-----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, ULHXNzSQhERa5zap6eotCRuz94+aUi8V/dnReQyujarSa1MHtDqWo0nD6obuE6Bb 0tXd0X+mstOV1Do2/pWigA== 0000950116-05-002697.txt : 20050809 0000950116-05-002697.hdr.sgml : 20050809 20050809163847 ACCESSION NUMBER: 0000950116-05-002697 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050809 DATE AS OF CHANGE: 20050809 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: 051010457 BUSINESS ADDRESS: STREET 1: 1845 WALNUT STREET STREET 2: SUITE 1000 CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 215-546-5005 MAIL ADDRESS: STREET 1: 1845 WALNUT STREET STREET 2: SUITE 1000 CITY: PHILADELPHIA STATE: PA ZIP: 19103 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 form10-q.txt 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 June 30, 2005 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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] The number of outstanding shares of the registrant's common stock on August 2, 2005 was 18,307,551. RESOURCE AMERICA, INC. AND SUBSIDIARIES INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheets - June 30, 2005 and September 30, 2004................ 3 Consolidated Statements of Income Three Months and Nine Months Ended June 30, 2005 and 2004.................... 4 Consolidated Statement of Changes in Stockholders' Equity Nine Months Ended June 30, 2005.............................................. 5 Consolidated Statements of Cash Flows Nine Months Ended June 30, 2005 and 2004..................................... 6 Notes to Consolidated Financial Statements - June 30, 2005........................ 7 - 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 23 - 42 Item 3. Quantitative and Qualitative Disclosures about Market Risk........................ 43 Item 4. Controls and Procedures........................................................... 44 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders............................... 45 Item 6. Exhibits.......................................................................... 45 SIGNATURES......................................................................................... 46
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RESOURCE AMERICA, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
JUNE 30, SEPTEMBER 30, 2005 2004 ------------- -------------- (unaudited) ASSETS Current assets: Cash and cash equivalents................................................... $ 42,883 $ 69,099 Investments in equipment finance............................................ 54,899 24,177 Accounts receivable......................................................... 9,861 26,903 Receivables from related parties............................................ 5,522 976 Prepaid expenses and other current assets................................... 5,445 3,755 Assets held for sale........................................................ 104,781 102,963 ------------- -------------- Total current assets...................................................... 223,391 227,873 Investments in real estate..................................................... 47,410 47,119 Investment in Resource Capital Corp............................................ 15,000 -- Investments in Trapza entities................................................. 9,616 8,483 Investments in financial fund management entities.............................. 13,172 1,065 Property and equipment, net.................................................... 58,468 374,192 Other assets, net.............................................................. 17,114 29,504 Goodwill....................................................................... -- 37,470 ------------- -------------- $ 384,171 $ 725,706 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt........................................... $ 700 $ 6,151 Secured revolving credit facilities - equipment finance..................... 45,625 8,487 Accounts payable............................................................ 10,656 25,413 Liabilities associated with assets held for sale............................ 76,953 65,300 Accrued liabilities and other current liabilities........................... 16,490 38,679 Liabilities associated with drilling contracts.............................. -- 29,375 ------------- -------------- Total current liabilities................................................. 150,424 173,405 Long-term debt................................................................. 28,469 114,696 Deferred revenue and other liabilities......................................... 4,723 9,263 Deferred income taxes.......................................................... -- 19,677 Minority interest - financial fund management entities......................... 9,880 -- Minority interests - energy.................................................... -- 150,750 Commitments and contingencies.................................................. -- -- Stockholders' equity: Preferred stock $1.00 par value: 1,000,000 authorized shares; none outstanding.......................................................... -- -- Common stock, $.01 par value: 49,000,000 authorized shares.................. 260 255 Additional paid-in capital.................................................. 254,414 247,865 Less treasury stock, at cost................................................ (77,428) (77,667) Less ESOP loan receivable................................................... (493) (1,127) Accumulated other comprehensive income (loss)............................... 1,995 (1,575) Retained earnings........................................................... 11,927 90,164 ------------- -------------- Total stockholders' equity................................................ 190,675 257,915 ------------- -------------- $ 384,171 $ 725,706 ============= ==============
See accompanying notes to consolidated financial statements 3 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------- -------------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- REVENUES Real estate............................................ $ 11,104 $ 4,921 $ 20,008 $ 13,575 Equipment finance...................................... 3,481 1,326 9,190 4,191 Financial fund management(1)........................... 4,828 968 10,908 4,046 ---------- ---------- ---------- ---------- 19,413 7,215 40,106 21,812 COSTS AND EXPENSES Real estate............................................ 4,242 2,207 11,014 7,641 Equipment finance...................................... 2,467 1,975 6,976 5,627 Financial fund management.............................. 2,263 689 4,720 1,300 General and administrative............................. 1,879 3,840 5,514 7,403 Start-up costs - Resource Capital Corp. ............... 309 -- 1,132 -- Depreciation and amortization.......................... 820 742 2,133 1,758 Provision (recovery) for possible losses............... (12) 182 150 582 ---------- ---------- ---------- ---------- 11,968 9,635 31,639 24,311 ---------- ---------- ---------- ---------- OPERATING INCOME (LOSS)................................... 7,445 (2,420) 8,467 (2,499) OTHER INCOME (EXPENSE) Interest expense....................................... (863) (832) (2,167) (4,405) Minority interest in financial fund management entities (415) -- (1,158) -- Other income, net...................................... 310 1,959 3,788 6,571 ---------- ---------- ---------- ---------- (968) 1,127 463 2,166 ----------- ---------- ---------- ---------- Income (loss) from continuing operations before taxes..... 6,477 (1,293) 8,930 (333) Provision (benefit) for income taxes...................... 2,955 (439) 3,572 (113) ---------- ----------- ---------- ----------- Income (loss) from continuing operations.................. 3,522 (854) 5,358 (220) Income (loss) from discontinued operations, net of tax.... (1,912) 3,700 12,281 12,571 ---------- ---------- ---------- ---------- NET INCOME................................................ $ 1,610 $ 2,846 $ 17,639 $ 12,351 ========== ========== ========== ========== BASIC EARNINGS (LOSS) PER COMMON SHARE: From continuing operations............................. $ 0.20 $ (0.05) $ 0.30 $ (0.01) Discontinued operations................................ (0.11) 0.21 0.70 0.72 ---------- ---------- ---------- ---------- Net income............................................. $ 0.09 $ 0.16 $ 1.00 $ 0.71 ========== ========== ========== ========== Weighted average shares outstanding.................... 17,716 17,452 17,582 17,393 ========== ========== ========== ========== DILUTED EARNINGS (LOSS) PER COMMON SHARE: From continuing operations............................. $ 0.19 $ (0.05) $ 0.28 $ (0.01) Discontinued operations................................ (0.10) 0.20 0.65 0.69 ---------- ---------- ---------- ---------- Net income............................................. $ 0.09 $ 0.15 $ 0.93 $ 0.68 ========== ========== ========== ========== Weighted average shares outstanding.................... 18,926 18,599 18,819 18,189 ========== ========== ========== ========== DIVIDENDS DECLARED PER COMMON SHARE....................... $ 0.05 $ 0.03 $ 0.15 $ 0.10 ========== ========== ========== ==========
- ------------- (1) Includes $1.4 million and $1.8 million of revenues related to Resource Capital Corp. for the three months ended June 30, 2005 and for the period from March 8, 2005 (inception) through June 30, 2005, respectively. See accompanying notes to consolidated financial statements 4 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NINE MONTHS ENDED JUNE 30, 2005 (in thousands, except share data) (unaudited)
ACCUMULATED COMMON STOCK ADDITIONAL TREASURY STOCK ESOP OTHER -------------------------- PAID-IN ------------------------ LOAN COMPREHENSIVE SHARES AMOUNT CAPITAL SHARES AMOUNT RECEIVABLE INCOME (LOSS) ------------------------------------------------------------------------------------------------------ Balance, October 1, 2004.... 25,547,632 $ 255 $ 247,865 (8,053,062) $ (77,667) $ (1,127) $ (1,575) Common shares issued........ 465,157 5 6,413 -- -- -- -- Treasury shares issued...... -- -- 136 21,571 239 -- -- Other comprehensive income................... -- -- -- -- -- -- 1,705 Cash dividends.............. -- -- -- -- -- -- -- Distribution of shares of Atlas America, Inc........ -- -- -- -- -- -- 1,865 Repayment of ESOP loan...... -- -- -- -- -- 634 -- Net income.................. -- -- -- -- -- -- -- ---------- --------- ----------- ----------- ---------- --------- ------------ Balance, June 30, 2005...... 26,012,789 $ 260 $ 254,414 (8,031,491) $ (77,428) $ (493) $ 1,995 ========== ========= =========== ============ ========== ========= ============ TOTALS RETAINED STOCKHOLDERS' EARNINGS EQUITY -------------------------------- Balance, October 1, 2004.... Common shares issued........ $ 90,164 $ 257,915 Treasury shares issued...... -- 6,418 Other comprehensive -- 375 income................... Cash dividends.............. -- 1,705 Distribution of shares of (2,632) (2,632) Atlas America, Inc........ Repayment of ESOP loan...... (93,244) (91,379) Net income.................. -- 634 17,639 17,639 Balance, June 30, 2005...... ----------- ----------- $ 11,927 $ 190,675 =========== ===========
See accompanying notes to consolidated financial statements 5 RESOURCE AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
NINE MONTHS ENDED JUNE 30, --------------------------- 2005 2004 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................................................... $ 17,639 $ 12,351 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization.................................................. 2,133 1,758 Amortization of discount on debt and deferred finance costs.................... 34 399 Accretion of discount.......................................................... (1,325) (2,345) Collection of interest......................................................... 550 793 Provision for possible losses.................................................. 150 582 Equity in earnings of equity investees......................................... (7,395) (4,375) Minority interest.............................................................. 1,158 -- Income from discontinued operations............................................ (12,281) (12,571) Gain on sale of RAIT Investment Trust shares................................... (1,459) (7,095) Net (gain) loss on asset resolutions........................................... (5,836) 1,181 Loan writedown................................................................. 369 -- Deferred income tax provision (benefit)........................................ 3,921 (12,365) Non-cash compensation on long-term incentive plans............................. 375 216 Non-cash compensation for Resource Capital Corp. stock and options received.... (1,018) -- Non-cash compensation for Resource Capital Corp. stock and options issued...... 405 -- Tax benefit from the exercise of stock options................................. (138) -- Provision for deferred rent.................................................... 221 -- Net change in net assets of FIN 46 entities' and others held for sale............ (3,461) 1,050 Increase in equipment finance investments........................................ (31,163) (35,447) Changes in operating assets and liabilities....................................... (8,986) 11,665 --------- --------- NET CASH USED IN OPERATING ACTIVITIES OF CONTINUING OPERATIONS.................... (46,107) (44,203) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................................................. (15,956) (820) Payments received on real estate loans and real estate........................... 4,848 7,939 Investments in real estate loans and real estate................................. (3,552) (6,864) Distributions from equity investees.............................................. 20,809 5,155 Financial fund management investments............................................ (8,300) (4,011) Investment in Resource Capital Corp.............................................. (15,000) -- Proceeds from sale of financial fund management assets........................... 1,950 -- Proceeds from sale of RAIT Investment Trust shares............................... 2,924 15,233 Dividends received from Atlas America............................................ -- 52,133 --------- --------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS..... (12,277) 68,765 CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings....................................................................... 193,386 111,478 Principal payments on borrowings................................................. (159,355) (169,115) Distributions paid to minority holders........................................... (1,136) -- Investor contributions to financial fund management investments.................. 3,651 -- Dividends paid................................................................... (2,632) (1,743) Proceeds from issuance of stock.................................................. 4,735 478 Increase in other assets......................................................... (204) (367) --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES OF CONTINUING OPERATIONS..... 38,445 (59,269) Net cash provided by discontinued operations..................................... 22,915 59,092 Net cash retained by Atlas America............................................... (29,192) -- --------- --------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................ (26,216) 24,385 Cash and cash equivalents at beginning of period................................. 69,099 41,129 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD....................................... $ 42,883 $ 65,514 ========= =========
See accompanying notes to consolidated financial statements 6 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 (UNAUDITED) NOTE 1 - MANAGEMENT'S OPINION REGARDING INTERIM FINANCIAL STATEMENTS The consolidated financial statements include the accounts of the Company and its subsidiaries, including certain variable interest entities ("VIEs") in which the Company has determined that it is the primary beneficiary (see Note 6). On June 30, 2005, the Company distributed its remaining 10.7 million shares of Atlas America, Inc., our former energy subsidiary, ("Atlas America") (Nasdaq: ATLS) to its stockholders in the form of a tax free dividend. Each stockholder of the Company received 0.59367 shares of Atlas America for each share of Company common stock owned as of June 24, 2005, the record date. Although the distribution itself will be tax-free to our stockholders, as a result of the deconsolidation there may be some tax liability arising from prior unrelated corporate transactions among Atlas America and some of its subsidiaries. We anticipate that any liability arising from this transaction will be reimbursed to us by Atlas America. The Company no longer consolidates with Atlas America as of June 30, 2005, and the results of Atlas America's operations are reflected as discontinued operations in the Consolidated Statements of Income. The consolidated financial statements and the information and tables contained in the notes thereto as of June 30, 2005 and for the three and nine months ended June 30, 2005 and 2004 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 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 for the fiscal year ended September 30, 2004 ("fiscal 2004"). The results of operations for the three months and nine months ended June 30, 2005 may not necessarily be indicative of the results of operations for the full fiscal year ending September 30, 2005 ("fiscal 2005"). Certain reclassifications have been made to the fiscal 2004 consolidated financial statements to conform to the fiscal 2005 presentation. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 (in thousands):
NINE MONTHS ENDED JUNE 30, ----------------------------- 2005 2004 ---------- --------- Cash paid during the period for: Interest........................................................................ $ 1,989 $ 4,249 Income taxes.................................................................... $ 10,800 $ -- Non-cash activities include the following: Receipt of note upon resolution of a real estate loan treated as a FIN 46 asset. $ -- $ 8,772 Distribution of shares of Atlas America to shareholders......................... $ 91,379 $ --
7 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JUNE 30, 2005 (UNAUDITED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 154, "Accounting Changes and Error Corrections" ("SFAS 154"). SFAS 154 requires retrospective application to prior periods' financial statements of changes in accounting principles. It also requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather than being reported in an income statement. The statement will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of SFAS 154 will depend on the nature and extent of any voluntary accounting changes and correction of errors after the effective date, but management does not currently expect SFAS 154 to have a material impact on the Company's financial position or results of operations. In December 2004, the FASB issued a revision of SFAS 123, "Share-Based Payment," ("SFAS 123-R") which requires all share-based payments to employees to be recognized in the income statement based on their fair values. The Company's option grants to employees and directors, as well as any restricted stock awards represent share-based payments. SFAS 123-R supersedes Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees," and amends SFAS 95, "Statement of Cash Flows." SFAS 123-R is effective for the Company beginning with its fiscal year commencing October 1, 2005. The adoption of SFAS 123-R may have a material impact on its financial statements in fiscal 2006, but the Company cannot reasonably estimate the impact of adoption because the Company expects certain assumptions that can materially effect the calculation of the value of share-based payments to recipients to change between now and the time of adoption. STOCK-BASED COMPENSATION The Company accounts for stock-based employee compensation plans under the recognition and measurement principles of APB 25 and related interpretations. For substantially all grants of stock options, no stock-based employee compensation expense 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. SFAS 123, "Accounting for Stock-Based Compensation," ("SFAS 123) requires the disclosure of pro forma net income and earnings per share as if the Company had adopted the fair value method for stock options granted after June 30, 1996. The following table provides the pro forma effects of recognizing compensation expense in accordance with SFAS 123 (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ------------------------ 2005 2004 2005 2004 --------- --------- --------- --------- Net income as reported.................................... $ 1,610 $ 2,846 $ 17,639 $ 12,351 Stock-based employee compensation determined under the fair value-based method for all grants, net of tax (265) (636) (801) (1,921) --------- --------- --------- --------- Pro forma net income...................................... $ 1,345 $ 2,210 $ 16,838 $ 10,430 ========= ========= ========= ========= Basic earnings per share: As reported............................................ $ 0.09 $ 0.16 $ 1.00 $ 0.71 Pro forma.............................................. $ 0.08 $ 0.13 $ 0.96 $ 0.60 Diluted earnings per share: As reported............................................ $ 0.09 $ 0.15 $ 0.93 $ 0.68 Pro forma.............................................. $ 0.07 $ 0.12 $ 0.89 $ 0.57
8 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JUNE 30, 2005 (UNAUDITED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of periodic temporary investments of cash and cash equivalents. The Company places its temporary cash investments in high-quality, short-term money market instruments and deposits with high-quality financial institutions and brokerage firms. At June 30, 2005, the Company had $46.1 million in deposits at various banks, of which $43.4 million was over the insurance limit of the Federal Deposit Insurance Corporation. The Company has not incurred any losses on such investments. INTEREST INCOME RECOGNITION - SECURITIES The Company accounts for its interests in unconsolidated collateralized debt obligations in accordance with Emerging Issues Task Force ("EITF") 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," using the effective yield method. NOTE 3 - COMPREHENSIVE INCOME Comprehensive income includes net income and all other changes in the equity of a business during a period from transactions and other events and circumstances from non-owner sources. These changes, other than net income, are referred to as "other comprehensive income" and for the Company include changes in the fair value, net of taxes, of its marketable securities and changes in the value of hedges related to our energy operations through the date of the spin-off of Atlas America. The following table presents comprehensive income, net of tax (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ------------------------ 2005 2004 2005 2004 --------- --------- --------- --------- Net income................................................ $ 1,610 $ 2,846 $ 17,639 $ 12,351 Other comprehensive income (loss): Unrealized gains (losses) on investments in marketable securities, net of tax of $(488), $675, ($1,058) and ($598).................................. 907 (1,448) 1,965 1,161 Reclassification for gains realized in net income, net of tax of $0, $544, $511 and $2,412.................. -- (1,057) (948) (4,683) Unrealized gains (losses) on hedging contracts, net of tax of $323 and $(122)............................... (599) -- 227 -- Less: Reclassification Adjustment for losses realized in net income, net of taxes of $(226) and $(248)........ 420 -- 461 -- --------- --------- --------- --------- Comprehensive income...................................... $ 2,338 $ 341 $ 19,344 $ 8,829 ========= ========= ========= =========
