-----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, R5hCmRLhgEwILbqrJLMK8H8HxoJ36hFZVR0Ioc8Krbd4YwUnUvxCdTkdBO7EIJW/ EBWO5nrrlzPbQoS5P+jFXA== 0000950116-99-001057.txt : 19990518 0000950116-99-001057.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950116-99-001057 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESOURCE AMERICA INC CENTRAL INDEX KEY: 0000083402 STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282] IRS NUMBER: 720654145 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-04408 FILM NUMBER: 99627484 BUSINESS ADDRESS: STREET 1: 1521 LOCUST ST STREET 2: 4TH FL CITY: PHILADELPHIA STATE: PA ZIP: 19102 BUSINESS PHONE: 2155465005 MAIL ADDRESS: STREET 1: 2876 SOUTH ARLINGTON ROAD CITY: AKRON STATE: OH ZIP: 44312 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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.) 1521 Locust Street Suite 400 Philadelphia, PA 19102 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (215) 546-5005 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of outstanding shares of each of the issuer's classes of common stock, as of the latest practicable date: 22,060,372 Shares May 14, 1999 RESOURCE AMERICA, INC. AND SUBSIDIARIES INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements Consolidated Balance Sheet - March 31, 1999 (Unaudited) and September 30, 1998......................................................... 3 Consolidated Statement of Income (Unaudited) Three Months and Six Months Ended March 31, 1999 and 1998...................... 4 Consolidated Statement of Comprehensive Income (Unaudited) Six Months Ended March 31, 1999 and 1998....................................... 5 Consolidated Statement of Changes in Stockholders' Equity (Unaudited) Six Months Ended March 31, 1999................................................ 6 Consolidated Statement of Cash Flows (Unaudited) Six Months Ended March 31, 1999 and 1998....................................... 7 Notes to Consolidated Financial Statements (Unaudited) March 31, 1999................................................................. 8-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................... 16-26 Item 3. Quantitative and Qualitative Disclosures About Market Risk ........................ 26 PART II. OTHER INFORMATION Item 6. Exhibits
2 PART I. FINANCIAL INFORMATION RESOURCE AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
March 31, September 30, 1999 1998 ----------- ------------ ASSETS (Unaudited) Cash and cash equivalents $ 44,305 $ 78,080 Accounts and notes receivable and other prepaid expenses 21,597 12,570 Investments in Real Estate Loans (less allowance for possible losses of $1,570 and $1,191) 278,792 202,050 Investments in Leases and Notes Receivable (less allowance for possible losses of $9,743 and $1,602) 313,031 24,977 Investment in Resource Asset Investment Trust 9,822 11,912 Property and Equipment Oil and gas properties and equipment 48,172 44,516 (successful efforts) Gas gathering and transmission facilities 7,358 6,751 Other 11,450 9,133 ----------- ----------- 66,980 60,400 Less - accumulated depreciation, depletion and amortization (18,942) (16,915) ------------ ------------ Net Property and Equipment 48,038 43,485 Other Assets (less accumulated amortization of $4,842 and $3,112) 71,920 53,373 ----------- ----------- $ 787,505 $ 426,447 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Borrowings under warehouse facilities $ 8,195 $ 5,166 Other debt 492,379 140,280 Accounts payable 10,376 12,864 Accrued liabilities 28,142 23,653 Estimated income taxes 1,136 6,242 Deferred income taxes - 1,764 ---------- ----------- Total Liabilities 540,228 189,969 Commitments and Contingencies Stockholders' Equity Preferred stock, $1.00 par value: 1,000,000 authorized shares - - Common stock, $.01 par value: 49,000,000 authorized shares 231 230 Net unrealized loss on investment (1,420) (43) Additional paid-in capital 208,846 208,588 Less treasury stock, at cost (17,303) (17,890) Less loan receivable for Employee Stock Option Plan ("ESOP") (1,536) (1,591) Retained earnings 58,459 47,184 ----------- ----------- Total Stockholders' Equity 247,277 236,478 ----------- ----------- $ 787,505 $ 426,447 =========== ===========
See accompanying notes to consolidated financial statements 3 RESOURCE AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands except per share data)
