stock and Deferred Compensation Plan.(11) 10.19(a) Amendment to Plan.(9) 10.20 2002 Key Employee Stock Option Plan.(12) 10.21 Agreement between Resource Financial Fund Management, Inc. and 9 Henmar LLC, dated April 15, 2003.
30 99.1 Certification Pursuant to 302 of the Sarbannes Oxley Act of 2002. 99.2 Certification Pursuant to 302 of the Sarbannes Oxley Act of 2002. 99.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 99.4 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None
- ------------------- (1) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended December 31, 1999 and by this reference incorporated herein. (2) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and by this reference incorporated herein. (3) Filed previously as an exhibit to our Registration Statement on Form S-4 (File No. 333-40231) and by this reference incorporated herein. (4) Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended September 30, 2000 and by this reference incorporated herein. (5) Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended September 30, 2002 and by this reference incorporated here. (6) Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended September 30, 1999 and by this reference incorporated herein. (7) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2002 and by this reference incorporated herein. (8) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and by this reference incorporated herein. (9) Filed previously as an exhibit to our Definitive Proxy Statement on Schedule 14A for the 2003 annual meeting of stockholders and by this reference incorporated herein. (10) Files previously as an exhibit to our Definitive Proxy Statement on Schedule 14A for the 1999 annual meeting of stockholders and by this reference incorporated herein. (11) Filed previously as an exhibit to our Registration Statement on Form S-8 (File No. 333-98507) and by this reference incorporated herein. (12) Filed previously as an exhibit to our Registration Statement on Form S-8 (File No. 333-98505) and by this reference incorporated herein. 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RESOURCE AMERICA, INC. (Registrant) Date: May 14, 2003 By: Steven J. Kessler -------------------------- STEVEN J. KESSLER Senior Vice President and Chief Financial Officer Date: May 14, 2003 By: Nancy J. McGurk -------------------------- NANCY J. McGURK Vice President-Finance and Chief Accounting Officer 32 EX-10 3 ex10-13a.txt EXHIBIT 10.13(A) SECOND AMENDMENT TO CREDIT AGREEMENT ------------------------------------ This Second Amendment to Credit Agreement (this "Amendment") is made as of the 28th day of March, 2003, by and among ATLAS PIPELINE PARTNERS, L.P., a Delaware limited partnership (the "Borrower"); ATLAS PIPELINE PARTNERS GP, LLC, a Delaware limited liability company ("General Partner"); ATLAS PIPELINE NEW YORK, LLC, a Pennsylvania limited liability company ("APL New York"); ATLAS PIPELINE OHIO, LLC, a Pennsylvania limited liability company ("APL Ohio"), ATLAS PIPELINE PENNSYLVANIA, LLC, a Pennsylvania limited liability company ("APL Pennsylvania"), and ATLAS PIPELINE OPERATING PARTNERSHIP, L.P., a Delaware limited partnership ("APL Operating," together with General Partner, APL New York, APL Ohio and APL Pennsylvania, collectively, the "Guarantors" and the Borrower and the Guarantors collectively, the "Obligors"); each of the lenders that is a signatory hereto (individually, together with its successors and assigns, a "Lender" and, collectively, the "Lenders"); WACHOVIA BANK, NATIONAL ASSOCIATION, as administrative agent for the Lenders (in such capacity, together with its successors in such capacity the "Administrative Agent"), and as issuing bank (in such capacity, together with its successors in such capacity, the "Issuing Bank"). R E C I T A L S: ---------------- A. The parties hereto are parties to the Credit Agreement dated December 27, 2002 (the "Credit Agreement"), pursuant to which the Lenders agreed to loan up to $7,500,000 to Borrower. B. The Credit Agreement was amended by that certain First Amendment to Credit Agreement dated January 31, 2003 (the "First Amendment"), pursuant to which the Lenders agreed to loan up to $10,000,000 to Borrower (the Credit Agreement as amended by the First Amendment is herein called the "Original Agreement"). C. Immediately prior to the effectiveness of this Amendment Wachovia Bank, National Association, as Lender, has assigned to KeyBank National Association under that certain Assignment Agreement of even date herewith (the "Assignment Agreement") fifty percent (50%) of Wachovia Bank, National Association's Percentage Share of the Revolving Credit Commitment (the "Assigned Interest"). Pursuant to such assignment, KeyBank National Association is a party to the Original Agreement and, under Section 2.12 of the Original Agreement, is an "Augmenting Lender." D. Borrower has requested, pursuant to Section 2.12 of the Original Agreement, the Maximum Revolving Credit Amount be increased to $15,000,000 and KeyBank National Association, as Augmenting Lender, the other