Accumulated other comprehensive income, net of tax, is related to the following (in thousands):
JUNE 30, SEPTEMBER 30, 2005 2004 ----------- ------------- Marketable securities - unrealized gains..................................... $ 1,995 $ 978 Unrealized energy hedging losses............................................. -- (2,553) ----------- ------------- $ 1,995 $ (1,575) =========== =============
9 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JUNE 30, 2005 (UNAUDITED) NOTE 4 - EARNINGS PER SHARE Basic earnings per share ("Basic EPS") is determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share ("Diluted EPS") is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding after giving effect to the potential dilution from the exercise of securities, such as stock options, into shares of common stock as if those securities were exercised. The following table presents a reconciliation of the components used in the computation of Basic EPS and Diluted EPS (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ------------------------ 2005 2004 2005 2004 --------- --------- --------- --------- Income (loss) from continuing operations.................. $ 3,522 $ (854) $ 5,358 $ (220) Income (loss) from discontinued operations, net of tax.... (1,912) 3,700 12,281 12,571 --------- --------- --------- --------- Net income................................................ $ 1,610 $ 2,846 $ 17,639 $ 12,351 ========= ========= ========= ========= Basic shares outstanding.................................. 17,716 17,452 17,582 17,393 Dilutive effect of stock option and award plans........... 1,210 1,147 1,237 796 --------- --------- --------- --------- Dilutive shares outstanding............................... 18,926 18,599 18,819 18,189 ========= ========= ========= =========
NOTE 5 - INVESTMENTS IN EQUIPMENT FINANCE The Company's investments in equipment finance include the following (in thousands):
JUNE 30, SEPTEMBER 30, 2005 2004 ---------- ---------- Direct financing leases, net............................................... $ 36,591 $ 20,845 Notes receivable, net...................................................... 13,892 2,822 Assets subject to operating leases, net of accumulated depreciation of $263 and $22............................................................. 4,416 510 ---------- ---------- $ 54,899 $ 24,177 ========== ==========
The interest rates on notes receivable range from 8% to 10%. The components of direct financing leases are as follows (in thousands):
JUNE 30, SEPTEMBER 30, 2005 2004 ---------- ---------- Total future minimum lease payments receivable............................. $ 43,541 $ 25,052 Initial direct costs, net of amortization.................................. 736 428 Unguaranteed residual...................................................... 580 87 Unearned income............................................................ (8,153) (4,722) Security deposits.......................................................... (113) -- ---------- ---------- $ 36,591 $ 20,845 ========== ==========
10 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JUNE 30, 2005 (UNAUDITED) NOTE 5 - INVESTMENTS IN EQUIPMENT FINANCE - (CONTINUED) Although the lease terms extend over many years as indicated in the following table, the Company routinely sells the leases it acquires to Lease Equity Appreciation Funds I and II or to Merrill Lynch Equipment Finance, LLC shortly after their origination in accordance with agreements with each party. As a result of these routine sales of leases and the Company's credit evaluations, management concluded that no allowance for possible losses was needed at June 30, 2005 and September 30, 2004. The contractual future minimum lease and note payments and related rental payments expected to be received on direct financing non-cancelable leases, notes receivable and operating leases for each of the five succeeding annual periods ending June 30 and thereafter are as follows (in thousands):
DIRECT FINANCING NOTES OPERATING LEASES RECEIVABLE LEASES ---------------- ---------- --------- 2006................................................... $ 9,962 $ 3,343 $ 1,259 2007................................................... 9,632 1,580 1,196 2008................................................... 8,818 1,665 904 2009................................................... 6,833 1,591 383 2010................................................... 5,373 1,650 279 Thereafter............................................. 2,923 4,063 7 ------------- --------- -------- $ 43,541 $ 13,892 $ 4,028 ============= ========= ========
NOTE 6 - INVESTMENTS IN REAL ESTATE REAL ESTATE LOANS AND REAL ESTATE The Company focuses its real estate operations on the sponsorship and management of real estate investment programs and the management and resolution of its investments in real estate. In the management of its real estate investment programs, the Company receives fees for acquisitions, debt placements and management services related to the properties acquired by these programs. The following is a summary of the changes in the carrying value of its investments in real estate for the periods presented (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ------------------------ 2005 2004 2005 2004 --------- --------- --------- --------- Investments in real estate loans, beginning of period..... $ 23,140 $ 48,535 $ 24,066 $ 40,416 New loan............................................... -- -- -- 8,772 Additions to existing loans............................ -- 955 1,240 3,017 Loan writedown......................................... -- -- (369) -- Accretion of discount (net of collection of interest).. 299 574 775 1,552 Collection of principal................................ -- -- (2,273) -- Cost of loans resolved................................. -- -- -- (3,693) --------- --------- --------- ---------- Investments in real estate loans, end of period........... 23,439 50,064 23,439 50,064 Real estate ventures...................................... 10,957 13,415 10,957 13,415 Real estate owned, net of accumulated depreciation of $1,259 and $830........................................ 13,784 12,127 13,784 12,127 Allowance for possible losses............................. (770) (1,823) (770) (1,823) --------- --------- --------- ---------- Investments in real estate................................ 23,971 23,719 23,971 23,719 --------- --------- --------- ---------- $ 47,410 $ 73,783 $ 47,410 $ 73,783 ========= ========= ========= ==========
11 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JUNE 30, 2005 (UNAUDITED) NOTE 6 - INVESTMENTS IN REAL ESTATE - (CONTINUED) REAL ESTATE LOANS AND REAL ESTATE - (CONTINUED) At June 30, 2005 and 2004, the Company held, for its own account, real estate loans with aggregate face values of $59.1 million and $186.9 million, respectively. Amounts receivable, net of senior lien interests, were $43.6 million and $103.1 million at June 30, 2005 and 2004, respectively. In determining the Company's allowance for possible losses related to its investments in real estate, the Company considers general and local economic conditions, neighborhood values, competitive overbuilding, casualty losses and other factors which may affect the value of loans and real estate. The value of loans and real estate may also be affected by factors such as the cost of compliance with regulations and liability under applicable environmental laws, changes in interest rates and the availability of financing. Income from a property will be reduced if a significant number of tenants are unable to pay rent or if available space cannot be rented on favorable terms. In addition, the Company continuously monitors collections and payments from its borrowers and maintains an allowance for estimated losses based upon its historical experience and its knowledge of specific borrower collection issues. The Company reduces its investments in real estate loans and real estate by an allowance for amounts that may become unrealizable in the future. Such allowance can be either specific to a particular loan or property or general to all loans and real estate. The following is a summary of activity in the allowance for possible losses related to investments in real estate (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2005 2004 2005 2004 ------------ ------------ --------- ----------- Balance, beginning of period.............................. $ 770 $ 1,673 $ 989 $ 1,417 Provision for possible losses............................. -- 150 150 550 Write-downs............................................... -- -- (369) (144) ------------ ------------ --------- ----------- Balance, end of period.................................... $ 770 $ 1,823 $ 770 $ 1,823 ============ ============ ========= ===========
VARIABLE INTEREST ENTITIES Financial Interpretation Number ("FIN") 46-R ("FIN 46-R") issued by the FASB in December 2003, provides guidance as to the definition of a VIE and requires it to be consolidated by its primary beneficiary, generally the party having an ownership or other contractual financial interest that is expected to absorb the majority of the VIEs expected losses. If no party has exposure to the majority of the VIE's expected losses, the primary beneficiary will be the party, if any, entitled to receive the majority of the VIE's residual returns. The primary beneficiary is required to consolidate the VIE's assets, liabilities and non-controlling interest at fair value. Certain entities relating to the Company's real estate business have been consolidated in accordance with FIN 46-R. Due to the timing of the receipt of financial information, the Company accounts for these entities' activities on a one quarter lag, except when adjusting for the impact of significant events such as a refinance or sale. The assets, liabilities, revenues and costs and expenses of the consolidated VIEs are included in the Company's consolidated financial statements where previously the Company's interests had been recorded as real estate loans. 12 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JUNE 30, 2005 (UNAUDITED) NOTE 6 - INVESTMENTS IN REAL ESTATE - (CONTINUED) CONSOLIDATION OF VARIABLE INTEREST ENTITIES - (CONTINUED) The assets, liabilities, revenues and costs and expenses of the VIEs that are now included in the consolidated financial statements are not the Company's. The liabilities of the VIEs will be satisfied from the cash flows of the VIEs consolidated assets, not from the assets of the Company, which has no legal obligation to satisfy those liabilities. The following tables provide supplemental information about assets, liabilities, revenues and costs and expenses associated with entities consolidated in accordance with FIN 46-R and are not classified as held for sale at the dates indicated. The assets and liabilities of these VIEs are included in the balance sheets as indicated (in thousands):
JUNE 30, SEPTEMBER 30, 2005 2004 ----------- ------------ ASSETS: Cash and cash equivalents.............................................. $ 494 $ 1,306 Accounts receivable, prepaid expenses and other current assets......... 154 347 Property and equipment, net of accumulated depreciation of $1,793 and $1,462........................................................... 41,837 58,897 Other assets, net...................................................... -- 8 ----------- ------------ $ 42,485 $ 60,558 =========== ============ LIABILITIES: Current portion of long-term debt...................................... $ 686 $ 790 Accounts payable....................................................... 3,884 4,036 Accrued liabilities and other current liabilities...................... 471 481 Long-term debt......................................................... 18,001 22,849 Deferred revenue and other liabilities................................. 186 1,835 ----------- ------------ $ 23,228 $ 29,991 =========== ============ THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2005 2004 2005 2004 ---------- ---------- ---------- ---------- CONTINUING OPERATIONS - FIN 46: Revenues - real estate.............................. $ 3,725 $ 2,728 $ 9,435 $ 7,714 Costs and expenses: Operating expenses - real estate.................. 2,780 1,459 6,426 4,488 Depreciation and amortization..................... 372 390 1,031 1,044 ---------- ---------- ---------- ---------- Operating income.................................... 573 879 1,978 2,182 Interest expense.................................... 261 237 785 864 ---------- ---------- ---------- ---------- Income from continuing operations before taxes.... $ 312 $ 642 $ 1,193 $ 1,318 ========== ========== ========== ==========
Minimum future rental income under non-cancelable operating leases associated with real estate rental properties owned by the Company or real estate consolidated under FIN 46-R that have terms in excess of one year for each of the five succeeding years ended June 30, are as follows: 2006 - $715,000; 2007 - $673,000; 2008 - $679,000; 2009 - $644,000 and 2010 - $583,000. 13 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JUNE 30, 2005 (UNAUDITED) NOTE 6 - INVESTMENTS IN REAL ESTATE - (CONTINUED) VARIABLE INTEREST ENTITIES - (CONTINUED) The following tables provide supplemental information about assets, liabilities and discontinued operations associated with six entities that are held for sale, substantially all of which are consolidated in accordance with FIN 46-R (in thousands):
JUNE 30, SEPTEMBER 30, 2005 2004 ------------ ----------- ASSETS: Cash and cash equivalents............................................. $ 1,497 $ 5,073 Accounts receivable, prepaid expenses and other current assets........ 2,348 873 Property and equipment, net........................................... 99,930 94,717 Other assets, net..................................................... 1,006 2,300 ------------ ----------- Total assets held for sale.......................................... $ 104,781 $ 102,963 ============ =========== LIABILITIES: Mortgage loans........................................................ $ 69,116 $ 58,168 Other liabilities..................................................... 7,837 7,132 ------------ ----------- Total liabilities associated with assets held for sale.............. $ 76,953 $ 65,300 ============ =========== THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 2005 2004 2005 2004 ---------- ----------- ---------- ----------- LOSSES FROM DISCONTINUED OPERATIONS: Revenues............................................ $ 4,025 $ 3,927 $ 12,112 $ 10,369 Costs and expenses.................................. 3,663 4,218 10,856 11,252 ---------- ----------- ---------- ----------- Operating income (loss)............................. 362 (291) 1,256 (883) Loss on disposals................................... (7,681) (25) (7,961) (1,860) Income tax benefit.................................. 2,482 111 2,342 958 ---------- ----------- ---------- ----------- Losses from discontinued operations............... $ (4,837) $ (205) $ (4,363) $ (1,785) ========== =========== ========== ===========
For further information, see Note 15 on discontinued operations and Note 18 in the subsequent events footnote for loss on disposal. 14 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JUNE 30, 2005 (UNAUDITED) NOTE 7 - INVESTMENT IN RESOURCE CAPITAL CORP. In March 2005, the Company formed and sponsored Resource Capital Corp. ("RCC"), a real estate investment trust that is managed by the Company. RCC's principal business activity is to purchase and manage a diversified portfolio of real estate related securities and commercial finance assets. The Company purchased 1.0 million shares of RCC common stock for $15.00 per share and was granted 345,000 shares of RCC restricted common stock and options to purchase 651,666 common shares of RCC at an exercise price of $15.00 per share. As of June 30, 2005, the Company has awarded 279,000 of these restricted shares to certain members of RCC's management. The investment of $15.0 million is carried at the lower cost or market. NOTE 8 - INVESTMENTS IN TRAPEZA ENTITIES Investments in Trapeza entities are accounted for using the equity method of accounting because the Company, as a 50% owner of the general partner of these entities, has the ability to exercise significant influence over their operating and financial decisions. The Company accounts for its share of equity earnings using a one-quarter lag, as permissible by the accounting principles generally accepted in the United States of America. The Company's combined general and limited partner interests in these entities range from 13% to 18%. NOTE 9 - INVESTMENTS IN FINANCIAL FUND MANAGEMENT ENTITIES Investments in financial fund management entities contain the interests in unconsolidated collateralized debt obligations owned by partnerships that the Company controls and as a result, the entities are consolidated. The Company accounts for these interests in accordance with EITF 99-20 and reflects the interest owned by third parties as minority interest in financial fund management on the consolidated balance sheets. The Company's combined general and limited partner interests in these entities range from 15% to 36%. NOTE 10 - PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation, depletion and amortization is based on cost, less estimated salvage value, using the straight-line method over the assets' estimated useful lives. Maintenance and repairs are expensed as incurred. Major renewals and improvements that extend the useful lives of property and equipment are capitalized. The estimated service lives of property and equipment are as follows: Leasehold improvements................................... 1-7 years Land and buildings tenant-in-common interest............. 28 years Real estate assets - FIN 46.............................. 40 years Furniture and equipment.................................. 3-7 years Energy property and equipment............................ 3-40 years 15 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JUNE 30, 2005 (UNAUDITED) NOTE 10 - PROPERTY AND EQUIPMENT - (CONTINUED) Property and equipment, net, consists of the following (in thousands):
JUNE 30, SEPTEMBER 30, 2005 2004 ------------- -------------- Leasehold improvements..................................................... $ 571 $ 403 Land and buildings tenant-in-common interest............................... 14,022 -- Real estate assets - FIN 46................................................ 43,630 60,358 Furniture and equipment.................................................... 3,811 2,962 Energy property and equipment (see Note 1)................................. -- 379,939 ------------- -------------- 62,034 443,662 Accumulated depreciation, depletion and amortization: Energy property and equipment.......................................... -- (66,847) Other ................................................................. (3,566) (2,623) ------------- -------------- (3,566) (69,470) ------------- -------------- $ 58,468 $ 374,192 ============= ==============
NOTE 11 - OTHER ASSETS The following table provides information about other assets (in thousands):
JUNE 30, SEPTEMBER 30, 2005 2004 ------------- -------------- Investments in The Bancorp, Inc. common stock, at estimated fair value including unrealized gains of $2,979 at June 30, 2005 and at cost at September 30, 2004..................................................... $ 6,983 $ 4,004 Investment in RAIT Investment Trust, at estimated fair value including unrealized gains of $90 and $1,483..................................... 169 3,026 Energy assets (see Note 1)................................................. -- 15,198 Other...................................................................... 9,962 7,276 ------------- -------------- $ 17,114 $ 29,504 ============= ==============
The Company accounts for its investments in The Bancorp, Inc. ("TBBK") and RAIT Investment Trust ("RAIT") common shares in accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." These investments are classified as available-for-sale and, as such, are carried at fair market value based on market quotes. Unrealized gains are reported as a separate component of stockholders' equity. The cost of securities sold is based on the specific identification method. The Company's investment in TBBK preferred shares is valued at the lower of cost or market and is included in other. 16 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JUNE 30, 2005 (UNAUDITED) NOTE 12 - DEBT Total debt consists of the following (in thousands):
JUNE 30, SEPTEMBER 30, 2005 2004 ------------- ----------- Real estate - FIN 46 mortgage loans....................................... $ 18,687 $ 23,639 Mortgage payable tenant-in-common interest................................ 10,399 -- Equipment finance - revolving credit facilities........................... 45,625 18,083 Energy facilities and term loan (see Note 1).............................. -- 85,000 Other debt................................................................ 83 2,612 ------------- ----------- Total debt............................................................ 74,794 129,334 Less current equipment finance - revolving credit facilities.............. 45,625 8,487 Less current maturities................................................... 700 6,151 ------------- ----------- Long-term debt........................................................... $ 28,469 $ 114,696 ============= ===========
Annual debt principal payments over the next five years ending June 30 are as follows (in thousands): 2006..................................... $ 46,325 2007..................................... 1,543 2008..................................... 739 2009..................................... 781 2010..................................... 14,220 NOTE 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS In the ordinary course of its business operations, the Company has ongoing relationships with several related parties. For a more detailed description of these transactions, see the Company's annual report on Form 10-K for the fiscal year ended September 30, 2004, at Note 5 of the "Notes to Consolidated Financial Statements." The following table details receivables from related parties (in thousands):