Three Months Six Months Ended March 31, Ended March 31, --------------------- ----------------------- 1999 1998 1999 1998 ---- ---- ---- ---- REVENUES Real Estate Finance.............................. $ 10,210 $ 15,875 $ 21,066 $ 25,267 Equipment Leasing................................ 11,240 3,452 15,646 6,624 Energy........................................... 14,002 1,535 29,128 3,350 Interest and Other............................... 759 443 1,732 1,144 -------- --------- --------- --------- 36,211 21,305 67,572 36,385 COSTS AND EXPENSES Real Estate Finance.............................. 2,271 2,985 4,262 4,508 Equipment Leasing................................ 3,305 1,465 5,338 2,790 Energy........................................... 7,990 870 19,336 1,753 General and Administrative....................... 1,961 1,289 2,949 2,216 Depreciation, Depletion and Amortization......... 2,106 708 3,854 1,216 Interest......................................... 7,098 4,171 11,123 8,041 Provision for Possible Losses.................... 1,350 623 1,927 941 -------- --------- --------- --------- 26,081 12,111 48,789 21,465 -------- --------- --------- --------- Income Before Income Taxes and Extraordinary Item.... 10,130 9,194 18,783 14,920 Provision for Income Taxes........................... 3,396 2,875 6,338 4,650 -------- --------- --------- --------- Income Before Extraordinary Item..................... 6,734 6,319 12,445 10,270 Extraordinary Item - gain on early extinguishment of debt, net of taxes of $150..... - - 291 - -------- --------- --------- --------- NET INCOME........................................... $ 6,734 $ 6,319 $ 12,736 $ 10,270 ======== ========= ========= ========= Net Income Per Common Share - Basic Before Extraordinary Item............................... $ .31 $ .44 $ .57 $ .72 Extraordinary Item................................... - - .01 - -------- --------- --------- --------- Net Income Per Common Share - Basic.................. $ .31 $ .44 $ .58 $ .72 ======== ========= ========= ========= Weighted Average Common Shares Outstanding........... 22,020 14,247 21,944 14,223 ======== ========= ========= ========= Net Income Per Common Share - Diluted Before Extraordinary item............................... $ .30 $ .43 $ .55 $ .70 Extraordinary Item................................... - - .01 - -------- --------- --------- --------- Net Income Per Common Share - Diluted................ $ .30 $ .43 $ .56 $ .70 ======== ========= ========= ========= Weighted Average Common Shares....................... 22,656 14,748 22,597 14,733 ======== ========= ========= =========
See accompanying notes to consolidated financial statements 4 RESOURCE AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited) (in thousands) Six Months Ended March 31, -------------------------- 1999 1998 ---- ---- Net Income .................................... $ 12,736 $ 10,270 Other Comprehensive Income: Unrealized loss on investments................. $ (2,090) $ - Tax effect..................................... 713 - ----------- ----------- (1,377) - ----------- ----------- Comprehensive Income.............................. $ 11,359 $ 10,270 =========== =========== See accompanying notes to consolidated financial statements 5 RESOURCE AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Six Months Ended March 31, 1999 (Unaudited) (in thousands, except share data)
Net Common Stock Unrealized Additional Treasury Stock ------------------------ Loss on Paid-In ------------------------------ Shares Amounts Investment Capital Shares Amount ---------------------------------------------------------------------------------------- Balance, October 1, 1998 22,969,108 $230 $(43) $208,588 (1,109,151) $(17,890) Treasury shares issued (311) 27,928 587 Issuance of common stock 172,487 1 569 Net Income Other Comprehensive Income: Unrealized loss on investment, net of tax (1,377) Repayment of ESOP Loan Dividends ($.06 per share) ---------- ---- --------- -------- --------- -------- Balance, March 31, 1999 23,141,595 $231 $ (1,420) $208,846 (1,081,223) $(17,303) ========== ==== ========= ======== ========= ======== ESOP Totals Loan Retained Stockholders' Receivable Earnings Equity --------------------------------------------- Balance, October 1, 1998 $(1,591) $47,184 $236,478 Treasury shares issued 276 Issuance of common stock 570 Net Income 12,736 12,736 Other Comprehensive Income: Unrealized loss on investment, net of tax (1,377) Repayment of ESOP Loan 55 55 Dividends ($.06 per share) (1,461) (1,461) -------- ------- -------- Balance, March 31, 1999 $ (1,536) $58,459 $247,277 ======== ======= ========