Lenders and the Administrative Agent consent to amend the Original Agreement in order to modify certain provisions of the Original Agreement pursuant to the terms and conditions hereof. NOW, THEREFORE, in consideration of the foregoing, and intending to be legally bound, the parties agree as follows: SECTION 1. Terms Defined in Agreement. As used in this Amendment, except as may otherwise be provided herein, all capitalized terms which are defined in the Original Agreement shall have the same meaning herein as therein, all of such terms and their definitions being incorporated herein by reference. The Original Agreement, as amended by this Amendment, is hereinafter called the "Agreement." SECTION 2. Amendment to Agreement. Subject to the conditions precedent set forth in Section 4 hereof, the Original Agreement is hereby amended as follows: (a) Section 1.02 is amended to add the following: "Appalachian Basin" shall mean the states of New York, Ohio, West Virginia, Kentucky and Tennessee, and the Commonwealths of Pennsylvania and Virginia. (b) The definition of "Majority Lenders" is amended by deleting the term "sixty-seven percent (67%)" and replacing it with the term "one hundred percent (100%)" in each instance such term appears. (b) Section 9.03(i) is amended by inserting the following phrase immediately before the period "." at the end of subsection (i): "; provided further, that (x) such acquisitions shall be limited to Persons primarily involved in the business of, and/or assets primarily involving, natural gas gathering operations and (y) such acquisitions outside the Appalachian Basin which are otherwise permitted pursuant to this Section 9.03(i) shall be limited to an aggregate purchase price of $5,000,000 during the term of this Agreement." (c) Section 10.01 is amended by replacing the period "." at the end of subsection (l) with "; or" and adding the following subsection (m) immediately after subsection (l): "(m) a Material Adverse Effect occurs." (d) Annex I attached to the Original Agreement is deleted in its entirety and Annex I attached hereto is substituted in lieu thereof. SECTION 3. Increase in Maximum Revolving Credit Amounts. Pursuant to the Borrower's written request under Section 2.12, and immediately following the assignment of the Assigned Interest to Key Bank National Association, the total aggregate Maximum Revolving Credit Amounts will be increased to $15,000,000. After giving effect to this Amendment, the Maximum Revolving Credit Amounts, outstanding Loans, risk relating to outstanding Letters of Credit, and Percentage Share of the Lenders are as set forth on Annex I hereto. -2- SECTION 4. Conditions of Effectiveness. The obligations of Administrative Agent and Lenders to amend the Original Agreement as provided in this Amendment and give effect to Section 3 hereof is subject to the fulfillment of the following conditions precedent: (a) The Assignment Agreement from Wachovia Bank, National Association to KeyBank National Association shall be fully executed. (b) Borrower shall deliver to Administrative Agent and Lenders multiple counterparts of this Amendment, duly executed by the Obligors. (c) Borrower shall deliver to Wachovia Bank, National Association its $7,500,000 promissory note duly executed by Borrower. (d) Borrower shall deliver to KeyBank National Association its $7,500,000 promissory note duly executed by Borrower. (e) Borrower shall pay to Administrative Agent for the benefit of KeyBank National Association $56,250.00 as an upfront fee. (f) Borrower shall deliver duly executed multiple counterparts of certificates of the Secretary or Assistant Secretary of the Company and Guarantor setting forth resolutions of its Board of Directors in form and substance satisfactory to the Lender with respect to this Amendment. (g) such other agreements, documents, financing statements, items, instruments, opinions, certificates, waivers, consents, and evidence as the Lender may request. (h) Borrower shall have made payment to Administrative Agent, in immediately available funds, payment of all accrued and unpaid legal fees and expenses referred to in Section 12.03 of the Original Agreement and Section 7 hereof to the extent invoices for such fees and expenses have been delivered to Borrower. SECTION 5. Representations and Warranties. Each of the Obligors represents and warrants to Administrative Agent and Lenders, with full knowledge that Administrative Agent and Lenders are relying on the following representations and warranties in executing this Amendment, as follows: (a) Each Obligor has the organizational power and authority to execute, deliver and perform this Amendment and such other Loan Documents executed in connection herewith, and all organizational action on the part of such Person requisite for the due execution, delivery and performance of this Amendment and such other Loan Documents executed in connection herewith has been duly and effectively taken; (b) The Original Agreement as amended by this Amendment and the Loan Documents and each and every other document executed