JUNE 30, SEPTEMBER 30, 2005 2004 ------------- ------------ Real estate investment partnerships....................................... $ 2,224 $ 509 Equipment finance partnerships............................................ 1,060 467 Atlas America............................................................. 1,297 -- Financial fund management entities........................................ 923 -- Other..................................................................... 18 -- ------------- ------------ $ 5,522 $ 976 ============= ============
17 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JUNE 30, 2005 (UNAUDITED) NOTE 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS - (CONTINUED) Relationship with Real Estate Investment Partnerships. In the three months ended June 30, 2005 and 2004 and the nine months ended June 30, 2005 and 2004, the Company received fees from real estate investment partnerships in which it was the general partner and manager of $1.8 million and $641,000, respectively, and $3.2 million and $1.4 million, respectively. Relationship with Equipment Finance Partnerships. In the three months ended June 30, 2005 and 2004 and the nine months ended June 30, 2005 and 2004, the Company received fees from equipment finance partnerships in which it was the general partner and manager of $639,000 and $261,000, respectively, and $2.0 million and $701,000, respectively. Relationship with Atlas America. On June 30, 2005, the Company completed the spin-off of Atlas America. Certain operating expenditures totaling $1.3 million that remain to be settled between the Company and Atlas America are reflected in the consolidated balance sheets as receivables from related parties. In connection with the spin-off, the Company and Atlas America have entered into a series of agreements, including shared services and tax matters, which will govern the future contractual obligations between the two companies. Relationships with Trapeza and Structured Finance Fund ("SFF") Partnerships. In the three months ended June 30, 2005 and 2004 and nine months ended June 30, 2005 and 2004, the Company received fees from Trapeza and SFF partnerships in which it was the general partner and manager of $1.2 million and $329,000, respectively, and $2.6 million, and $1.6 million, respectively. Relationship with RCC. In the three and nine months ended June 30, 2005, the Company received management fees and net equity compensation revenue (See Note 7) of $1.4 million and $1.8 million, respectively, from RCC, which began operations in March 2005. In addition, the Company was reimbursed $325,000 for operating expenses in the three and nine months ended June 30, 2005. The Company is the external manager of RCC. Other Relationships. In October 2003, the Company paid $200,000 to Messrs. S. Schaeffer, D. Cohen and E. Cohen to reimburse them (without interest) for costs that they had incurred in assuming title to a property in 1998, facilitating the Company's maintenance of control of the property at that time. In October 2003, the asset of an entity that is consolidated on the Company's financial statements (as a result of the application of FIN 46-R) and that underlies one of the Company's loans was sold to an entity of which D. Cohen is a shareholder. The buyer was the highest bidder for the property. The Company received $6.6 million in cash and recognized a gain of $78,000. Prior to such sale, the FIN 46 entity's asset had been owned by a partnership in which Messrs. E. Cohen, D. Cohen and Mrs. B. Cohen were limited partners. In December 2003, RAIT provided the Company a standby commitment to provide $10.0 million in bridge financing in connection with the retirement of the Company's senior debt. RAIT received a $100,000 facilitation fee from the Company in connection with providing this standby commitment. During January 2004, the Company borrowed and subsequently repaid the $10.0 million from RAIT. 18 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JUNE 30, 2005 (UNAUDITED) NOTE 14 - OTHER INCOME The Company's other income, net consists of the following (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Settlement of claim against directors' and officers' liability insurance carrier........................... $ -- $ -- $ 1,400 $ -- Gains on sales of RAIT shares............................. -- 1,601 1,459 7,095 Write-off of deferred finance costs and premium paid on redemption of senior notes......................... -- -- -- (1,955) Dividend income from RAIT................................. 2 177 10 848 Dividend income from TBBK................................. 38 -- 38 -- Interest income........................................... 256 98 700 307 Other..................................................... 14 83 181 276 ---------- ---------- ---------- ---------- $ 310 $ 1,959 $ 3,788 $ 6,571 ========== ========== ========== ==========
NOTE 15 - DISCONTINUED OPERATIONS As a result of the spin-off of Atlas America, the results of its operations are reflected as discontinued operations for all periods presented. The loss on disposal included as part of discontinued operations reflects a non-cash charge of $1.3 million related to the acceleration of stock options held by Atlas America employees, in addition to legal, accounting and valuation fees related to the spin-off. Summarized operating results of energy operations of Atlas America are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Income from discontinued operations before taxes.......... $ 9,634 $ 5,904 $ 31,450 $ 21,145 Loss on disposal.......................................... (2,130) -- (2,508) -- Provision for income taxes................................ (4,603) (1,999) (12,322) (7,181) ---------- ---------- ---------- ---------- Income from discontinued operations, net.................. $ 2,901 $ 3,905 $ 16,620 $ 13,964 ========== ========== ========== ==========
The assets and liabilities of three and six real estate entities as of June 30, 2005 and 2004, respectively, that are consolidated under the provisions of FIN 46-R and three real estate properties owned have been classified as held for sale based on the Company's intent to sell its interests in the properties and in the VIE's real estate loans' underlying assets and liabilities included in the Company's consolidated financial statements. Summarized operating results of real estate held for sale are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Income (loss) from discontinued operations before taxes... $ 362 $ (291) $ 1,256 $ (883) Loss on disposal.......................................... (7,681) (25) (7,961) (1,860) Income tax benefit........................................ 2,482 111 2,342 958 ---------- ---------- ---------- ---------- Loss from discontinued operations, net.................... $ (4,837) $ (205) $ (4,363) $ (1,785) ========== ========== ========== ==========
19 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JUNE 30, 2005 (UNAUDITED) NOTE 15 - DISCONTINUED OPERATIONS - (CONTINUED) In September 1999, the Company adopted a plan to discontinue its residential mortgage lending business, LowCostLoan.com, Inc. ("LCL"), formerly Fidelity Mortgage Funding, Inc. The business was disposed of in November 2000. Accordingly, LCL has been reported as a discontinued operation. Upon final resolution of certain lease obligations and assets associated with LCL, the Company had recognized a gain on disposal in the periods shown below. Summarized results of LCL are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Gain on disposal.......................................... $ 36 $ -- $ 36 $ 602 Income tax provision...................................... (12) -- (12) (210) ---------- ---------- ---------- ---------- Income from discontinued operations, net.................. $ 24 $ -- $ 24 $ 392 ========== ========== ========== ==========
Summarized results of discontinued energy, real estate and LCL operations are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Income from discontinued operations before tax............ $ 9,996 $ 5,613 $ 32,706 $ 20,262 Loss on disposal.......................................... (9,775) (25) (10,433) (1,258) Income tax provision...................................... (2,133) (1,888) (9,992) (6,433) ---------- ---------- ---------- ---------- Income (loss) from discontinued operations................ $ (1,912) $ 3,700 $ 12,281 $ 12,571 =========== ========== ========== ==========
NOTE 16 - OPERATING SEGMENTS The Company's operations include three reportable operating segments that reflect the way the Company manages its operations and makes business decisions. In addition to its reporting operating segments, certain other activities are reported in the "All other" category. Summarized operating segment data are as follows (in thousands): THREE MONTHS ENDED JUNE 30, 2005:
Revenues from Other significant external Depreciation Segment items: customers and amortization profit (loss) segment assets --------- ---------------- ------------- -------------- Real estate..................... $ 11,104 $ 375 $ 6,216 $ 233,629 Equipment finance............... 3,481 372 98 70,706 Financial fund management....... 4,828 18 1,823 56,338 All other(a).................... -- 55 (1,660) 68,758 Eliminations.................... -- -- -- (45,260) -------- ---------- ---------- ----------- Totals.......................... $ 19,413 $ 820 $ 6,477 $ 384,171 ======== ========== ========== ===========
20 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JUNE 30, 2005 (UNAUDITED) NOTE 16 - OPERATING SEGMENTS - (CONTINUED)
THREE MONTHS ENDED JUNE 30, 2004: Revenues from Other significant external Depreciation Segment items: customers and amortization profit (loss) segment assets --------- ---------------- ------------- -------------- Real estate..................... $ 4,921 $ 501 $ 1,645 $ 244,690 Equipment finance............... 1,326 200 (1,100) 55,055 Financial fund management....... 968 -- 278 8,687 All other(a).................... -- 41 (2,116) 367,214 Eliminations.................... -- -- -- (70,148) -------- -------- -------- ----------- Totals.......................... $ 7,215 $ 742 $ (1,293) $ 605,498 ======== ======== ======== =========== NINE MONTHS ENDED JUNE 30, 2005: Revenues from Other significant external Depreciation Segment items: customers and amortization profit (loss) segment assets --------- ---------------- ------------- -------------- Real estate..................... $ 20,008 $ 1,174 $ 6,858 $ 233,629 Equipment finance............... 9,190 755 172 70,706 Financial fund management....... 10,908 46 3,851 56,338 All other(a).................... -- 158 (1,951) 68,758 Eliminations.................... -- -- -- (45,260) -------- ---------- ---------- ----------- Totals.......................... $ 40,106 $ 2,133 $ 8,930 $ 384,171 ======== ======== ======== =========== NINE MONTHS ENDED JUNE 30, 2004: Revenues from Other significant external Depreciation Segment items: customers and amortization profit (loss) segment assets --------- ---------------- ------------- -------------- Real estate..................... $ 13,575 $ 1,329 $ 2,049 $ 244,690 Equipment finance............... 4,191 308 (2,569) 55,055 Financial fund management....... 4,046 -- 2,708 8,687 All other(a).................... -- 121 (2,521) 367,214 Eliminations.................... -- -- -- (70,148) -------- ---------- ---------- ------------ Totals.......................... $ 21,812 $ 1,758 $ (333) $ 605,498 ======== ========== ========== =============
- ------------ (a) Includes general corporate expenses and assets not allocable to any particular segment and energy segment assets as of the three and nine months ended June 30, 2004. There are no corresponding energy segment assets as of June 30, 2005 due to the spin-off of Atlas America. Segment profit (loss) represents income from continuing operations before income taxes. Energy results have been reclassified as discontinued operations and are therefore excluded from this presentation. 21 RESOURCE AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JUNE 30, 2005 (UNAUDITED) NOTE 17 - COMMITMENTS AND CONTINGENCIES In connection with the Company's sale on August 1, 2000 of its former leasing subsidiary, Fidelity Leasing, Inc. and its subsidiary, JLA Credit Corporation, the Company has been advised in April 2005 by the successor in interest to the purchaser that the State of California has asserted a claim for sales taxes, plus interest, of $4.0 million relating to JLA's operations for the period from October 1996 through July 2000. Fidelity Leasing acquired JLA in February 1999. The successor has asserted that payments, if any, with respect to such claim are covered under indemnification provisions of the agreement of sale. The Company believes it has meritorious defenses to any such indemnification claim, as well as cross claims against the entities and persons from whom it acquired JLA for that portion of any sales tax claim made by the State of California relating to periods before the Company acquired JLA. The Company also believes that JLA likely has meritorious defenses to the sales tax claim purportedly being made by the State of California. From time to time, the Company is named as a defendant in legal actions arising from its normal business activities. Although the amount of any liability that could arise with respect to currently pending actions cannot be accurately predicted, the Company does not believe that the resolution of any pending action will have a material adverse effect on its financial position, results of operations or liquidity. NOTE 18 - SUBSEQUENT EVENTS On July 29, 2005, an Agreement of Sale among the Company and Scott Schaeffer, as sellers, and ACP Mid-Atlantic LLC ("Buyer") became definitive. Pursuant to the Agreement of Sale, (i) the Company agreed to sell to Buyer a promissory note in the original principal amount of $31,000,000 made by ABB South Street Associates, LLC ("ABB") (which owns the Alex Brown Building located in Baltimore, Maryland), which note has a current principal balance of $56.3 million and which is secured by ownership interests in ABB; and (ii) the Company agreed to sell to Buyer all of its equity interests in ABB. Scott Schaeffer also agreed to sell certain equity interests to Buyer. Although the Company owns a promissory note, ABB is a variable interest entity pursuant to FIN 46-R under whose provisions ABB has been consolidated in the Company's financial statements (see Note 6). In connection with the sale, the Company expects to receive net proceeds of approximately $20.0 million and assumption by Buyer of $65.0 million of debt. Closing is contingent upon the approval of the lender holding the mortgage loan on the Alex Brown Building and the approval of the other equity holders. Based on the contract value and an estimate of remaining costs and indemnities associated with the transaction, a write-down of $7.6 million was recorded in the June 30, 2005 consolidated financial statements. In July 2005, RCC filed a registration statement with the Securities and Exchange Commission for an initial public offering of common stock. The number of shares and pricing have not yet been determined. 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) WHEN USED IN THIS FORM 10-Q, THE WORDS "BELIEVES" "ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES MORE PARTICULARLY DESCRIBED IN ITEM 1, UNDER THE CAPTION "RISK FACTORS", IN OUR ANNUAL REPORT ON FORM 10-K FOR FISCAL 2004. 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 NINE MONTHS ENDED JUNE 30, 2005 AND 2004 We completed the spin-off of Atlas America, Inc., our former energy business, in our third fiscal quarter ended June 30, 2005. With the spin-off completed, we no longer consolidate Atlas America's financial statements with ours and, as a result, our assets, liabilities, stockholders' equity and revenues and expenses have been substantially reduced. Although the distribution itself will be tax-free to our stockholders, as a result of the deconsolidation there may be some tax liability arising from prior unrelated corporate transactions among Atlas America and some of its subsidiaries. We anticipate that any liability arising from this transaction will be reimbursed to us by Atlas America. The initiatives we began in fiscal 2003 to expand our specialized asset management businesses resulted in material growth in both revenues and assets under management for those operations. Our total assets under management increased from $2.7 billion at June 30, 2004 to $5.7 billion at June 30, 2005, a 113% increase. The growth was the result of an increase in real estate assets managed on behalf of limited partnerships that we sponsor; an increase in equipment finance assets managed on behalf of limited partnerships we sponsor and on behalf of Merrill Lynch; and an increase in the financial fund management assets we manage on behalf of individual and institutional investors and on behalf of Resource Capital Corp. or RCC, an externally managed real estate investment trust that we sponsored in March 2005. The following table sets forth certain information relating to our assets under management (in millions): AS OF JUNE 30, ------------------------------- 2005 2004 ----------- ------------ Real estate................................. $ 482 $ 439 Equipment finance........................... 291 139 Financial fund management................... 4,973 2,118 ----------- ------------ $ 5,746 $ 2,696 =========== ============ Our revenues in each of our business segments are generated by the fees we earn for structuring and managing the investment partnerships we sponsor on behalf of individual and institutional investors and the income produced by assets and investments we hold. 23 The following table set forth certain information related to the revenues we recognized (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Finance and rental revenues(1)............................ $ 5,589 $ 4,642 $ 14,133 $ 12,466 Fund management revenues ((2))............................ 7,009 2,439 18,510 7,580 Other((3))................................................ 6,815 134 7,463 1,766 ---------- ---------- ---------- ---------- $ 19,413 $ 7,215 $ 40,106 $ 21,812 ========== ========== ========== ==========
- --------------- (1) includes interest and accreted discount income from our real estate operations, interest income from our equipment finance operations and revenues from certain real estate assets; (2) includes fees from each of our real estate, equipment finance and financial fund management operations; our share of the income or loss from limited and general partnership interests we own in our real estate and financial fund management operations; as well as fees earned from our real estate and equipment finance operations; and (3) includes the resolution of loans and other property interests we hold in our real estate segment; the disposition of leases in our equipment finance operations; equity compensation earned in connection with the formation of RCC and documentation; and late fee charges from our equipment finance operations. A detailed description of the revenues generated by each of our business segments can be found under Results of Operations: Real Estate, Equipment Finance and Financial Fund Management. RESULTS OF OPERATIONS: REAL ESTATE In real estate we manage two classes of assets: o real estate loans, owned assets and ventures, known collectively as our legacy portfolio; and o real estate investment limited partnerships. (in millions) JUNE 30, JUNE 30, 2005 2004 ---------- ---------- Legacy portfolio..................................... $ 307 $ 332 Real estate investment limited partnerships.......... 175 107 ---------- ---------- $ 482 $ 439 ========== ========== During the twelve months ended June 30, 2005, we increased our total assets under management to $481.6 million as compared to $438.6 million as of June 30, 2004. We have sponsored four real estate investment limited partnerships and one tenant-in-common offering as of June 30, 2005 and three partnership offerings as of June 30, 2004. We increased the amount of assets we managed on behalf of the real estate investment limited partnerships we sponsored to $174.8 million at June 30, 2005 from $106.7 million at June 30, 2004. As part of our strategic plan, we are continuing to resolve our real estate loan portfolio through sales and loan resolutions. In the twelve months ended June 30, 2005, we resolved loans with a book value of $23.9 million, realizing $24.4 million in net proceeds. In addition, we refinanced the first mortgage on a property accounted for by us as a FIN 46 asset and received net proceeds of $8.6 million. The first mortgage on a real estate venture in which we have a 50% interest was refinanced and received net proceeds of $13.6 million. As a result, the loans and real estate assets in our loan portfolio, principally outstanding loan receivables, decreased from $331.9 million at June 30, 2004 to $306.8 million at June 30, 2005. 24 During the three and nine months ended June 30, 2005, our real estate operations continued to be affected by three principal trends or events: o we continued to selectively resolve the loans in our legacy portfolio through repayments, sales, refinancings and restructurings; o we sought growth in our real estate business through the sponsorship of real estate investment partnerships in which we are also a minority investor; and o the adoption of FIN 46-R. The principal effects of the first two factors has been to reduce the number of our real estate loans while increasing our interests in real property and, as a result of repayments, sales, refinancings and restructurings, also increasing our cash flow from loan resolutions. The principal effect of the adoption of FIN 46-R has been to consolidate in our financial statements the assets, liabilities, revenues and costs and expenses of a number of borrowers, although not affecting our creditor-debtor legal relationship with these borrowers and not causing these assets and obligations to become our legal assets or obligations. The following table sets forth certain information relating to the revenues recognized and costs and expenses incurred in our real estate operations (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------ -------------------------- 2005 2004 2005 2004 ----------- ---------- ---------- ---------- Revenues: FIN 46 revenues...................................... $ 3,725 $ 2,728 $ 9,435 $ 7,714 Fund management...................................... 1,669 641 3,184 1,371 Interest............................................. 149 225 550 792 Accreted loan discount (net of collection of interest).......................................... 299 574 775 1,552 Gains on resolution of loans, FIN 46 assets and ventures........................................... 5,733 -- 5,900 732 Earnings (losses) of equity investees (net of depreciation of $490 and $219)............. (641) 96 (176) 473 Rental............................................... 170 657 340 941 ---------- ---------- ---------- ---------- $ 11,104 $ 4,921 $ 20,008 $ 13,575 ========== ========== ========== ========== Costs and expenses: Real estate general and administrative............... $ 1,462 $ 764 $ 4,588 $ 3,117 Rental............................................... -- (16) -- 36 FIN 46 operating expenses............................ 2,780 1,459 6,426 4,488 ---------- ---------- ---------- ---------- $ 4,242 $ 2,207 $ 11,014 $ 7,641 ========== ========== ========== ==========