See accompanying notes to consolidated financial statements 6 RESOURCE AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Six Months Ended March 31, -------------------------- 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ....................................... $ 12,736 $ 10,270 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization................... 3,854 1,216 Property impairments............................ (14) 63 Amortization of discount on senior notes and deferred finance costs........................ 556 444 Provision for possible losses................... 1,927 941 Deferred income taxes........................... (1,250) 362 Accretion of discount........................... (12,975) (3,597) Collection of interest.......................... 7,370 2,769 Extraordinary gain on debt extinguishment....... (291) - Gain on asset dispositions...................... (8,832) (15,987) Change in operating assets and liabilities Increase in accounts receivable and other assets (4,383) (3,678) Decrease in accounts payable and other liabilities......................... (1,264) (3,075) ------------ ------------ Net cash used in operating activities................ (2,566) (10,272) CASH FLOWS FROM INVESTING ACTIVITIES: Net cash paid in business acquisitions............... (18,262) (997) Proceeds from sale of subsidiary..................... 3,556 - Cost of equipment acquired for lease................. (115,143) (32,966) Capital expenditures................................. (8,471) (2,654) Principal payments on notes receivable............... 4,932 5,539 Proceeds from sale of assets......................... 115,318 119,103 Increase in other assets............................. (1,562) (8,058) Investments in real estate loans..................... (98,882) (178,560) Increase (decrease) in other liabilities............. (9,950) 1,400 Payments received in excess of revenue recognized on leases....................................... 30,079 1,205 ----------- ----------- Net cash used in investing activities................ (98,385) (95,988) CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings................................. 132,806 82,211 Principal payments on long-term borrowings........... (62,583) (20,404) Net change in warehouse borrowings................... (2,665) (19,203) Dividends paid....................................... (1,461) (949) Purchase of treasury stock........................... - (440) Repayment of ESOP loan............................... 23 - (Increase) decease in other assets................... 210 (1,046) Proceeds from issuance of stock...................... 846 234 ----------- ----------- Net cash provided by financing activities............ 67,176 59,606 ----------- ----------- Decrease in cash and cash equivalents................ (33,775) (46,654) Cash and cash equivalents at beginning of period..... 78,080 69,279 ----------- ----------- Cash and cash equivalents at end of period........... $ 44,305 $ 22,625 =========== ===========
See accompanying notes to consolidated financial statements 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - March 31, 1999 (Unaudited) NOTE 1 - Management's Opinion Regarding Interim Financial Statements In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the results of operations for the interim periods included herein have been made. Certain reclassifications have been made to the consolidated financial statements for the quarter and six months ended March 31, 1998 to conform to the quarter and six months ended March 31, 1999. Unless otherwise indicated, all information set forth herein gives effect to the three-for-one stock split (effected in the form of a 200% stock dividend) in June 1998. The accounting policies followed by the Company, except as set forth in Note 2, are set forth in Note 1 to the Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. NOTE 2 - Summary of Significant Accounting Policies Revenue Recognition The Company contracts to drill oil and gas wells on a fixed fee basis. These contracts are accounted for under the completed-contract method. Costs in excess of amounts billed are classified as accounts receivable. Billings in excess of costs are classified as accounts payable. Upon completion of individual contracts, billings and accumulated costs are credited and charged to current operations. Comprehensive Income Effective October 1, 1998 the Company adopted SFAS No. 130 "Reporting Comprehensive Income" which requires disclosure of comprehensive income and its components. Comprehensive income is defined as changes in stockholders' equity from nonowner sources and, for the Company, includes net income and changes in the fair value of marketable securities. Other Assets Included in other assets are intangible assets that consist primarily of contracts acquired through acquisitions recorded at fair value on their acquisition dates, the excess of the acquisition cost over the fair value of the net assets of a business acquired (goodwill) and deferred financing costs. The contracts acquired are being amortized on a declining balance method, except for syndication network which is being amortized on a straight-line basis, over their respective estimated lives, ranging from five to 30 years, goodwill is being amortized on a straight-line basis over periods ranging from 15 to 30 years, deferred financing costs are being amortized over the terms of the related loans (two to seven years) and others costs are being amortized over varying periods of up to five years. 