and delivered in connection with this Amendment to which any Obligor is a party constitute the legal, valid and binding obligations of each Obligor to the extent it is a party thereto, enforceable against such Person in accordance with their respective terms; -3- (c) This Amendment does not and will not violate any provisions of any of the Organization Documents of any Obligor, or any contract, agreement, instrument or requirement of any Governmental Authority to which Borrower is subject; Obligors' execution of this Amendment will not result in the creation or imposition of any lien upon any properties of any Obligor other than those permitted by the Original Agreement and this Amendment; (d) Execution, delivery and performance of this Amendment by Obligors does not require the consent or approval of any other Person, including, without limitation, any regulatory authority or governmental body of the United States of America or any state thereof or any political subdivision of the United States of America or any state thereof; and (e) No Default or Event of Default exists and all of the representations and warranties contained in the Original Agreement and all instruments and documents executed pursuant thereto or contemplated thereby are true and correct in all material respects on and as of this date other than those which have been disclosed to Administrative Agent and Lenders in writing. Nothing in this Section 5 of this Amendment is intended to amend any of the representations or warranties contained in the Agreement or of the Loan Documents to which any Obligor is a party. SECTION 6. Reference to and Effect on the Agreement. (a) Upon the effectiveness of Sections 1, 2 and 3 hereof, on and after the date hereof, each reference in the Original Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like import, shall mean and be a reference to the Original Agreement as amended hereby. (b) Except as specifically amended by this Amendment, the Agreement shall remain in full force and effect and is hereby ratified and confirmed. SECTION 7. Cost, Expenses and Taxes. Borrower agrees to pay on demand all reasonable costs and expenses of Administrative Agent in connection with the preparation, reproduction, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder, including reasonable attorneys' fees and out-of-pocket expenses of Administrative Agent. In addition, Borrower shall pay any and all recording and filing fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Amendment and the other instruments and documents to be delivered hereunder, and agrees to save Administrative Agent harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes or fees. -4- SECTION 8. Extent of Amendments. Except as otherwise expressly provided herein, the Original Agreement and the other Loan Documents are not amended, modified or affected by this Amendment. Obligors ratify and confirm that (i) except as expressly amended hereby, all of the terms, conditions, covenants, representations, warranties and all other provisions of the Original Agreement remain in full force and effect, (ii) each of the other Loan Documents are and remain in full force and effect in accordance with their respective terms, and (iii) the Collateral is unimpaired by this Amendment. SECTION 9. Disclosure of Claims. As additional consideration to the execution, delivery, and performance of this Amendment by the parties hereto and to induce Lenders to enter into this Amendment, each Obligor represents and warrants that no Obligor knows of any defenses, counterclaims or rights of setoff to the payment of any Indebtedness. SECTION 10. Affirmation of Security Interest. Obligors hereby confirm and agree that any and all liens, security interest and other security or Collateral now or hereafter held by Administrative Agent for the benefit of Lenders as security for payment and performance of the Obligations under such Security Instruments to which such Obligor is a party are renewed and carried forth to secure payment and performance of all of the Obligations. The Security Instruments are and remain legal, valid and binding obligations of the parties thereto, enforceable in accordance with their respective terms. SECTION 11. Execution and Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. Delivery of an executed counterpart of this Amendment by facsimile and other Loan Documents shall be equally as effective as delivery of a manually executed counterpart of this Amendment and such other Loan Documents. SECTION 12. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas. SECTION 13. Headings. Section headings in this Amendment are included herein for convenience and reference only and shall not constitute a part of this Amendment for any other purpose. SECTION 14. NO ORAL AGREEMENTS. THE ORIGINAL AGREEMENT (AS AMENDED BY THIS AMENDMENT) AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [The remainder of this page intentionally blank. Signature pages to follow.] -5- IN WITNESS WHEREOF, the parties have executed this Second Amendment to Credit Agreement the day and year first above written. BORROWER: ATLAS PIPELINE PARTNERS, L.P., a Delaware limited partnership By: Atlas Pipeline Partners GP, LLC, its General Partner By:____________________________________ Michael L. Staines, President S-1 GUARANTORS: ATLAS PIPELINE PARTNERS GP, LLC, a Delaware limited liability company By:__________________________________________ Michael L. Staines, President ATLAS PIPELINE NEW YORK, LLC, a Pennsylvania limited liability company By: Atlas Pipeline Operating Partnership, L.P., a Delaware limited partnership and its sole member By: Atlas Pipeline Partners GP, LLC, a Delaware limited liability company and its sole general partner By:________________________________ Michael L. Staines, President ATLAS PIPELINE OHIO, LLC, a Pennsylvania limited liability company By: Atlas Pipeline Operating Partnership, L.P., a Delaware limited partnership and its sole member By: Atlas Pipeline Partners GP, LLC, a Delaware limited liability company and its sole general partner By:________________________________ Michael L. Staines, President S-2 ATLAS PIPELINE PENNSYLVANIA, LLC, a Pennsylvania limited liability company By: Atlas Pipeline Operating Partnership, L.P., a Delaware limited partnership and its sole member By: Atlas Pipeline Partners GP, LLC, a Delaware limited liability company and its sole general partner By:________________________________ Michael L. Staines, President ATLAS PIPELINE OPERATING PARTNERSHIP, a Delaware limited partnership By: Atlas Pipeline Partners GP, LLC, a Delaware limited liability company and its sole general partner By:________________________________ Michael L. Staines, President S-3 LENDER, ADMINISTRATIVE AGENT AND ISSUING BANK: WACHOVIA BANK, NATIONAL ASSOCIATION Individually, Administrative Agent and Issuing Bank By:__________________________________________ Russell Clingman Director S-4 LENDER: KEYBANK NATIONAL ASSOCIATION Individually By:_________________________ Sherrie I. Manson Vice President S-5 ANNEX 1
- ------------------------------- -------------------- ---------------------- ------------------- ---------------------- Maximum Revolving Name of Lender Outstanding Loans Letters of Credit Percentage Share Credit Amount - ------------------------------- -------------------- ---------------------- ------------------- ---------------------- Wachovia Bank, 50% $7,500,000 National Association - ------------------------------- -------------------- ---------------------- ------------------- ---------------------- KeyBank National 50% $7,500,000 Association - ------------------------------- -------------------- ---------------------- ------------------- ---------------------- Total 100% $15,000,000 - ------------------------------- -------------------- ---------------------- ------------------- ----------------------
Annex I 1 EX-10 4 ex10-15.txt EXHIBIT 10.15 AGREEMENT This Agreement (this "Agreement") is made and entered into as of the 30th day of January 2003, by and between Resource Financial Fund Management, Inc., a Delaware corporation ("Resource") and 9 Henmar LLC, a Delaware limited liability company ("Henmar"). WHEREAS, Resource is a 50% owner of Trapeza Funding II, LLC, a Delaware limited liability company (the "LLC") which is the general partner of Trapeza Partners II L.P., a Delaware limited partnership (the "Partnership") formed to sponsor and own the equity interest in Trapeza CDO II, LLC, a Delaware limited liability company (the "CDO"); WHEREAS, Resource is a 50% owner of Trapeza Capital Management, LLC, a Delaware limited liability company ("TCM"), which will serve as the collateral manager for the CDO; WHEREAS, Henmar has agreed to provide certain consulting services to Resource in connection with the LLC, the Partnership and the CDO (the "CDO Venture"); and WHEREAS, this Agreement has been approved by the corporate governance and investment committee of the board of directors of Resource America, Inc., Resource's parent. NOW THEREFORE, in consideration of the mutual promises set forth in this Agreement, the adequacy of which is hereby acknowledged, intending to be legally bound hereby, the parties hereto agree as follows: 1. Services. Henmar shall provide Resource with such consulting services in connection with the CDO Venture as Resource may request from time to time, which services shall include advice on structuring the CDO venture, interacting with the underwriters for the CDO offering, placement agents for the Partnership offering and rating agencies, and providing research and support to the credit committee of TCM and the LLC. Henmar's obligation to provide services hereunder shall terminate upon the closing of the CDO offering (the "Closing"). 