25 Revenues - Three Months Ended June 30, 2005 as Compared to the Three Months Ended June 30, 2004 Revenues increased $6.2 million (126%) for the three months ended June 30, 2005 as compared to the prior year period. We attribute the increase to the following: o a $997,000 increase (37%) in FIN 46 revenues. The increase is primarily related to a hotel property in Savannah, Georgia that we foreclosed on during the three months ended June 30, 2005; we included five months of operating income in our results for the three months ended June 30, 2005 as compared to three months for the three months ended June 30, 2004; o a $1.0 million increase (160%) in fund management revenues. We earned fees for services provided to the real estate investment partnerships which we sponsored relating to the purchase and third party financing of three properties during the three months ended June 30, 2005. These transaction fees totaled $1.3 million for the three months ended June 30, 2005. Transaction fees related to the purchase and third party financing of one property totaled $453,000 for three months ended June 30, 2004. Additionally, we earned management fees for the properties owned by real estate investment partnerships which we sponsored totaling $319,000 for the three months ended June 30, 2005 as compared to $188,000 for the three months ended June 30, 2004. We anticipate earning additional fees from our existing partnerships and any future real estate investment partnerships which we may sponsor; and o a $5.7 million increase in gains on resolution of loans, FIN 46 assets and ventures. We recognized no gains during the three months ended June 30, 2004. A partnership in which we own a 50% equity interest refinanced its mortgage. We received net proceeds from the refinancing of $13.6 million which was $4.2 million in excess of the recorded value of our 50% interest. We recognized the $4.2 million as a gain. In addition, during the three months ended June 30, 2005 we foreclosed on a loan that was classified as a FIN 46 asset on our balance sheet. In connection with the foreclosure, we acquired a note payable for $540,000 that was recorded on our books as a FIN 46 liability in the amount of $1.6 million; as a result we recognized a gain of $1.0 million. The foreclosed asset is recorded as an investment in real estate at June 30, 2005. The increase was partially offset by the following: o a $351,000 decrease (44%) in interest and accreted discount income for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 resulting from the resolution of four loans which decreased interest income by $369,000; o a $737,000 decrease (768%) in our share of the operating results of our unconsolidated real estate investments accounted for on the equity method. The decrease for the three months ended June 30, 2005 was primarily due to losses incurred through equity investments in our real estate investment partnerships made subsequent to June 30, 2004 and the loss from an equity investment which was converted from a loan during fiscal 2004. We support our real estate investment partnerships by making long-term limited partnership investments. In addition, from time-to-time, we make bridge investments in the underlying properties to facilitate acquisitions. We record losses on our equity method investments primarily as a result of depreciation and amortization expense recorded by the real estate investment partnerships. As additional investors are admitted to the real estate investment partnerships, we transfer our bridge investment in the real estate investment partnerships to new investors at our original cost and recognize a gain approximately equal to the previously recognized losses incurred; and o a $487,000 decrease (74%) in rental income reflecting the sale of a real estate investment during the fourth quarter of fiscal 2004. 26 Gain on resolution of loans, FIN 46 assets and other real estate assets (if any) and the amount of fees received (if any) vary by each transaction and, accordingly, there may be significant variations in our gains on resolutions and fee income from period to period. Costs and Expenses - Three Months Ended June 30, 2005 as Compared to the Three Months Ended June 30, 2004 Costs and expenses of our real estate operations were $4.2 million for the three months ended June 30, 2005, an increase of $2.0 million (92%) as compared to the three months ended June 30, 2004. We attribute the increase to the following: o a $698,000 increase (91%) in real estate general and administrative expenses. The increase resulted primarily from the following: - a $216,000 increase in wages and benefits as a result of the addition of personnel in our real estate subsidiary to manage our existing portfolio of commercial loans and real estate and to expand our real estate operations through the sponsorship of real estate investment partnerships; - a $97,000 increase in sales and marketing expenses (none for the three months ended June 30, 2004) reflecting the efforts of in-house marketing personnel and external wholesale representatives to sell interests in our real estate investment partnerships and an increase in travel costs of $88,000 due to the increased acquisition activity associated with our management of our real estate investment programs; - a $144,000 increase in property management expenses related to real estate investment partnerships; and - a $153,000 net increase in outside services and office expenses. o an increase of $1.3 million (91%) in FIN 46 operating expenses. The increase is primarily related to a hotel property in Savannah, Georgia that we foreclosed on during the three months ended June 30, 2005; we included five months of operating expenses in our results for the three months ended June 30, 2005 as compared to three months for the three months ended June 30, 2004. Revenues - Nine months Ended June 30, 2005 as Compared to the Nine months Ended June 30, 2004 Revenues increased $6.4 million (47%) to $20.0 million in the nine months ended June 30, 2005 from $13.6 million in the nine months ended June 30, 2004. We attribute the increase to the following: o a $1.7 million increase (22%) in FIN 46 revenues for the nine months ended June 30, 2005, as compared to the nine months ended June 30, 2004. The increase is primarily related to a hotel property in Savannah, Georgia that we foreclosed on during the nine months ended June 30, 2005; we included eleven months of operating income in our results for the nine months ended June 30, 2005 as compared to nine months for the nine months ended June 30, 2004; o a $1.8 million increase (132%) in fund management revenues for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004. We earned fees for services provided to the real estate investment partnerships which we sponsored relating to the purchase and third party financing of five properties in the nine months ended June 30, 2005 and two properties in the nine months ended June 30, 2004. The transaction fees totaled $2.4 million for the nine months ended June 30, 2005 and $846,000 for the nine months ended June 30, 2004. Additionally, we earned management fees for the properties owned by real estate investment partnerships which we sponsored totaling $814,000 for the nine months ended June 30, 2005 and $525,000 for the nine months ended June 30, 2004; and 27 o a $5.2 million increase (706%) in gains on resolutions of loans, FIN 46 assets and real estate assets. A partnership in which we own a 50% equity interest refinanced its mortgage. We received net proceeds from the refinancing of $13.6 million which was $4.2 million in excess of the recorded value of our 50% interest. We recognized the $4.2 million as a gain. In addition, during the nine months ended June 30, 2005, we foreclosed on a loan that was classified as a FIN 46 asset on our balance sheet. In connection with the foreclosure, we acquired a note payable for $540,000 that was recorded on our books as a FIN 46 liability in the amount of $1.6 million; as a result we recognized a gain of $1.0 million. The foreclosed asset is recorded as an investment in real estate at June 30, 2005. We recognized an additional gain of $85,000 in connection with the resolution of an asset that was originally resolved during fiscal year 2004. We recognized an aggregate gain of $518,000 on the sale of two investments in our real estate investment partnerships during fiscal year 2005. In the nine months ended June 30, 2004, we resolved three loans having an aggregate book value of $3.7 million for $3.5 million, recognizing losses of $109,000. We also received $3.4 million for the sale of our investment in one venture resulting in a gain of $841,000. The increases were partially offset by the following: o a $1.0 million decrease (43%) in interest and accreted discount income resulting from the resolution of six loans since June 30, 2004. The decrease relates principally to one loan resolved during fiscal 2004; o an $649,000 decrease (137%) in our share of the operating results of our unconsolidated real estate investments accounted for on the equity method for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004. The decrease for the nine months ended June 30, 2005 was primarily due to losses incurred through equity investments in our real estate investment partnerships made subsequent to June 30, 2004 and the loss from an equity investment which was converted from a loan during fiscal 2004. We support our real estate investment partnerships by making long-term limited partnership investments. In addition, from time-to-time, we make bridge investments in the underlying properties to facilitate acquisitions. We record losses on our equity method investments primarily as a result of depreciation and amortization expense recorded by the real estate investment partnerships. As additional investors are admitted to the real estate investment partnerships, we transfer the bridge investment in the real estate investment partnership to new investors at our original cost and recognize a gain approximately equal to the previously recognized losses incurred; and o a $601,000 decrease (64%) in rental income for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004 because of the sale of a real estate investment during the fourth quarter of fiscal 2004. Gains on resolutions of loans, FIN 46 assets and other real estate assets (if any) and the amount of fees received (if any) vary from transaction to transaction and there may be significant variations in our gains on resolutions and fee income from period to period. Costs and Expenses - Nine Months Ended June 30, 2005 as Compared to the Nine Months Ended June 30, 2004 Costs and expenses of our real estate operations were $11.0 million for the nine months ended June 30, 2005, an increase of $3.4 million (44%) as compared to the nine months ended June 30, 2004. We attribute the increase to the following: o an increase of $1.5 million (47%) in real estate general and administrative expenses in the nine months ended June 30, 2005, as compared to the nine months ended June 30, 2004. The increase resulted primarily from the following: - a $1.3 million increase in wages and benefits and $22,000 in office expenses as a result of the addition of personnel in our real estate subsidiary to manage our existing portfolio of commercial loans and real estate and to expand our real estate operations through the sponsorship of real estate investment partnerships; 28 - a $113,000 increase in both property management expenses related to real estate investment partnerships and $164,000 of travel costs due to the increased acquisition activity associated with managing our real estate investment programs; - a $183,000 increase in sales and marketing expenses reflecting the efforts of in-house marketing personnel and external wholesale representatives to sell interests in our real estate investment partnerships; - a $262,000 decrease in outside services, primarily legal and consulting; and o a $1.9 million increase (43%) in FIN 46 operating expenses for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004. The increase is primarily related to a hotel property in Savannah, Georgia that we foreclosed on during the three months ended June 30, 2005; we included five months of operating expense in our results for the three months ended June 30, 2005 as compared to three months for the three months ended June 30, 2004. RESULTS OF OPERATIONS: EQUIPMENT FINANCE During the twelve months ended June 30, 2005, we continued to increase our assets under management to $290.7 million as compared to $138.9 million as of June 30, 2004, an increase of $151.8 million (109%). Our equipment finance origination growth was driven by our March 2005 acquisition of the business and lease portfolio of Allco Enterprises totaling $28.0 million, new vendor programs as well as expansion of our sales staff. This growth was facilitated by our relationships with Merrill Lynch and our investment partnerships. In December 2004, we began the $60.0 million offering of our second investment partnership Lease Equity Appreciation Fund II ("LEAF II"). On April 14, 2005, we sold the required number of units to break escrow and commenced operations. As of June 30, 2005, LEAF II has raised $4.8 million. As of June 30, 2005, Lease Equity Appreciation Fund I ("LEAF I"), our first investment partnership, has approached full investment and has $92.3 million in equipment finance assets. In March 2005, our agreement with Merrill Lynch Equipment Finance LLC ("Merrill Lynch") was extended for two more years until April 2007. The following table sets forth certain information relating to assets managed on behalf of our investment partnerships, Merrill Lynch and ourselves (in thousands): JUNE 30, JUNE 30, 2005 2004 ------------- ----------- LEAF Financial......................... $ 54,899 $ 41,860 LEAF I................................. 92,314 36,753 LEAF II................................ 5,899 -- Merrill Lynch.......................... 137,571 60,266 ------------- ----------- $ 290,683 $ 138,879 ============= =========== The following table sets forth certain information related to the types of businesses in which our equipment finance assets are used and the concentration by type of equipment finance assets under management as of June 30, 2005, as a percentage of our total managed portfolio:
LESSEE BUSINESS EQUIPMENT UNDER LEASE - --------------- --------------------- Services 51% Industrial 25% Manufacturing services 12% Medical 22% Retail trade services 12% Computers 17% Wholesaler trade 5% Office equipment 10% Transportation / Communication 5% Software 7% Finance / Insurance 5% Garment care 7% Construction 5% Communication 4% Agriculture 2% Building systems 4% Other 3% Other 4% -------- ------- 100% 100% ======== =======
29 The revenues from our equipment finance operations consist primarily of finance revenues from financings (leases and loans) owned by us before they are sold; asset acquisition fees which are earned when equipment finance assets are sold to one of the investment partnerships; or Merrill Lynch and asset management fees which are earned over the life of the lease after a lease is sold. The following table sets forth certain information relating to the revenues recognized and costs and expenses incurred in our equipment finance operations (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------- -------------------------- 2005 2004 2005 2004 ---------- ---------- ----------- ---------- Revenues: Finance.............................................. $ 1,246 $ 458 $ 3,033 $ 1,467 Fund management fees................................. 1,968 869 5,626 2,245 Other................................................ 267 (1) 531 479 ---------- ---------- ---------- ---------- $ 3,481 $ 1,326 $ 9,190 $ 4,191 ========== ========== ========== ========== Costs and expenses...................................... $ 2,467 $ 1,975 $ 6,976 $ 5,627 ========== ========== ========== ==========
Revenues - Three Months Ended June 30, 2005 as Compared to the Three Months Ended June 30, 2004 Revenue increased $2.2 million (163%) for the three months ended June 30, 2005 as compared to the prior year period. We attribute this increase to the following: o $788,000 (172%) increase in finance revenues for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 due to the growth in lease originations; o $1.1 million (126%) increase in fund management fees for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004. This increase resulted primarily from the following: - $932,000 (453%) increase in asset management fees for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 resulting from the increase in assets under management of our affiliated partnerships and Merrill Lynch ($290.7 million as compared to $138.9 million as of June 30, 2005 and 2004 respectively); - $167,000 (25%) increase in asset acquisition fees for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 resulting from the increase in leases sold to our affiliated partnerships and Merrill Lynch; and o $268,000 increase in other income for the three month period June 30, 2005 as compared to the three months ended June 30, 2004. This increase is due to gains on lease dispositions of $131,000, an increase in documentation fees and late charges of $61,000 and interest income of $70,000. Costs and Expenses - Three Months Ended June 30, 2005 as Compared to the Three Months Ended June 30, 2004 Costs and expenses increased $492,000 (25%) for the three month period ended June 30, 2005 as compared to the prior year period. We attribute this increase to the following: o $586,000 increase in salary expense for the three months ended June 30, 2005 as compared to the three month period ended June 30, 2004. This increase is a result of additional personnel needed to support the expansion of our operations; and o $94,000 decrease in general and administrative expenses for the three month period ended June 30, 2005 as compared to the three months ended June 30, 2004. This decrease resulted primarily from the following: - a onetime $359,000 liquidation expense incurred in 2004 as a result of dissolving other affiliated partnerships; and - an increase in the expenses reimbursed from our investment partnerships of $104,000 which results in a decrease to general and administrative expenses. 30 These decreases were partially offset by the following: o an increase in professional fees of $136,000 related to accounting, legal and consulting. These increases are the result of the over all expansion of our operation; o an $88,000 increase in UCC filing fees which is related to the increase in assets under management; o a $79,000 increase in travel and entertainment as result of the expansion of our business development activities; and o a $52,000 increase in business development expenses. Revenues - Nine Months Ended June 30, 2005 as Compared to the Nine Months Ended June 30, 2004 Revenues increased $5.0 million (119%) to $9.2 million in the nine months ended June 30, 2005 as compared to the prior year period. We attribute the increase to the following: o $1.6 million increase in finance revenues for the nine month period ended June 30, 2005 as compared to the nine month period ended June 30, 2004. This increase is primarily due to an increase of $71.8 million in lease originations for the nine month period ended June 30, 2005 as compared to the prior year period; o $3.4 million (151%) increase in fund management fees for the nine month period ended June 30, 2005 as compared to the nine month period ended June 30, 2004. We attribute this increase to the following: - $2.0 million increase in asset management fees for the nine month period ended June 30, 2005 as compared to the nine month period ended June 30, 2004. This increase is directly related to our increase in assets under management; - $1.4 million increase in asset acquisition fees for the nine month period ended June 30, 2005 as compared to the nine month period ended June 30, 2004. Our increase in lease originations allowed us to increase our sales to our affiliated partnerships and Merrill Lynch for which we are paid acquisition fees; and o $52,000 increase in other income for the nine month period ended June 30, 2005 as compared to the nine month period ended June 30, 2004. This increase is primarily due to an increase in our fee income offset by a decrease in gains on dispositions of lease assets. Costs and Expenses - Nine Months Ended June 30, 2005 as Compared to the Nine Months Ended June 30, 2004 Costs and expenses increased $1.3 million (24%) for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004. We attribute this increase to the following: o $1.8 million increase in salary, wages and benefits for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004. This increase is due to additional personnel for further expansion of our operations; o $485,000 decrease in general and administrative expenses for the nine month period ended June 30, 2005 as compared to the nine months ended June 30, 2004. We attribute this decrease to the following: - $1.2 million decrease in offering and organization expenses related to our affiliated partnerships for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004; and - $360,000 decrease in liquidation expense as a result of a one time charge in 2004 as a result of dissolving other affiliated partnerships. The decreases were partially offset by the following: o $473,000 decrease in expenses reimbursed to us by our investment partnerships; o $206,000 increase in travel and entertainment expenses resulting from the expansion of our business development activities; 31 o $183,000 increase in professional fees related to accounting, legal and consulting. This increase is directly related the over all expansion of our operations; o $124,000 increase in credit report fees as a result of our increased lease originations; and o $41,000 increase in insurance resulting from the overall expansion of our operations for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004. RESULTS OF OPERATIONS: FINANCIAL FUND MANAGEMENT In financial fund management, we manage the following types of securities and loans: o bank and bank holding company and insurance trust preferred securities ("Trapeza"); o asset-backed securities ("Ischus"); o syndicated loans ("Apidos"); and o mezzanine and B notes ("Resource Real Estate"). During the twelve months ended June 30, 2005, we continued to increase our assets under management to $5.0 billion as compared to $2.1 billion as of June 30, 2004. The following table sets forth certain information relating to assets managed on behalf of institutions and individual investors and assets managed on behalf of a newly formed mortgage REIT, Resource Capital Corp. ("RCC"), which is managed by us (in millions).