8 Other assets consist of the following: March 31, September 30, 1999 1998 ---- ---- (in thousands) Goodwill .................................... $ 48,421 $ 29,335 Contracts acquired (including syndication network).......... 14,466 14,943 Deferred financing costs..................... 3,997 4,312 Other .................................... 5,036 4,783 --------- -------- Total.................................... $ 71,920 $ 53,373 ========= ======== Earnings Per Share The following table presents a reconciliation of the components used in the comparison of net income per common share-basic and net income per common share-diluted for the three months and six months ended March 31, 1999 and 1998:
Three Months Six Months Ended March 31, Ended March 31, -------------------- ------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands) Income before extraordinary item..................... $ 6,734 $ 6,319 $ 12,445 $ 10,270 Extraordinary gain on early extinguishment of debt (net of taxes of $150) .................. - - 291 - ----------- ----------- ----------- ----------- Net Income $ 6,734 $ 6,319 $ 12,736 $ 10,270 =========== =========== =========== =========== Basic weighted average shares of common stock outstanding................................ 22,020 14,247 21,944 14,223 Dilutive effective of stock option and award plans ..................................... 636 501 653 510 ----------- ----------- ----------- ----------- Dilutive weighted average shares of common stock 22,656 14,748 22,597 14,733 =========== =========== =========== ===========
9 NOTE 3 - Cash Flow Statements Supplemental disclosure of cash flow information:
Six Months Ended March 31, -------------------------- 1999 1998 ---- ---- (in thousands) Cash paid during the period for: Interest.................................... $ 9,614 $ 8,010 Income taxes................................ 12,702 7,870 Non-cash activities include the following: Notes received in exchange for: Sales of leases............................. - 8,843 Sales of residential mortgage loans......... - 8,267 Receipt of note in satisfaction of real estate sale......................... - 1,000 Stock issued in acquisitions................ - 2,500 Acquisition of business: Fair value of assets acquired............... 315,466 3,545 Liabilities assumed......................... (147,534) - Debt issued................................. (142,997) (48) Stock issued................................ - (2,500) Amounts due seller.......................... (6,673) - ------------ ----------- Net cash paid............................... $ 18,262 $ 997 =========== =========== Disposal of business: Net liabilities assumed by buyer............ $ 4,436 $ - =========== ===========
NOTE 4 - Acquisitions On February 4, 1999, the Company acquired all of the common stock of JLA Credit Corporation ("JLA") in exchange for cash and assumption of JLA debt. JLA is a company primarily involved in the small ticket equipment leasing business. The acquisition has been accounted for as a purchase and accordingly the purchase price has been allocated to assets and liabilities based on their fair market values at the date of acquisition. The sale of leases to JLA's special purpose subsidiaries for securitization purposes, are accounted for as securitized financings, and, accordingly, the leases are retained on JLA's balance sheet as long-term investments. In connection with the acquisition of JLA, the Company obtained an asset backed commercial paper borrowing facility (ABS) to repay JLA bank debt and an additional ABS facility to fund leases originated by JLA. As a result of the magnitude of the JLA acquisition and the related borrowing facilities, the composition of the Company's consolidated balance sheet has changed significantly. The company believes that, consistent with the presentation of other specialty finance companies, it is more appropriate to present its consolidated balance sheet on a non-classified basis, which does not segregate assets and liabilities into current and non-current categories. 10 The following table reflects unaudited pro forma combined results of operations of the Company and JLA presented as if the acquisition had taken place on October 1, 1997:
Six Months Ended Six Months Ended March 31, 1999 March 31, 1998 ---------------- ---------------- (in thousands, except share amounts) (unaudited) Revenues ....................................... $ 80,682 $ 54,341 Net income...................................... 14,384 14,223 Net income per common share-diluted............. .64 .97 Shares used in computation...................... 22,597 14,733