2. Fees. In consideration of its services hereunder and heretofore provided to Resource, Resource shall pay to Henmar the following: a. Resource's Income. TCM is entitled to receive a collateral management fee from the CDO and the LLC is entitled to receive an administrative fee from the Partnership (collectively, the "Management Fees") and, in its capacity as general partner of the Partnership, to receive 20% of distributions from net profits of the Partnership (the "Carried Interest"). Resource shall pay to Henmar 10% of the cash received by it with respect to the Management Fees and the Carried Interest, less Resource's out of pocket expenses in connection with CDO Venture after the Closing, which shall not exceed $5,000 per annum; provided, however, that if Resource is required to return any of the Management Fees or Carried Interest to the Partnership or the CDO, upon written notice from Resource, Henmar shall, within 5 business days of such notice, remit to Resource 10% of such returned amounts. b. Expense Reimbursement. The LLC is entitled to receive a structuring expense reimbursement from the CDO upon the Closing (the "Expense Reimbursement"). Resource shall pay to Henmar 50% of the cash received by it with respect to the Expense Reimbursment, less the aggregate amount of contributions theretofore paid by Resource to the LLC and less Resource's out of pocket expenses in connection with the CDO Venture accrued through the date of payment. 3. Cooperation. Henmar shall designate a representative, in addition to D. Gideon Cohen, to provide Resource with updates, at least weekly and at such other times as Resource may request, with respect to Henmar's performance of its services hereunder. Henmar shall promptly provide to Resource all information, including summaries of all meetings and copies of all documents, draft or otherwise, gathered or generated by Henmar with respect to the CDO Venture. 4. Warranty. Henmar warrants that the services provided by it pursuant to this Agreement will be provided in a professional manner. 5. Termination. Either party may immediately terminate this Agreement upon a material default or breach hereof by the other party; provided, however, that the parties obligations pursuant to Section 3(a) hereof shall survive notwithstanding any such termination. 6. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws of the Commonwealth of Pennsylvania applicable to agreements made and to be performed entirely within such state, without regard to the principles of conflicts of law. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior agreements, arrangements, and understandings, written or oral, relating thereto. No representation, promise, or inducement has been made by either party that is not embodied in this Agreement and neither party shall be bound by or liable for any alleged representation, promise, or inducement not so set forth. Neither party shall have the right to assign any of its right or obligations under this Agreement. No amendment or waiver of this Agreement shall be effective, binding, or enforceable unless in writing and signed by both you and us or, in the case of a waiver, by the party granting the waiver. [SIGNATURES APPEAR ON THE FOLLOWING PAGE] 2 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. RESOURCE FINANCIAL FUND MANAGEMENT, INC. By: ___________________________________________ Michael Yecies Secretary 9 HENMAR LLC By: ___________________________________________ D. Gideon Cohen Sole Member 3 EX-10 5 ex10-21.txt EXHIBIT 10.21 AGREEMENT --------- This Agreement (this "Agreement") is made and entered into as of the 15th day of April 2003, by and between Resource Financial Fund Management, Inc., a Delaware corporation ("Resource") and 9 Henmar LLC, a Delaware limited liability company ("Henmar"). WHEREAS, Resource is a 50% owner of Trapeza Funding III, LLC, a Delaware limited liability company (the "LLC") which is the general partner of Trapeza Partners III L.P., a Delaware limited partnership (the "Partnership") formed to sponsor and own the equity interest in Trapeza CDO III, LLC, a Delaware limited liability company (the "CDO"); WHEREAS, Resource is a 50% owner of Trapeza Capital Management, LLC, a Delaware limited liability company ("TCM"), which will serve as the collateral manager for the CDO; WHEREAS, Henmar has agreed to provide certain consulting services to Resource in connection with the LLC, the Partnership and the CDO (the "CDO Venture"); and WHEREAS, this Agreement has been approved by the corporate governance and investment committee of the board of directors of Resource America, Inc., Resource's parent. NOW THEREFORE, in consideration of the mutual promises set forth in this Agreement, the adequacy of which is hereby acknowledged, intending to be legally bound hereby, the parties hereto agree as follows: 1. Services. Henmar shall provide Resource with such consulting services in connection with the CDO Venture as Resource may request from time to time, which services shall include advice on structuring the CDO venture, interacting with the underwriters for the CDO offering, placement agents for the Partnership offering and rating agencies, and providing research and support to the credit committee of TCM and the LLC. Henmar's obligation to provide services hereunder shall terminate upon the closing of the CDO offering (the "Closing"). 