AS OF JUNE 30, 2005 --------------------------------------------------- INSTITUTIONAL AND INDIVIDUAL INVESTORS RCC TOTAL BY TYPE ----------------- ---------- ------------- Assets Under Management: Trapeza............................................. $ 2,643 $ -- $ 2,643 Ischus.............................................. 859 1,257 2,116 Apidos.............................................. 34 155 189 Resource Real Estate................................ -- 25 25 --------- ---------- -------- $ 3,536 $ 1,437 $ 4,973 ========= ========== ========
Through management of these assets we earn management fees, administration fees and reimbursements as follows: Assets managed on behalf of institutional and individual investors o collateral management fees - these vary by CDO issuer, but have ranged from between 0.25% and 0.60% of the aggregate principal balance of the collateral securities owned by the CDO issuers collateralized debt obligations ("CDO"); and o administration fees - these vary by limited partnership, but have ranged from between 0.75% and 2.00% of the partnership capital balance. Assets managed on behalf of RCC o base management fee - 1.50% annually of RCC's equity, paid monthly, as defined under the Management Agreement, dated March 8, 2005, between Resource Capital Manager, Inc. ("RCM"), an indirect wholly-owned subsidiary, and RCC; o incentive management fee - 25% of RCC's net income (as defined in the Management Agreement) in excess of the greater of a return of 8.00% or the 10 year Treasury rate plus 2.00%; and o reimbursements - we receive expense reimbursements from RCC on a monthly basis for certain out-of-pocket expenses that relate to RCC. 32 TRAPEZA We have co-sponsored, structured and currently co-manage seven CDO issuers holding approximately $2.4 billion in bank and bank holding company trust preferred securities. At June 30, 2005, we managed $244.2 million in bank and bank holding company and insurance trust preferred securities for our eighth CDO and anticipate closing this CDO in August 2005 after fully ramping the warehouse line to include $300.0 million of these securities when closed. The Company anticipates that it will make an equity investment in this transaction. We own a 50% interest in an entity that manages five CDO issuers in this series with collateral pools consisting of the trust preferred securities of financial institutions and a 33.33% interest in another entity that manages two collateral pools of trust preferred CDO issuers. We also own a 50% interest in the general partners of the limited partnerships (the "Trapeza Partnerships") that own the equity interest of the five Trapeza CDO issuers. We also have invested as a limited partner in each of these limited partnerships. We derive revenues from these CDO operations through management and administration fees. We also receive distributions on amounts we invest in the limited partnerships. Management fees vary by CDO issuer, but have ranged from between 0.25% and 0.60% of the aggregate principal balance of the collateral securities owned by the CDO issuers. These fees are also shared with our co-sponsors. The fees are payable monthly, quarterly or semi-annually, as long as the Trapeza management entity continues as the collateral manager of the CDO issuer. Our interest in distributions from the CDO issuers varies with the amount of our investment in a particular limited partnership and with the terms of our general partner interest. We have incentive distribution interests in four of the partnerships. ISCHUS In June 2004, we formed Ischus to focus on selecting, managing and investing in and managing asset-backed securities ("ABS") (primarily real estate asset-backed securities) including residential mortgage-backed securities and commercial mortgage backed securities. In December 2004, we closed Ischus CDO I Ltd, a CDO with approximately $400.0 million in ABS collateral. At June 30, 2005, we managed $459.2 million of asset-backed securities for Ischus III and anticipate closing this CDO after fully ramping the warehouse line to include $1.5 billion of these securities when closed. The Company anticipates making an equity investment in this transaction. Ischus acts as collateral manager for CDO I and will act as collateral manager for Ischus III. We own a 50% interest in the general partner and manager of Structured Finance Fund, L.P. and Structured Finance Fund II, L.P., ("SFF"). These partnerships own a portion of the equity interests of three Trapeza CDO issuers and Ischus CDO I, Ltd. We also have invested as a limited partner in each of these limited partnerships. We derive revenues from these CDO operations through management and administration fees. We also receive distributions on amounts we invest in the limited partnerships. Ischus receives management fees of 0.35% of the aggregate principal balance of the collateral securities owned by the CDO issuer of which a portion is subordinated. Our interest in distributions from the CDO issuer varies with the amount of our investment in a particular limited partnership and with the terms of our general partner interest. APIDOS In January 2005, we formed Apidos to focus on selecting, investing and managing syndicated loans. Apidos intends to leverage our expertise and experience as a CDO collateral manager. At June 30, 2005, we managed $34.5 million of these types of loans for Apidos II and anticipate closing a CDO after fully ramping the warehouse line to include $350.0 million of these types of loans. Apidos will act as collateral manager for the CDO. The Company anticipates making an equity investment in this transaction. 33 RCC In March 2005, we formed RCC, a real estate investment trust, externally managed by RCM. The offering generated gross proceeds of approximately $230.0 million and net proceeds of approximately $214.2 million to RCC, after deducting the initial purchaser's discount and placement fees and estimated offering expenses. RCC's principal business activity is to purchase and manage a diversified portfolio of real estate related securities and commercial finance assets. We derive revenues from RCC through its management agreement with RCM. In return for certain investment and advisory services, RCM is entitled to receive a base management fee, an incentive management fee and a reimbursement for certain out-of-pocket expenses that relate to RCC. In addition, we have invested $15.0 million in RCC and expect to receive dividends on our investment in the future. At June 30, 2005, we managed a portfolio of over $1.4 billion of diversified real estate related securities and commercial finance assets, including $936.5 million of agency and $321.0 million of non-agency (Ischus II) asset-backed securities managed by Ischus, $154.5 million of syndicated loans (Apidos I) managed by Apidos, and $25.2 million of mezzanine B notes managed by Resource Real Estate. In connection with the formation of RCC, we were granted 345,000 shares of restricted common stock and options to purchase 651,666 common shares at an exercise price of $15.00 per share. We subsequently transferred 279,000 of restricted shares to certain members of RCC's management. The following table sets forth certain information relating to the revenues recognized and costs and expenses incurred in our financial fund management operations (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Revenues: Fund management fees............................... $ 1,035 $ 493 $ 2,862 $ 1,242 Earnings of consolidated partnerships.............. 556 -- 1,719 -- Limited and general partner interests.............. 1,756 340 3,890 2,249 RCC management fee and equity compensation......... 1,386 -- 1,800 -- Other.............................................. 95 135 637 555 ---------- ----------- ---------- ---------- $ 4,828 $ 968 $ 10,908 $ 4,046 ========== ========== ========== ========== Costs and expenses: General and administrative......................... $ 1,893 $ 689 $ 4,196 $ 1,300 Equity compensation expense........................ 349 -- 405 -- Expenses of consolidated partnerships.............. 21 -- 119 -- ---------- ---------- ---------- ---------- $ 2,263 $ 689 $ 4,720 $ 1,300 ========== ========== ========== ==========
Revenues - Three Months Ended June 30, 2005 as Compared to the Three Months Ended June 30, 2004 Revenues increased $3.9 million (399%) to $4.8 million in the three months ended June 30, 2005 from $968,000 in the three months ended June 30, 2004. We attribute the increase to the following: o a $542,000 increase in fund management fees for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 was as a result of a full quarter in the three months ended June 30, 2005 of fund management fees for our sixth and seventh Trapeza CDO issuer and our first Ischus CDO issuer; o a $556,000 increase in earnings of consolidated partnerships resulting from the following: - in May 2004, SFF invested $6.9 million in Trapeza CDO V and VI. In December 2004, SFF invested $4.5 million in Ischus CDO I. In January 2005, SFF invested $1.3 million in Trapeza CDO VII. We began to consolidate SFF on October 1, 2004, when we assumed control. Interest income from SFF investments in unconsolidated CDO issuers of $343,000 was recognized in the three months ended June 30, 2005; and 34 - in December 2004, we invested $2.5 million in Ischus CDO I which resulted in the recognition of $217,000 of net interest income in the three months ended June 30, 2005. In April 2005, we sold $2.0 million of our interest in Ischus CDO I and incurred a loss of $64,000. o a $1.4 million increase in limited and general partner interests for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004. The increase resulted primarily from an increase in net unrealized appreciation on the mark-to-market of securities and swap agreements of $1.2 million. In addition, an increase of $162,000 in our share of the operating results of our unconsolidated Trapeza Partnerships for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004. This increase was primarily due to the result of higher interest spreads generated from our investments in Trapeza CDOs; o a $1.4 million increase in RCC management fees and equity compensation. The increase resulted primarily from the following: - a $574,000 increase in RCC management fees for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 as RCC. These fees are the result of the management agreement, dated March 8, 2005, between RCM and RCC; and - an $812,000 increase in RCC equity compensation for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004. In connection with the formation of RCC, we were granted 345,000 shares of restricted common stock and options to purchase 651,666 common shares at an exercise price of $15.00 per share. o a $40,000 decrease in other revenue. The decrease resulted primarily from the following: - a $303,000 decrease in net reimbursement fees in the three months ended June 30, 2005 as compared to the three months June 30, 2004. The fees accrued in the three months ended June 30, 2004 were due to the anticipation of the completion of Trapeza CDO VI. No such fees were accrued in the three months ended June 30, 2005, which was partially offset by; - a $169,000 increase in net operating expenses for the three months ended June 30, 2004; and - a $92,000 increase in consulting and advisory fees for the three months ended June 30, 2005, as compared to the three months ended June 30, 2004. These fees are the result of consulting services relating to structuring of financing transactions. Costs and Expenses - Three Months Ended June 30, 2005 as Compared to the Three Months Ended June 30, 2004 Costs and expenses of our financial fund management operations increased $1.6 million (228%) for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004. We attribute the increase to the following: o a $1.2 million increase in general and administrative expenses. The increase resulted primarily from the following: - a $992,000 increase in wages and benefits as a result of the addition of collateral management personnel to select, invest, and manage our existing portfolio of asset-backed securities and syndicated loans; - a $230,000 increase in financial service fees and publications as a result of the implementation of new asset management systems in response to our growing assets under management; - a $431,000 increase in other operating expenses, primarily from increased rent allocations and other general and administrative expenses related to the addition of personnel; and 35 - a decrease of $23,000 in outside services, primarily in professional fees. These increases were partially offset by reimbursed expenses of $80,000 and $325,000 from our Trapeza operations and RCC, respectively, for the three months ended June 30, 2005. o a $349,000 increase in equity compensation expense. The increase resulted from the amortization for the three months ended June 30, 2005 relating to the transfer of 279,000 restricted shares of RCC held by RCM to certain members of management. o a $21,000 increase in expense of consolidated partnerships. The increase resulted primarily from $19,000 of professional services incurred during the three months ended June 30, 2005. The minority interest share of the operating results of the limited partners of our consolidated partnerships for the three months ended June 30, 2005 is shown as a separate line item on the consolidated statements of income as minority interest expense. Expenses totaling $309,000 have been specifically identified as relating to RCC start-up costs in the consolidated statement of income for the three months ended June 30, 2005. Revenues - Nine Months Ended June 30, 2005 as Compared to the Nine Months Ended June 30, 2004 Revenues increased $6.9 million (170%) to $10.9 million in the nine months ended June 30, 2005 from $4.0 million in the nine months ended June 30, 2004. We attribute the increase to the following: o a $1.6 million increase in fund management fees for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004 which was principally caused by the completion of our seventh Trapeza CDO issuer and our first Ischus CDO issuer, coupled with nine months of collateral management fees for our fourth, fifth and sixth Trapeza CDO issuers; o a $1.7 million increase in our earnings from consolidated partnerships resulting from the following: - in May 2004, SFF invested $6.9 million in Trapeza CDO V and VI. In December 2004, SFF invested $4.5 million in Ischus CDO I. In January 2005, SFF invested $1.3 million in Trapeza CDO VII. We began to consolidate SFF on October 1, 2004 when we assumed control. Interest income from SFF investments in unconsolidated CDO issuers of $1.2 million was recognized in the nine months ended June 30, 2005; and - in December 2004, we invested $2.5 million in Ischus CDO I, which resulted in the recognition of $444,000 of interest income in the nine months ended June 30, 2005. In April 2005, we sold $2.0 million of our interest in Ischus CDO I. o a $1.6 million increase in limited and general partner interests for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004 resulting from the following: - a $1.4 million increase in net unrealized appreciation on the mark-to-market of securities and swap agreements in the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004; and - a $466,000 increase from our limited and general partner share of the operating results of our unconsolidated Trapeza Partnerships for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004. The increase was the result of having five Trapeza Partnerships for the entire nine months ended June 30, 2005 as compared to three Trapeza Partnerships for the entire nine months ended June 30, 2004 in addition to higher interest spreads generated from our investments in Trapeza CDOs; which was partially offset by; - a $147,000 decrease in net reimbursement fees in the nine months ended June 30, 2005 as compared to the nine months June 30, 2004. The fees accrued in the nine months ended June 30, 2004 were due to the anticipation of the completion of Trapeza CDO VI. No such fees were accrued in other revenue in the nine months ended June 30, 2005; 36 - a $83,000 decrease in net interest income for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004 due to securities held by Trapeza Partnerships for the nine months ended June 30, 2004. These securities were subsequently sold to Trapeza CDOs. No such securities were held by Trapeza Partnerships for the nine months ended June 30, 2005. o a $1.8 million increase in RCC management fees and equity compensation. RCC was formed in March 2005. The increase resulted primarily from the following: - a $782,000 increase in RCC management fees for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004. These fees are the result of the management agreement, dated March 8, 2005, between RCM and RCC, previously described. These fees are paid on a monthly basis; - a $1.0 million increase in RCC equity compensation for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004. In connection with the formation of RCC, we were granted 345,000 shares of restricted common stock and options to purchase 651,666 common shares at an exercise price of $15.00 per share; and o an $82,000 increase in other revenue. The increase resulted primarily from the following: - a $623,000 increase in consulting and advisory fees for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004. These fees are the result of consulting services relating to structuring of financing transactions; which was partially offset by; - an $817,000 decrease in net reimbursement fees in the nine months ended June 30, 2005 as compared to the nine months June 30, 2004. The fees accrued in the nine months ended June 30, 2004 were due to the anticipation of the completion of Trapeza CDO VI. No such fees were accrued in the nine months ended June 30, 2005. These fees were partially offset by an increase in net operating expenses of $262,000 in the nine months ended June 30, 2004. Costs and Expenses - Nine Months Ended June 30, 2005 as Compared to the Nine Months Ended June 30, 2004 Costs and expenses of our financial fund management operations increased $3.4 million (263%) for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004. We attribute the increases to the following: o a $2.9 million increase in general and administrative expenses. The increase resulted primarily from the following: - a $2.5 million increase in wages and benefits as a result of the addition of collateral management personnel to manage our existing portfolio of asset-backed securities and syndicated loans. - a $1.2 million increase in other operating expenses, primarily from increased rent allocations and other general and administrative expenses related to the addition of personnel. - a $555,000 increase in outside services, primarily in professional fees. - a $368,000 increase in financial software programs and publications as a result of the implementation of new asset management systems in response to our growing assets under management. 