These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments to: (i) depreciation and amortization expense attributable to allocation of the purchase price;(ii) equipment leasing revenue as a result of the purchase price allocation; (iii) general and administrative expenses for certain cost reductions realized from the combining of operations; and (iv) interest expense for additional borrowings. They do not purport to be indicative of the results of operation which actually would have resulted had the combination been consummated at the beginning of the period or of future results of operations of the consolidated entities. On September 29, 1998, the Company acquired The Atlas Group, Inc. ("Atlas") in exchange for 2,063,496 shares of the Company's Common Stock and the assumption of Atlas debt. Atlas is primarily involved in the energy finance business through the syndication of oil and gas properties in the Appalachian basin. The acquisition has been accounted for as a purchase and accordingly the purchase price has been allocated to assets and liabilities based on their fair market values at the date of acquisition. Prior to March 31, 1999, a business unit acquired, as part of the Atlas acquisition, entered into natural gas futures contracts to hedge its exposure to changes in natural gas prices. The futures contracts employed by the Company were commitments to purchase or sell natural gas at a future date and generally covered one-month periods for up to 18 months in the future. The Company, in accordance with its intent, at the date of acquisition, disposed of this business unit on March 31, 1999. The value of the contracts acquired increased during the "holding period" by approximately $1.2 million, which amount is included in operations in the six months ended March 31, 1999. 11 The following table reflects unaudited pro forma combined results of operations of the Company and Atlas presented as if the acquisition had taken place on October 1, 1997. Pro forma information for the current year is not presented for Atlas as the operations of Atlas are included in the Company's Consolidated Financial Statements: Six Months Ended March 31, 1998 -------------- (in thousands, except share amounts) (unaudited) Revenues................................... $ 57,590 Net income................................. 11,715 Net income per common share-diluted........ .69 Shares used in computation................. 16,916 These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments to: (i) depletion, depreciation and amortization expense attributable to allocation of the purchase price;(ii) general and administrative expenses for certain cost reductions realized from the combining of operations; and (iii) interest expense for additional borrowings. They do not purport to be indicative of the results of operations which actually would have resulted had the combination been consummated at the beginning of the period or of future results of operations of the consolidated entities. NOTE 5 - Investments in Real Estate Loans The Company has primarily focused its real estate activities on the purchase of income producing commercial mortgage loans at a discount from both the face value of such mortgage loans and the appraised value of the properties underlying the mortgage loans. The Company records as income the accretion of a portion of the difference between its cost basis in a commercial mortgage loan and the sum of projected cash flows therefrom. Cash received by the Company for payment on each mortgage is allocated between principal and interest. This accretion of discount amounted to $2.7 million and $1.9 million during the three months ended March 31, 1999 and 1998, respectively, and $5.6 million and $3.6 million during the six months ended March 31, 1999 and 1998, respectively. As the Company sells senior lien interests or receives funds from refinancings of such mortgages, a portion of the cash received is employed to reduce the cumulative accretion of discount included in the carrying value of the Company's investments in real estate loans. At March 31, 1999, the Company held commercial mortgage loans having aggregate face values of $812.4 million, which were being carried at aggregate cost of $273.0 million, including cumulative accretion. The following is a summary of the changes in the carrying value of the Company's investments in loans for the periods indicated: 12