2. Fees. In consideration of its services hereunder and heretofore provided to Resource, Resource shall pay to Henmar the following: a. Resource's Income. TCM is entitled to receive a collateral management fee from the CDO and the LLC is entitled to receive an administrative fee from the Partnership (collectively, the "Management Fees") and, in its capacity as general partner of the Partnership, to receive 20% of distributions from net profits of the Partnership (the "Carried Interest"). Resource shall pay to Henmar 10% of the cash received by it with respect to the Management Fees and the Carried Interest, less Resource's out of pocket expenses in connection with CDO Venture after the Closing, which shall not exceed $5,000 per annum; provided, however, that if Resource is required to return any of the Management Fees or Carried Interest to the Partnership or the CDO, upon written notice from Resource, Henmar shall, within 5 business days of such notice, remit to Resource 10% of such returned amounts. b. Expense Reimbursement. The LLC is entitled to receive a structuring expense reimbursement from the CDO upon the Closing (the "Expense Reimbursement"). Resource shall pay to Henmar 50% of the cash received by it with respect to the Expense Reimbursment, less the aggregate amount of contributions theretofore paid by Resource to the LLC and less Resource's out of pocket expenses in connection with the CDO Venture accrued through the date of payment. 3. Cooperation. Henmar shall assist Resource in marking trust preferred securities to market on a quarterly basis for the life of the CDO. Additionally, Henmar shall designate a representative, in addition to D. Gideon Cohen, to provide Resource with updates, at least weekly and at such other times as Resource may request, with respect to Henmar's performance of its services hereunder. Henmar shall promptly provide to Resource all information, including summaries of all meetings and copies of all documents, draft or otherwise, gathered or generated by Henmar with respect to the CDO Venture. 4. Warranty. Henmar warrants that the services provided by it pursuant to this Agreement will be provided in a professional manner. 5. Termination. Either party may immediately terminate this Agreement upon a material default or breach hereof by the other party; provided, however, that the parties obligations pursuant to Section 3(a) hereof shall survive notwithstanding any such termination. 6. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws of the Commonwealth of Pennsylvania applicable to agreements made and to be performed entirely within such state, without regard to the principles of conflicts of law. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior agreements, arrangements, and understandings, written or oral, relating thereto. No representation, promise, or inducement has been made by either party that is not embodied in this Agreement and neither party shall be bound by or liable for any alleged representation, promise, or inducement not so set forth. Neither party shall have the right to assign any of its right or obligations under this Agreement. No amendment or waiver of this Agreement shall be effective, binding, or enforceable unless in writing and signed by both you and us or, in the case of a waiver, by the party granting the waiver. [SIGNATURES APPEAR ON THE FOLLOWING PAGE] 2 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. RESOURCE FINANCIAL FUND MANAGEMENT, INC. By: _______________________________ Michael Yecies Secretary 9 HENMAR LLC By: _______________________________ D. Gideon Cohen Sole Member 3 EX-99 6 ex99-1.txt EXHIBIT 99.1 Exhibit 99.1 CERTIFICATIONS I, Edward E. Cohen, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Resource America, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 Edward E. Cohen --------------- Edward E. Cohen Chairman of the Board, President and Chief Executive Officer EX-99 7 ex99-2.txt EXHIBIT 99.2 Exhibit 99.2 CERTIFICATIONS I, Steven J. Kessler, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Resource America, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 Steven J. Kessler ----------------- Steven J. Kessler Senior Vice President and Chief Financial Officer EX-99 8 ex99-3.txt EXHIBIT 99.3 Exhibit 99.3 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 March 31, 2003 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. Edward E. Cohen - ---------------- Edward E. Cohen Chief Executive Officer May 14, 2003 A signed original of this written statement required by Section 906 has been provided to Resource America, Inc. and will be retained by Resource America, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-99 9 ex99-4.txt EXHIBIT 99.4 Exhibit 99.4 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 March 31, 2003 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. Steven J. Kessler - ----------------- Steven J. Kessler Chief Financial Officer May 14, 2003 A signed original of this written statement required by Section 906 has been provided to Resource America, Inc. and will be retained by Resource America, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----