37 These increases were partially offset by reimbursed expenses of $1.3 million from our Trapeza and Ischus operations and $325,000 from RCC, for the nine months ended June 30, 2005. o a $405,000 increase in equity compensation expense. The increase resulted from the amortization for the nine months ended June 30, 2005 related to the transfer of 279,000 RCM's restricted shares to certain members of RCC's management; and o a $119,000 increase in expenses of consolidated partnerships. The increase resulted primarily from $109,000 of professional services incurred and $8,000 of state, city and miscellaneous taxes. The minority interest share of the operating results of the limited partners of our consolidated partnerships for the nine months ended June 30, 2005 is shown as a separate line item in the consolidated statements of income as minority interest expense. In addition, expenses totaling $1.1 million have been specifically identified as relating to RCC start-up costs in the consolidated statements of income for the nine months ended June 30, 2005. RESULTS OF OPERATIONS: OTHER COSTS AND EXPENSES AND OTHER INCOME (EXPENSE) General and administrative costs were $1.9 million and $5.5 million for the three and nine months ended June 30, 2005, respectively, a decrease of $2.0 million (51%) and $1.9 million (26%) as compared to $3.8 million and $7.4 million for the three and nine months ended June 30, 2004. In the three and nine months ended June 30, 2004, we incurred $1.5 million of reorganization expenses and spin-off costs in connection with the initial public offering and planned spin-off of Atlas America. Costs related to the spin-off of Atlas America are included in discontinued operations for the three and nine months ended June 30, 2005. In addition in the three months and nine months ended June 30, 2004, our corporate operations incurred legal and accounting fees which in the three months and nine months ended June 30, 2005 were allocated to our operating units. These decreases were in part offset by additional accounting and consulting fees related to our compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Depreciation and amortization expense was $820,000 and $2.1 million for the three and nine months ended June 30, 2005, respectively, an increase of $78,000 (11%) and $375,000 (21%) as compared to $742,000 and $1.8 million for the three and nine months ended June 30, 2004, respectively. This increase arose primarily from our equipment finance operations which increased their operating lease assets owned to $4.7 million at June 30, 2005 from $532,000 at June 30, 2004. Our provision for possible losses decreased due to a recovery of $12,000 and a provision of $150,000 for the three and nine months ended June 30, 2005, respectively, from a provision of $182,000 and $582,000 for the three and nine months ended June 30, 2004, respectively. These decreases reflect primarily our decreased investment in our real estate loan portfolio and other real estate assets owned through the repayment of loans and property resolutions during the last twelve months. Interest expense was $863,000 and $2.2 million for the three and nine months ended June 30, 2005, respectively, an increase of $31,000 and a decrease of $2.2 million, as compared to $832,000 and $4.4 million for the three and nine months ended June 30, 2004, respectively. The decrease in interest expense for the nine months reflects the $1.4 million reduction of interest from the prior year redemption of our 12% senior notes and the repayment of other debt related to our real estate operations. At June 30, 2005, we owned a 15.1% and 36.1% limited partner interest in Structured Finance Fund, L.P. and Structured Finance Fund II, L.P., ("SFF"), respectively, limited partnerships formed to invest in the equity of CDO issuers we have formed. We also own a 50% interest in Structured Finance Management, LLC and Structured Finance Fund GP LLC, the manager and general partner, respectively, of SFF. As the general partner, we control the operations of SFF and, therefore, include it in our consolidated financial statements and reflect the ownership of the partners as a minority interest. For the three and nine months ended June 30, 2005, we recorded $415,000 and $1.2 million of minority interest related to these entities. As of June 30, 2004, these entities were not yet formed. 38 Other income, net, was $310,000 and $3.8 million for the three and nine months ended June 30, 2005, respectively, a decrease of $1.6 million and $2.8 million, as compared to $2.0 million and $6.6 million for the three and nine months ended June 30, 2004, respectively. During the nine months ended June 30, 2005 and 2004, we sold 105,000 and 597,700 shares, respectively, of RAIT and recorded gains of $1.5 million and $7.1 million, respectively. Dividend income from RAIT decreased by $838,000 to $10,000 for the nine months ended June 30, 2005 from $848,000 for the nine months ended June 30, 2004 as a result of these sales. As of June 30, 2005, we own approximately 5,600 shares of RAIT. The nine months ended June 30, 2004 reflected charges of $2.0 million related to the write-off of deferred finance costs and the premium paid on the redemption of our 12% senior notes. Our effective tax rate was 46% and 40% for the three and nine months ended June 30, 2005, respectively, a 12% and 6% increase as compared to the 34% effective rate for the three and nine months ended June 30, 2004. The increase in our tax rate results primarily from an increase in our state tax provision as a result of an increase in the pre-tax income of our continuing businesses. DISCONTINUED OPERATIONS In accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long Lived Assets," our decision to dispose of certain real estate investments and to spin-off Atlas America, our former energy subsidiary, resulted in the presentation of these operations as discontinued. On June 30, 2005, we distributed our remaining 10.7 million shares of Atlas America to our stockholders in the form of a tax free dividend. In addition, we classified three FIN 46 entities and three real estate properties owned as held for sale at June 30, 2005. We have reported their operations as discontinued. LIQUIDITY AND CAPITAL RESOURCES General. Our major sources of liquidity have historically been cash generated by operations of Atlas America, resolutions of real estate loans and investments, borrowings under our existing credit facilities and sales of our RAIT shares. We have employed these funds principally to expand our specialized asset management operations and to reduce our outstanding debt and in fiscal 2004, for the redemption of our senior notes. We expect to fund our asset management business from a combination of cash to be generated by operations, our working capital, and borrowings under our existing credit facilities. The following table sets forth our sources and uses of cash for the periods presented (in thousands):
NINE MONTHS ENDED JUNE 30, ------------------------------- 2005 2004 ----------- ----------- Used in operating activities of continuing operations...................... $ (46,107) $ (44,203) (Used in) provided by investing activities of continuing operations........ (12,277) 68,765 Provided by (used in) financing activities of continuing operations........ 38,445 (59,269) Provided by discontinued operations........................................ 22,915 59,092 Net cash retained by Atlas America......................................... (29,192) -- ----------- ----------- $ (26,216) $ 24,385 =========== ===========
We had $42.9 million in cash and cash equivalents at June 30, 2005 compared to $69.1 million at September 30, 2004. Our ratio of earnings from continuing operations before income taxes, minority interest and interest expense to fixed charges was 11.5 to 1.0 for the nine months ended June 30, 2005 as compared to 1.1 to 1.0 for the nine months ended June 30, 2004. Our working capital was $73.0 million as of June 30, 2005 as compared to $54.5 million at September 30, 2004. The increase of $22.1 million primarily reflected our reduction in current liabilities principally as a result of the spin-off of Atlas America. Our ratio of long-term debt (including current maturities) to equity was 39% and 50% at June 30, 2005 and September 30, 2004, respectively. 39 Cash Flows from Operating Activities. Net cash used in operating activities increased $1.9 million for the nine months ended June 30, 2005 to $46.1 million from $44.2 million for the nine months ended June 30, 2004, substantially as a result of the following: o changes in operating assets, liabilities and taxes accounted for $9.0 million use of cash, principally in connection with the purchase of a tenant-in-common or TIC interests offering sponsored by Resource Real Estate; offset in part by o a source of cash as a result of a $2.8 million decrease in net loss as adjusted to reconcile net income to net cash from operating activities; and o a decrease of $4.3 million in the cash used in our equipment finance operations. Cash Flows from Investing Activities. Net cash provided by our investing activities of continuing operations decreased by $81.0 million for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004, primarily as a result of the following: o in the nine months ended June 30, 2004, we received dividends from Atlas America of $52.1 million. No such dividends were received in the nine months ended June 30, 2005; o a $15.1 million increase in capital expenditures, of which $14.0 million related to the TIC; and o a decrease of $12.3 million in net proceeds received from the sale of shares we held of RAIT to $2.9 million for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004. Cash Flows from Financing Activities. Net cash provided by our financing activities of continuing operations increased by $97.7 million for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004. This increase in our cash flows is principally reflective of the following: o an increase in our borrowings, net of repayments, of $91.7 million in the nine months ended June 30, 2005, principally reflecting the redemption of $54.0 million of our outstanding senior notes during the nine months ended June 30, 2004; and o an increase of $4.3 million of additional proceeds from the issuance of common stock as a result of the exercise of employee stock options. Cash Flows from Discontinued Operations. Net cash provided by discontinued operations decreased by $65.4 million for the nine months ended June 30, 2005 as compared to the nine months ended June 30, 2004. This decrease included $29.2 million of cash retained by Atlas America in the spin-off of their business and a $25.9 million decrease in proceeds received from the resolution of real estate investments. We received $34.5 million principally from the sale of two FIN 46 assets offset by cash outlays for certain other discontinued assets in the nine months ended June 30, 2004 as compared to $8.6 million from the net proceeds received from the refinancing of a first mortgage on a FIN 46 property offset by cash outlays for other discontinued assets in the nine months ended June 30, 2004. Capital Requirements The amount of funds we must commit to investments in our real estate, equipment finance and financial fund management operations depends upon the level of funds raised through real estate, equipment finance and financial fund management programs. We believe cash flows from operations, cash and other working capital and amounts available under our real estate and equipment finance credit facilities will be adequate to fund our contribution to these programs. However, the amount of funds we raise and the level of our investments will vary in the future depending on market conditions. 40 CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following tables summarize our contractual obligations and commitments at June 30, 2005 (in thousands):
PAYMENTS DUE BY PERIOD ------------------------------------------------------ LESS THAN 1 - 3 4 - 5 AFTER 5 CONTRACTUAL CASH OBLIGATIONS: TOTAL 1 YEAR YEARS YEARS YEARS ----------- ---------- --------- --------- ---------- Long-term debt (1)..................... $ 29,086 $ 686 $ 2,253 $ 14,961 $ 11,186 Secured revolving credit facilities.... 45,625 45,625 -- -- -- Operating lease obligations............ 4,931 1,227 2,339 1,365 -- Capital lease obligations.............. 83 14 29 40 -- Unconditional purchase obligations..... -- -- -- -- -- Other long-term obligations............ -- -- -- -- -- ----------- ---------- --------- --------- ---------- Total contractual cash obligations..... $ 79,725 $ 47,552 $ 4,621 $ 16,366 $ 11,186 =========== ========== ========= ========= ==========
- -------------- (1) Not included in the table above are estimated interest payments calculated at rates in effect at June 30, 2005; Less than 1 year: $2.3 million; 1-3 years: $2.3 million; 4-5 years: $1.8 million and After 5 years; $655,000.
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD ------------------------------------------------------ LESS THAN 1 - 3 4 - 5 AFTER 5 OTHER COMMERCIAL COMMITMENTS: TOTAL 1 YEAR YEARS YEARS YEARS ----------- ---------- --------- --------- ---------- Standby letters of credit.............. $ -- $ -- $ -- $ -- $ -- Guarantees............................. 338 338 -- -- -- Standby replacement commitments........ 3,536 2,381 1,155 -- -- Other commercial commitments........... 327,230 3,607 68,206 68,996 186,421 ----------- ----------- ---------- --------- ---------- Total commercial commitments........... $ 331,104 $ 6,326 $ 69,361 $ 68,996 $ 186,421 =========== =========== ========== ========= ==========
Real estate investment partnerships in which we have general partner interests have obtained senior lien financing with respect to eleven properties. The senior liens are with recourse only to the properties securing them subject to certain standard exceptions, which we have guaranteed. These guarantees expire as the related indebtedness is paid down over the next ten years. In addition, property owners have obtained senior lien financing with respect to six of our real estate investments. The senior liens are with recourse only to the properties securing them subject to certain standard exceptions, which we have guaranteed. These guarantees expire as the related indebtedness is paid down over the next five years. 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 the 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. 41 For a detailed discussion on the application of policies critical to our business operations and other accounting policies, see our annual report on Form 10-K for fiscal 2004, at Note 2 of the "Notes to Consolidated Financial Statements." RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 154, "Accounting Changes and Error Corrections" ("SFAS 154"). SFAS 154 requires retrospective application to prior periods' financial statements of changes in accounting principles. It also requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather than being reported in an income statement. The statement will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of SFAS 154 will depend on the nature and extent of any voluntary accounting changes and correction of errors after the effective date, but management does not currently expect SFAS 154 to have a material impact on the Company's financial position or results of operations. In December 2004, the FASB issued a revision of SFAS 123, "Share-Based Payment" or SFAS 123-R which requires all share-based payments to employees to be recognized in the income statement based on their fair values. The Company's option grants to employees and directors, as well as any restricted stock awards represent share-based payments. SFAS 123-R supersedes Accounting Principles Board or APB Opinion 25, "Accounting for Stock Issued to Employees," and amends SFAS 95, "Statement of Cash Flows." SFAS 123-R is effective for the Company beginning with its fiscal year commencing October 1, 2005. The adoption of SFAS 123-R may have a material impact on its financial statements in that fiscal year, but cannot now reasonably estimate the impact of adoption because the Company expects certain assumptions that can materially effect the calculation of the value of share-based payments to recipients to change between now and the time of adoption. 42 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 following discussion is not meant to be a precise indicator of expected future losses, but rather an indicator 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. These risks can impact our results of operations, cash flows and financial position. We manage these risks through regular operating and financing activities. The following analysis presents the effect on our earnings, cash flows and financial position as if hypothetical changes in market risk factors occurred at June 30, 2005. We analyze only the potential impacts of hypothetical assumptions. Our analysis does not consider other possible effects that could impact our business. REAL ESTATE Portfolio Loans and Related Senior Liens. We believe that none of the four loans held in our portfolio as of June 30, 2005 (including loans treated in our consolidated financial statements as FIN 46 entities) is sensitive to changes in interest rates since: o the loans are subject to forbearance or other agreements that require all of the operating cash flow from the properties underlying the loans, after debt service on senior lien interests, to be paid to us and thus are not currently being paid based on the stated interest rates of the loans; o the senior lien interests ahead of our interests are at fixed rates and are thus not subject to interest rate fluctuation that would affect payments to us; and o each loan has significant accrued and unpaid interest and other charges outstanding to which cash flow from the underlying property would be applied even if cash flow were to exceed the interest due, as originally underwritten. FIN 46 Loans. Three loans we treat as FIN 46 liabilities upon adoption of FIN 46-R, and currently included in long-term debt, are at fixed interest rates and are thus not subject to interest rate fluctuations. Mortgage payable tenant-in-common interest. This mortgage is at a fixed rate and thus not subject to interest rate fluctuations. EQUIPMENT FINANCE At June 30, 2005, the amount outstanding on the $45.0 million LEAF credit facility with National City Bank was $39.8 million at a weighted average interest rate of 5.7% while the amount outstanding on its $15.0 million credit facility with Commerce Bank was $5.8 million at a weighted average interest rate of 5.9%. A hypothetical 10% change in the weighted average interest rates on these facilities would change our annual net income by approximately $110,000. 43 ITEM 4. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports required under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Under the supervision of our Chief Executive Officer and Chief Financial Officer and with the participation of our disclosure committee appointed by such officers, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level. There have been no significant changes in our internal controls over financial reporting that have partially affected, or are reasonably likely to materially affect, our internal control over financial reporting during our most recent fiscal quarter. 44 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Stockholders held on May 11, 2005, the stockholders of the Company elected two directors of the Company and approved the adoption of the Resource America, Inc. 2005 Omnibus Equity Compensation Plan. The stockholders voted 7,338,137 shares for, 3,471,684 shares against, and 59,264 shares abstained for the Plan adoption. Mr. Edward E. Cohen and Mr. Carlos C. Campbell were elected to serve as directors at the meeting. The voting results were 14,864,576 shares for and 1,742,079 shares withheld for Mr. Cohen and 16,323,875 shares for and 282,870 shares withheld for Mr. Campbell. Messrs. Michael J. Bradley, Jonathan Z. Cohen, Kenneth A. Kind, Andrew M. Lubin and John S. White continue to serve their terms as directors. ITEM 6. 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 Fourth Modification, dated June 30, 2005, of Revolving Credit Agreement, Revolving Credit Loan and Security Agreement dated July 27, 1999 by and between Resource Properties, Inc., Resource Properties 53, Inc., Resource Properties XXIV, Inc., Resource Properties XL, Inc. and Sovereign Bank. 10.2(a) Seventh Amendment dated March 18, 2005, to Revolving Credit Agreement and Assignment Revolving Credit Agreement and Assignment between LEAF Financial Corporation and National City Bank, and related guaranty of Resource America, Inc., dated June 11, 2002. 10.2(b) Second Amendment to Guaranty of Payment Dated March 2005 between Resource America, Inc. and National City Bank. 10.2(c) Eighth Amendment to Revolving Credit Agreement and Assignment dated June 29, 2005. 10.15 2005 Equity Compensation Plan. (2) 31.1 Certification Pursuant to Rule 13a-15(e)/15(d) - 15 (e). 31.2 Certification Pursuant to Rule 13a-15(e)/15(d) - 15 (e). 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. - ----------- (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 as an exhibit to our Proxy Statement on Schedule 14A on April 11, 2005 and by this reference incorporated herein. 45 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RESOURCE AMERICA, INC. (REGISTRANT) Date: August 9, 2005 By: /s/ Steven J. Kessler --------------------- STEVEN J. KESSLER Executive Vice President and Chief Financial Officer Date: August 9, 2005 By: /s/ Arthur J. Miller -------------------- ARTHUR J. MILLER Vice President and Chief Accounting Officer 46 EX-10 2 exh10-1.txt EXHIBIT 10.1 FOURTH MODIFICATION OF REVOLVING CREDIT LOAN AND SECURITY AGREEMENT AND OTHER LOAN DOCUMENTS THIS LOAN MODIFICATION AGREEMENT (the "MODIFICATION") made this 30th day of June, 2005 by and among RESOURCE AMERICA, INC. ("RAI"), RESOURCE PROPERTIES XXIV, INC. ("RPI XXIV"), RESOURCE PROPERTIES XL, INC. ("RPI XL"), RESOURCE PROPERTIES XXX, INC. ("RPI XXX") and RESOURCE PROPERTIES XXXI, INC. ("RPI XXXI"), each a Delaware corporation (collectively, the "BORROWERS"), and SOVEREIGN BANK, a federal banking association, having an address of 1500 Market Street, Suite 1420, Philadelphia, Pennsylvania 19102 ("BANK" or "LENDER"). BACKGROUND A. Resource Properties, Inc., which merged into RAI on June 29, 2005, RPI XXIV, RPI XL, and Resource Properties 53, Inc. ("RPI 53") (the "ORIGINAL BORROWERS") and the Bank entered into a certain Revolving Credit Loan and Security Agreement dated July 27, 1999 (the "ORIGINAL LOAN AGREEMENT") wherein the Original Borrowers established a line of credit loan facility with the Bank in the amount of Fifteen Million Dollars ($15,000,000) (the "LOAN"). B. As security for the obligations of Original Borrowers under the Loan Documents, RPI XL granted to Lender that certain Leasehold Mortgage and Security Agreement (the "LEASEHOLD MORTGAGE") with regard to the real estate known as Factors Walk - Phase Two, Savannah, Georgia (the "REAL ESTATE"). C. Original Borrowers, and Bank entered into that certain Modification of Revolving Credit Loan and Security Agreement dated March 30, 2000 (the "FIRST MODIFICATION"), whereby, inter alia, the principal amount of the Loan was increased to Eighteen Million Dollars ($18,000,000). D. To evidence the revised Loan in the amount of $18,000,000, Original Borrowers executed and delivered to Bank that certain Replacement Line Note dated March 30, 2000, in the amount of $18,000,000 (the "NOTE"). E. Original Borrowers, RPI XXX, RPI XXXI, and Bank entered into that certain Second Modification of Revolving Credit Loan and Security Agreement and Modification of Other Loan Documents dated April 30, 2002 (the "SECOND MODIFICATION"), whereby RPI 53 requested that Bank release it from its obligations under the Loan and release certain collateral related to RPI 53's obligations (the "RPI 53 COLLATERAL") and then to substitute RPI XXX and RPI XXXI as additional makers under the Note and add additional collateral owned by RPI XXX and RPI XXXI to the security for the Loan (the "ADDITIONAL COLLATERAL"), in accordance with the terms therein. E. RPI, Original Borrowers RPI XXX, RPI XXXI, RPI XXIV, RPI XL and Bank entered into that certain Third Modification of Revolving Credit Loan and Security Agreement dated September 15, 2003 (the "THIRD MODIFICATION") whereby the term of the Loan was extended until July 27, 2005. -1- F. The Note, the Loan Agreement, the Mortgage and all the documents, instruments and undertakings evidencing or securing the Loan, as modified hereby and by the First Modification, Second Modification and Third Modification (collectively, the "OTHER MODIFICATIONS"), are hereinafter collectively referred to as the "LOAN DOCUMENTS"). All capitalized terms used but not defined herein shall have the meaning given to such terms in the Loan Agreement. G. Borrowers have requested that Bank (i) extend the term of the Loan, (ii) release RPI XXIV from its obligations under the Loan Documents and (iii) acknowledge that by operation of law, since Resource Properties, Inc., which was a Borrower, merged into RAI, RAI is now a Borrower under the Loan Documents, which Bank has agreed to do, on the terms and conditions as more fully set forth herein. AGREEMENT --------- NOW THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions. As used in this Agreement, all capitalized terms shall have the respective meanings provided therefor herein or, in absence of such provision, the respective meanings provided therefor in the Loan Documents. Without limiting the foregoing: (a) References in the Loan Documents to the "Mortgage" shall mean and include the Mortgage, as modified by this Agreement and the Other Modifications. (b) References in the Loan Documents to the "Loan Agreement" shall mean and include the Loan Agreement as modified by this Agreement and the Other Modifications. (c) References in the Loan Documents to the "Note" shall mean and include the Note as modified by this Agreement and the Other Modifications. (d) References in the Loan Documents to the "Loan Documents" shall mean and include the Loan Documents as modified by this Agreement and the Other Modifications. (e) References in the Loan Documents to the Collateral shall mean and include the Collateral, as defined therein, and any Additional Collateral. (f) References in the Loan Documents to the terms "Borrowers" shall mean and include RAI, RPI XXX, RPI XL, and RPI XXXI. (g) The term "Obligations" as used herein shall mean any and all Obligations of the Borrowers, or any of them, under the Note, the Mortgage, the Loan Agreement, the Collateral Documents and any other Loan Document. -2- 2. Confirmation of Indebtedness. (a) Borrowers hereby confirm, acknowledge, and agree that as of the date hereof, the outstanding principal balance of the Note is $0. Borrowers further acknowledge and agree that the foregoing principal balance from the date stated is validly and duly owing by Borrowers to Bank. (b) Borrowers hereby confirm, acknowledge, and agree that as of the date hereof, the Borrowing Base is $9,668,000. (c) RAI, RPI XXX, RPI XL, and RPI XXXI (collectively the "REMAINING BORROWERS") hereby ratify, confirm and acknowledge that (i) the Note, the Mortgage, and the other Loan Documents are each in full force and effect as of the date hereof, (ii) the Note, the Mortgage and the other Loan Documents constitute valid and legally binding obligations of the Remaining Borrowers, (iii) no event of default, or event which if continuing would constitute an Event of Default, has occurred under the Loan Documents, and (iv) the Loan Documents are enforceable against the Remaining Borrowers and its assets in accordance with their respective terms. (d) Not by way of limitation of anything herein or in the Loan Documents, RAI hereby agrees to be bound by the Note, the Loan Agreement and other Loan Documents, as if it was an original signatory thereto and a Borrower (as applicable) listed therein, and RAI agrees to comply with all covenants set forth in the Loan Documents and hereby sets forth its agreement to the remedies and rights granted to Bank therein. (e) In order to induce Bank to enter into this Modification, the Remaining Borrowers hereby reaffirm the various representations and warranties made by the Original Borrowers in the Loan Documents, as if such representations and warranties were made as of this date and set forth fully herein. In order to induce Bank to enter into this Modification, the Remaining Borrowers each hereby represents and warrants to Bank that all representations and warranties made by the Original Borrowers in the Loan Documents are hereby made by the Remaining Borrowers on and as of the date hereof. Not by way of limitation of the foregoing, Remaining Borrowers hereby further represent and warrant that: (i) RAI is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full power and authority to execute, deliver and comply with this Modification and the other Loan Documents, and to carry on its business as it is now being conducted and is duly licensed or qualified as a foreign corporation in good standing in each jurisdiction in which the character or location of the properties owned by it or the business transacted by it requires such licensing or qualification. (ii) The execution and delivery by RAI and the other Borrowers of this Modification and of the consummation of the transactions contemplated by the Loan Documents and this Modification and the fulfillment and compliance with the respective terms, conditions and -3- provisions of the Loan Documents: (a) have been duly authorized by all requisite corporate action of Borrowers, (b) will not conflict with or result in a breach of, or constitute a default (or might, upon the passage of time or the giving of notice or both, constitute a default) under, any of the terms, conditions or provisions of (i) any applicable statute, law, rule, regulation or ordinance, (ii) any Borrowers' articles of incorporation or bylaws, (iii) any indenture, mortgage, loan or credit agreement or instrument to which any of the Borrowers is a party or by which any of them may be bound or affected, or (iv) any judgment or order of any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, and (c) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of any of the Borrowers under the terms or provisions of any such agreement or instrument, except liens in favor of Bank. (iii) This Modification has been duly executed by each of the Remaining Borrowers and delivered to Bank, and this Modification and other documents and instruments required hereby or executed in connection herewith constitute legal, valid and binding obligations of such parties, enforceable in accordance with their respective terms. (iv) None of the Remaining Borrowers is in violation of its respective articles of organization or bylaws, nor is any such party in default in the performance or observance of any of its respective obligations, covenants or conditions contained in any indenture or other agreement creating, evidencing or securing any Indebtedness or pursuant to which any such Indebtedness is issued, nor is any of the Remaining Borrowers in violation of or in default under any other agreement or instrument or any judgment, decree, order, statute, rule or governmental regulation, applicable to any of them or by which any of their properties may be bound or affected. (v) There are no actions, suits or proceedings pending or, to the best of any of the Remaining Borrowers' knowledge, threatened against any of the Remaining Borrowers, or any properties of any of them before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to any Borrower, would have a material adverse effect on such Remaining Borrower's financial or operating condition. (vi) No authorization, consent, approval, license, exemption or any other action by and no registration, qualification or filing with any governmental agency or authority is or will be necessary in connection with the execution, delivery and performance of this Modification or any other document or instrument required hereby by any of the Remaining Borrowers. (vii) On and as of the date of this Modification, to the best of any of the Remaining Borrowers' knowledge, there has occurred no default or Event of Default under the Note or any other Loan Document and no event which with notice or lapse of time or both would, if unremedied, be a default or Event of Default under the Note or other Loan Document. -4- (f) Each of the Remaining Borrowers hereby ratify and confirm that it is fully obligated under the Loan Documents and that the Loan Documents remain in full force and effect as modified hereby. The Loan Documents, AND THE WARRANTS OF ATTORNEY TO CONFESS JUDGMENT CONTAINED IN THE NOTE AND ANY OF THE OTHER LOAN DOCUMENTS, extend to and secure the payment of the obligations of the Remaining Borrowers under the Loan Documents (the "OBLIGATIONS"), as modified by this Agreement. Each of the Loan Documents remains in full force and effect, as modified by this Agreement and, along with the Premises and the other Collateral, AND THE WARRANTS OF ATTORNEY TO CONFESS JUDGMENT CONTAINED IN THE NOTE AND ANY OF THE OTHER LOAN DOCUMENTS, extend to and continue to evidence and secure the Obligations as modified by this Agreement and the Loan Documents. To the extent required in order to achieve the intent of this Agreement, this Agreement shall be deemed to modify each of the Loan Documents. (g) BORROWERS HEREBY CONFIRM AND AGREE THAT THEY HAVE NO CLAIM, CAUSE OF ACTION, DEFENSE, SET-OFF, COUNTERCLAIM OR CHALLENGE OF ANY KIND OR NATURE WHATSOEVER AGAINST THE PAYMENT OF ANY OF THE SUMS OWING UNDER THE NOTE OR THE TERMS OF THE OTHER LOAN DOCUMENTS OR THE ENFORCEMENT OR VALIDITY OF THE NOTE OR THE OTHER LOAN DOCUMENTS, AND DO HEREBY REMISE, RELEASE AND FOREVER DISCHARGE ANY AND ALL SUCH CLAIMS, CAUSES OF ACTION, DEFENSES, SET-OFFS, COUNTERCLAIMS OR CHALLENGES. 3. Amendment to Note. Remaining Borrowers and Lender hereby acknowledge and agree that the term "Borrower" under the Note shall mean all of the Remaining Borrowers, each of which hereby assumes, on a joint and several basis, all obligations of "Borrower" thereunder and is otherwise obligated thereunder as if it were an original signatory thereto. The Remaining Borrowers hereby agree that they are, or remain, as the case may be, bound by the warrant of attorney to confess judgment as set forth in the Note. The Remaining Borrowers hereby confirm that they have agreed to be bound by the foregoing after receiving advice from counsel of their choosing with regard to the same and further confirm that their agreement to be so bound is based on a knowing, voluntary and intelligent decision. 4. Amendment to the Loan Agreement. (a) The following definitions in the Loan Agreement shall be amended as indicated below: (i) The term "Borrower" as defined in the Loan Agreement shall mean the Remaining Borrowers. (ii) The term "Expiration Date" in Section 1.1 of the Loan Agreement shall be July 27, 2006. -5- (b) Section 6.1 of the Loan Agreement and Schedule 6.1 referred to therein are hereby deleted in their entirety. (c) Section 6.7 of the Loan Agreement and Schedule 6.7 referred to therein are hereby deleted in their entirety and replaced with the following: "6.7 LIENS. Borrower shall not create, incur or permit to exist any mortgage, pledge, encumbrance, lien, security interest or charge of any kind (including liens or charges upon properties acquired or to be acquired under conditional sales agreements or other title retention devices) on any of the Collateral or any other property securing the obligations of any Obligor to Lender, whether now owned or hereafter acquired, or upon any income, profits or proceeds therefrom." (d) The last two sentences of Section 6.16 of the Loan Agreement and Schedule 6.16 referred to therein are hereby deleted in their entirety. 5. Conditions Precedent. The obligation of Bank to effect the modifications and agreements contained herein is subject to the conditions precedent that: (a) There has been no material adverse change in the financial or operating condition of the Remaining Borrowers since the date of the last submission of financial statements to Bank. (b) Remaining Borrowers shall have paid Bank's counsel fees incurred in connection with this Modification. (c) Bank shall have received all of the following documents, each of which shall be in form and substance satisfactory to Bank: (i) Copies, certified in writing by the secretaries or assistant secretaries of the Remaining Borrowers, of (a) resolutions of its boards of directors evidencing approval of this Modification and the other matters contemplated hereby, and (b) each document evidencing other necessary action and approvals, if any, with respect to this Modification; (ii) Written certificates by the secretaries or assistant secretaries of the Remaining Borrowers as to the names and signatures of its officers who are authorized to sign this Modification, and the other documents or certificates to be executed and delivered by it pursuant hereto; (iii) Evidence satisfactory to Bank that each of the Remaining Borrowers' Articles of Incorporation and Bylaws delivered to Bank on or about July 27, 1999 or April 30, 2002, as applicable, have not been amended in any way (or if they have been amended, the nature of such amendment) and are in full force and effect; -6- (iv) A fully executed copy of this Modification; and (v) Good standing certificate with respect to each of the Remaining Borrower issued by the Secretary of the State of the State of Delaware; (vi) A bringdown of the previous title report; (vii) Such other documents as Bank may reasonably request in connection with this Modification. (d) Remaining Borrowers shall have paid to Lender an extension fee of $________. (e) Exhibit "B" to the Loan Agreement shall be replaced with Exhibit "A" attached hereto. Schedules 5.3, 5.4, 5.7, 5.13, 5.18, and 5.22 to the Loan Agreement shall be replaced with the schedules attached hereto of the same numbers to reflect the inclusion of RAI as a Borrower. 6. Reaffirmation of Loan Documents, Accommodations and Collateral. Remaining Borrowers hereby ratify and confirm that each of them is fully obligated under the Loan Documents and that the Loan Documents remain in full force and effect as modified hereby. The Mortgage and the other Loan Documents shall remain in full force and effect and shall be deemed hereby to extend to and secure the Obligations, including without limitation those created under this Modification. To the extent required in order to achieve the intent of this Modification, this Modification shall be deemed to modify each of the Loan Documents and, along with the Real Estate, collateral, and any other collateral pledged or granted to Lender as security for the Obligations, or any of them, extend to and continue to evidence and secure the Loan Documents and the Obligations as modified by this Modification. 7. Miscellaneous. (a) Paragraph headings used in this Modification are for convenience only and shall not affect the construction of this Modification. (b) From time to time, Remaining Borrowers will execute and deliver to Bank such additional documents and will provide such additional information as Bank may reasonably require, to carry out the terms of this Modification. (c) Remaining Borrowers hereby indemnify, hold harmless, and upon request will defend Bank and its shareholders, officers, directors, employees, attorneys and agents, and their respective successors and assigns (collectively, the "Indemnified Parties") from and against any and all claims and liabilities to third parties, and will pay and reimburse to the Indemnified Parties all losses, payments, reasonable costs and expenses associated therewith, or with Bank's defense (including without limitation reasonable attorneys fees) which Bank may suffer, incur or be exposed to by reason of or in connection with or rising out of (i) the transactions evidenced by or referred to in or related to this Modification or any of the Loan Documents, as modified by this -7- Modification; and (ii) any actions or omissions of any one or more of the Indemnified Parties which conforms with the terms of this Modification or the Loan Documents, or is in good faith and connected therewith or with the enforcement thereof; provided, however, that the Indemnified Parties shall not be indemnified, defended or held harmless for any consequential or indirect losses or damages, or any losses or damages which were caused by the Indemnified Parties' willful misconduct or gross negligence. The provisions of this paragraph shall survive any cancellation, satisfaction, termination or modification of this Modification, the Note, the Mortgage, any other Loan Document, and the repayment of the Loan. (d) This Modification shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. (e) Remaining Borrowers shall pay all costs and expenses of Bank in connection with the preparation, execution, delivery, administration and enforcement of this Modification (including title charges and the fees and out-of-pocket costs of counsel with respect hereto). (f) This Modification may be signed in counterparts, all of which when taken together shall constitute one and the same instrument. (g) REMAINING BORROWERS ACKNOWLEDGE THAT THE NOTE AND OTHER LOAN DOCUMENTS CONTAIN AUTHORIZATIONS TO CONFESS JUDGMENT AGAINST BORROWERS, THAT AT THE TIME ORIGINAL BORROWERS EXECUTED THE NOTE AND THE OTHER LOAN DOCUMENTS BORROWERS CONSULTED, AND IN CONNECTION WITH THE EXECUTION OF THIS MODIFICATION AND THE EXECUTION OF THE DOCUMENTS AND INSTRUMENTS REQUIRED HEREBY HAVE CONSULTED LEGAL COUNSEL WITH RESPECT THERETO AND THAT BORROWERS UNDERSTAND (AND AT THE TIME BORROWERS EXECUTED THE NOTE AND OTHER LOAN DOCUMENTS BORROWERS UNDERSTOOD) THAT THE EXERCISE BY BANK OF THE AUTHORIZATIONS WILL RESULT IN THE ENTRY OF A JUDGMENT AGAINST BORROWERS AND THE SALE OR ATTACHMENT OF OR EXECUTION UPON BORROWERS' PROPERTY (INCLUDING WITHOUT LIMITATION REAL PROPERTY, PERSONAL PROPERTY AND BANK ACCOUNTS) WITHOUT PRIOR NOTICE OR THE OPPORTUNITY FOR A HEARING. SIGNATURE LINES FOLLOW ON NEXT PAGE. -8- IN WITNESS WHEREOF, the parties hereto have executed this Modification as of the date written above. Witness/Attest: BORROWERS: RESOURCE AMERICA, INC., a Delaware corporation ______________________________ By:________________________________ Alan F. Feldman, Senior Vice President RESOURCE PROPERTIES XXIV, INC., a Delaware corporation ______________________________ By:________________________________ Alan F. Feldman, President RESOURCE PROPERTIES XL, INC., a Delaware corporation ______________________________ By:________________________________ Alan F. Feldman, President RESOURCE PROPERTIES XXX, INC., a Delaware corporation ______________________________ By:________________________________ Alan F. Feldman, President RESOURCE PROPERTIES XXXI, INC., a Delaware corporation ______________________________ By:________________________________ Alan F. Feldman, President -9- BANK: SOVEREIGN BANK, a federal banking association Attest: ________________________ By:____________________________________ Name: Title: -10- STATE OF : : SS COUNTY OF : BE IT REMEMBERED, that on this _______ day of ___, 2005, personally came before me, the Subscriber, a Notarial Officer for the State and County aforesaid, Alan F. Feldman, the Senior Vice President of RESOURCE AMERICA, INC., and the President of RESOURCE PROPERTIES XXIV, INC., RESOURCE PROPERTIES XL, INC., RESOURCE PROPERTIES XXX, INC., and RESOURCE PROPERTIES XXXI, INC., each a Delaware corporation, each existing under the laws of the State of Delaware, party to this instrument, known to me personally to be such, and acknowledged this instrument to be the act and deed of the aforesaid corporations, that the signature of the officer thereto is in his own proper handwriting, and that his act of sealing, executing, acknowledging and delivering said instrument was duly authorized by the aforesaid corporations. IN WITNESS WHEREOF, I have hereunto set may hand and official seal. _____________________________ Notary Public -11- STATE OF : : SS COUNTY OF : On this _____ day of _________, 2005, before me, a Notary Public, personally appeared Richard J. Narkiewicz, who acknowledged that he is Vice President of SOVEREIGN BANK, and that he being authorized to do so as such officer, executed the foregoing instrument for the purposes therein contained.. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. _____________________________ Notary Public My Commission Expires: -12- EX-10 3 exh10-2a.txt EXHIBIT 10-2A SEVENTH AMENDMENT TO REVOLVING CREDIT AGREEMENT AND ASSIGNMENT THIS SEVENTH AMENDMENT TO REVOLVING CREDIT AGREEMENT AND ASSIGNMENT (this "Seventh Amendment") is made as of March __, 2005, by and among LEAF FINANCIAL CORPORATION, a Delaware corporation with offices at 1845 Walnut Street, 10th Floor, Philadelphia, Pennsylvania 19103 ("Leaf Financial") and LEAF FUNDING, INC., a Delaware corporation with offices at 110 S. Poplar Street, Suite 101, Wilmington, Delaware 19801 ("Leaf Funding", and together with Leaf Financial, each a "Debtor" and, collectively, the "Debtors") and NATIONAL CITY BANK, a national banking association with offices at One South Broad Street, 14th Floor, Philadelphia, Pennsylvania 19107 ("Secured Party"). BACKGROUND ---------- A. On June 11, 2002, Leaf Financial and Secured Party entered into that certain Revolving Credit Agreement and Assignment (the "Credit Agreement"), pursuant to which Secured Party promised from time to time to make loans to Leaf Financial, evidenced by a master note of even date therewith. B. On April 1, 2003, the Credit Agreement was amended to add Leaf Funding as a debtor pursuant to a Second Amendment to the Credit Agreement of even date therewith. The Credit Agreement has thereafter been amended from time to time. C. Debtors and Secured Party mutually desire to further amend the Credit Agreement and are entering into this Seventh Amendment to set forth their entire understanding and agreement with respect thereto. AGREEMENT --------- NOW THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree that the Credit Agreement is further amended as follows: A. Amendments. The Credit Agreement is hereby amended in the following respects effective as of the date hereof: 1. The "Commitment" amount described in Section 1(a) of the Credit Agreement is hereby increased up to an aggregate principal amount of Forty-Five Million Dollars ($45,000,000). The Commitment amount prior to the execution of this Seventh Amendment was Twenty Million Dollars ($20,000,000), therefore this Seventh Amendment increases the Commitment amount Twenty-five Million Dollars ($25,000,000). For purposes of this Seventh Amendment, this additional Twenty-five Million Dollars shall be referred to as the "Additional Commitment." 2. The "Commitment Termination Date" described in Section 1(a) of the Credit Agreement shall occur on June 30, 2005, unless earlier terminated pursuant to the terms of the Credit Agreement. 3. The definition of "Borrowing Base" in Section 11 of the Credit Agreement is hereby amended and restated as follows: "Borrowing Base" shall mean the lesser of (i) ninety percent (90%) of the present value of the cash flow stream from the underlying leases or (ii) the original underlying lease amount. 4. The first sentence of subsection 1(d)(i) of the Credit Agreement is hereby amended and restated as follows: The interest rate applicable to the Loans will be determined and adjusted using either (A) the "PRIME RATE" (as defined below) plus one percent (1%) per annum and interest on such Loans shall be the Prime Rate of the Secured Party announced in Cleveland, Ohio or (B) LIBOR plus two and one-quarter percent (2.25%) per annum. B. Use of Loans from Additional Commitment. Debtors hereby agree that the Loans from the Additional Commitment shall be used principally to provide bridge financing for Debtors' acquisition of the lease assets of Allco Enterprises Inc., and to pay any and all fees and expenses in connection with such acquisition. Thereafter, the Additional Commitment shall be available to Debtors to fund working capital, lease originations and other general corporate purposes in the reasonable discretion of Debtors. C. Consent. Secured Party hereby consents to the foregoing Amendments and waives all prohibitions thereto in the Credit Agreement. Such consent and waiver does not, however, constitute a waiver to any future actions prohibited by the Credit Agreement. D. General Provisions. 1. Except as expressly set forth herein, the Credit Agreement remains unmodified and will continue in full force and effect. The parties hereto will construe all other provisions of the Credit Agreement to give effect to the provisions hereof. 2. This Seventh Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their nominees, successors and assigns. 3. This Seventh Amendment may be executed in any number of counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all parties have not signed the same counterpart. 2 4. This Seventh Amendment, once executed by a party, may be delivered to the other parties hereto by facsimile transmission of a copy of this Seventh Amendment bearing the signature of the party so delivering this Seventh Amendment. Confirmation of execution by electronic transmission of a facsimile signature page shall be binding upon any party so confirming. 5. This Seventh Amendment shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. [SIGNATURES APPEAR ON FOLLOWING PAGE] 3 IN WITNESS WHEREOF, the parties have executed and delivered this Seventh Amendment to Revolving Credit Agreement and Assignment as of the date first above written. DEBTORS: -------- Address for Notices: LEAF FINANCIAL CORPORATION, a - -------------------- Delaware corporation 1845 Walnut Street, 10th Floor Philadelphia, PA 19103 By: ____________________________________ Miles Herman, President Address for Notices: LEAF FUNDING, INC., a Delaware - -------------------- corporation c/o Leaf Financial Corporation 1845 Walnut Street, 10th Floor Philadelphia, PA 19103 By: ____________________________________ Miles Herman, Senior Vice President SECURED PARTY: -------------- NATIONAL CITY BANK, a national banking association By:______________________________________ Name: Title: 4 EX-10 4 exh10-2b.txt EXHIBIT 10-2B SECOND AMENDMENT TO GUARANTY OF PAYMENT THIS SECOND AMENDMENT TO GUARANTY OF PAYMENT (this "Second Amendment") is made and entered into as of March ____, 2005, by RESOURCE AMERICA, INC., a Delaware corporation ("Guarantor") for the benefit of NATIONAL CITY BANK, a national banking association ("Secured Party"). BACKGROUND ---------- A. Guarantor has heretofore executed and delivered to Secured Party its Guaranty of Payment, dated June 11, 2002 (the "Guaranty"), pursuant to which Guarantor unconditionally guaranteed to Secured Party the indefeasible payment, performance and satisfaction when due of all Obligations (as defined in the Guaranty) of Leaf Financial Corporation ("Leaf Financial") arising out of that certain Revolving Credit Agreement and Assignment of even date therewith, between Leaf Financial and Secured Party (the "Credit Agreement"). B. On April 1, 2003, Leaf Funding, Inc. was added as a Borrower (as defined in the Credit Agreement) under the Credit Agreement. C. On June 30, 2004, Guarantor executed and delivered to Secured Party a First Amendment to the Guaranty. D. Guarantor and Secured Party mutually desire to amend the Guaranty and are entering into this Second Amendment to set forth their entire understanding and agreement with respect thereto. AGREEMENT --------- NOW THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree that the Guaranty is amended as follows: A. Amendment of "Guaranteed Debt" Definition. The definition of "Guaranteed Debt" in Section 1 of the Guaranty is hereby amended and restated as follows: guaranteed debt means, collectively, the principal of and interest from time to time accruing on any and all indebtedness owed by Borrower to Bank pursuant to a Revolving Credit Agreement, dated as of June 11, 2002, as amended, between Borrower and Bank providing for revolving credit in the maximum aggregate amount of $45,000,000 (the "Revolving Credit Agreement"), and all fees and other liabilities, if any, incurred by Borrower and owing to Bank under such Revolving Credit Agreement and includes (without limitation) every such advance or other liability even if the same be obtained during the existence of any default by Borrower or during Guarantor's incompetence, insolvency or liquidation, and each renewal or extension, if any, of the foregoing or any thereof in whole or in part; B. General Provisions. 1. By its execution hereinbelow, the Guarantor hereby affirms, confirms and reaffirms, on and as of the date hereof, the Guaranty and agrees that such Guaranty remains in full force and effect, as amended by this Second Amendment. 2. This Second Amendment, once executed, may be delivered by facsimile transmission of a copy of this Second Amendment bearing the signature of the party so delivering this Second Amendment. [SIGNATURE APPEARS ON FOLLOWING PAGE] 2 IN WITNESS WHEREOF, Guarantor has executed and delivered this Second Amendment to the Guaranty as of the date first above written. RESOURCE AMERICA, INC. By: _____________________ Name: Title: 3 EX-10 5 exh10-2c.txt EXHIBIT 10-2C EIGHTH AMENDMENT TO REVOLVING CREDIT AGREEMENT AND ASSIGNMENT THIS EIGHTH AMENDMENT TO REVOLVING CREDIT AGREEMENT AND ASSIGNMENT (this "Eighth Amendment") is made as of June __, 2005, by and among LEAF FINANCIAL CORPORATION, a Delaware corporation with offices at 1845 Walnut Street, 10th Floor, Philadelphia, Pennsylvania 19103 ("Leaf Financial") and LEAF FUNDING, INC., a Delaware corporation with offices at 110 S. Poplar Street, Suite 101, Wilmington, Delaware 19801 ("Leaf Funding", and together with Leaf Financial, each a "Debtor" and, collectively, the "Debtors") and NATIONAL CITY BANK, a national banking association with offices at One South Broad Street, 14th Floor, Philadelphia, Pennsylvania 19107 ("Secured Party"). BACKGROUND ---------- A. On June 11, 2002, Leaf Financial and Secured Party entered into that certain Revolving Credit Agreement and Assignment (the "Credit Agreement"), pursuant to which Secured Party promised from time to time to make loans to Leaf Financial, evidenced by a master note of even date therewith. B. On April 1, 2003, the Credit Agreement was amended to add Leaf Funding as a debtor pursuant to a Second Amendment to the Credit Agreement of even date therewith. The Credit Agreement has thereafter been amended from time to time. C. Debtors and Secured Party mutually desire to further amend the Credit Agreement and are entering into this Eighth Amendment to set forth their entire understanding and agreement with respect thereto. AGREEMENT --------- NOW THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree that the Credit Agreement is further amended as follows: A. Amendment. The Credit Agreement is hereby amended to provide that the "Commitment Termination Date" described in Section 1(a) of the Credit Agreement shall occur on September 30, 2005, unless earlier terminated pursuant to the terms of the Credit Agreement. B. Consent. Secured Party hereby consents to the foregoing Amendment and waives all prohibitions thereto in the Credit Agreement. Such consent and waiver does not, however, constitute a waiver to any future actions prohibited by the Credit Agreement. C. General Provisions. 1. Except as expressly set forth herein, the Credit Agreement remains unmodified and will continue in full force and effect. The parties hereto will construe all other provisions of the Credit Agreement to give effect to the provisions hereof. 2. This Eighth Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their nominees, successors and assigns. 3. This Eighth Amendment may be executed in any number of counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all parties have not signed the same counterpart. 4. This Eighth Amendment, once executed by a party, may be delivered to the other parties hereto by facsimile transmission of a copy of this Eighth Amendment bearing the signature of the party so delivering this Eighth Amendment. Confirmation of execution by electronic transmission of a facsimile signature page shall be binding upon any party so confirming. 5. This Eighth Amendment shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. [SIGNATURES APPEAR ON FOLLOWING PAGE] 2 IN WITNESS WHEREOF, the parties have executed and delivered this Eighth Amendment to Revolving Credit Agreement and Assignment as of the date first above written. DEBTORS: Address for Notices: LEAF FINANCIAL CORPORATION, a - -------------------- Delaware corporation 1845 Walnut Street, 10th Floor Philadelphia, PA 19103 By: ____________________________________ Miles Herman, President Address for Notices: LEAF FUNDING, INC., a Delaware - -------------------- corporation c/o Leaf Financial Corporation 1845 Walnut Street, 10th Floor Philadelphia, PA 19103 By: ____________________________________ Miles Herman, Senior Vice President SECURED PARTY: -------------- NATIONAL CITY BANK, a national banking association By:______________________________________ Name: Title: 3 EX-31 6 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION I, Jonathan Z. Cohen, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended June 30, 2005 of Resource America, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) [Omission in accordance with SEC Release Nos. 33-8238 and 33-8392 for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) [Omitted in accordance with SEC Release Nos. 33-8238 and 33-8392]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Jonathan Z. Cohen ------------------------------------------ Jonathan Z. Cohen Chief Executive Officer August 9, 2005 EX-31 7 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION I, Steven J. Kessler, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended June 30, 2005 of Resource America, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) [Omission in accordance with SEC Release Nos. 33-8238 and 33-8392 for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) [Omitted in accordance with SEC Release Nos. 33-8238 and 33-8392]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Steven J. Kessler ---------------------------------------------------- Steven J. Kessler Executive Vice President and Chief Financial Officer August 9, 2005 EX-32 8 ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Resource America, Inc. (the "Company") on Form 10-Q for the quarterly period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jonathan Z. Cohen, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jonathan Z. Cohen ------------------------------------------ Jonathan Z. Cohen Chief Executive Officer August 9, 2005 EX-32 9 ex32-2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Resource America, Inc. (the "Company") on Form 10-Q for the quarterly period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven J. Kessler, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Steven J. Kessler ---------------------------------------------------- Steven J. Kessler Executive Vice President and Chief Financial Officer August 9, 2005 -----END PRIVACY-ENHANCED MESSAGE-----