Three Months Ended Six Months Ended March 31, 1999 March 31, 1999 -------------- -------------- (in thousands) Commercial mortgage loan balance, beginning of period.......................... $ 197,144 $ 188,651 New loans....................................... 74,380 79,859 Additions to existing loans..................... 1,810 5,312 Provision for possible losses................... (200) (300) Accretion of discount (net of collection of interest) 2,659 5,605 Collection of principal......................... (2,835) (2,835) Cost of loans sold.............................. - (3,334) ------------ ------------- Commercial mortgage loan balance, end of period................................ 272,958 272,958 Investment in residential mortgage loans (less an allowance for possible losses of $365)........................................ 5,834 5,834 ------------ ------------ Total real estate loans........................... $ 278,792 $ 278,792 ============ ============
A summary of activity in the Company's allowance for possible losses related to real estate loans for the three and six months ended March 31, 1999 and 1998 is as follows:
Three Months Six Months Ended March 31, Ended March 31, -------------------------- --------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands) (in thousands) Balance, beginning of period..................... $ 1,331 $ 468 $ 1,191 $ 400 Provision for possible losses Commercial.................................. 200 82 300 134 Residential................................. 39 166 79 182 Write-offs....................................... - - - - ----------- ----------- ----------- ----------- Balance, end of period........................... $ 1,570 $ 716 $ 1,570 $ 716 =========== =========== =========== ===========
13 NOTE 6 - Investments in Leases and Notes Receivable Components of the investment in leases and notes receivable as of March 31, 1999 and September 30, 1998, including residual values are as follows:
March 31 As of September 30, -------- ------------------- 1999 1998 ---- ---- (in thousands) Total minimum lease payments receivable.............. $ 351,432 $ 10,011 Initial direct costs, net of amortization............ 824 153 Unguaranteed residual................................ 19,149 6,338 Unearned lease income................................ (63,167) (4,061) ------------- ------------ Investment in leases................................. 308,238 12,441 Notes receivable..................................... 14,536 14,138 Allowance for possible losses........................ (9,743) (1,602) ------------- ------------ Investment in leases and notes receivable............ $ 313,031 $ 24,977 ============ ===========
A summary of activity in the Company's allowance for possible losses related to investment in leases and notes receivable for the three and six months ended March 31, 1999 and 1998 follows:
Three Months Six Months Ended March 31, Ended March 31, -------------------------- --------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands) (in thousands) Balance, beginning of period......................... $ 2,019 $ 492 $ 1,602 $ 248 Provision for possible losses........................ 1,099 375 1,523 625 Balance of acquired subsidiary....................... 7,200 - 7,200 - (Write-offs) recoveries.............................. (575) (40) (582) (46) ----------- ------------ ------------ ------------ Balance, end of period............................... $ 9,743 $ 827 $ 9,743 $ 827 =========== =========== =========== ===========
14 NOTE 7 - Other Debt Other debt consists of the following:
March 31, September 30, 1999 1998 ---- ---- (in thousands) Two commercial paper borrowings secured by leases, interest from 6.97% to 8.00%, due in December 1999 and February 2000, but are renewable at the mutual option of the Company and the lender for a one year period, however, the timing and amount of the repayment of these borrowings are dependent upon the ultimate collection of the securitized lease payments................................................................... $ 143,066 $ - Two term loan facilities assumed in connection with the JLA acquisition, secured by leases, interest from 5.91% to 7.0%. The timing and amount of the repayment of notes are dependent upon the ultimate collection of the securitized lease payments.......................................... 116,953 - 12% senior unsecured notes, interest due semi-annually, principal due August 2004............................................................ 101,600 104,400 Two loans payable to a financial institution secured by a mortgage loan, the senior loan in the amount of $50,000 bears interest, payable monthly at 30 day LIBOR (5% at March 31, 1999) plus 3% for 90 days; the agreement provides for a reduction in the LIBOR spread to 2.75% upon completion of certain defined conditions by June 30, 1999; due in March 2002, and may be extended for one year; the junior loan in the amount of $15,000 bears interest at 17.5%, of which 15% is payable monthly with the balance accruing, due in March 2001................................................ 65,000 - Revolving and term loans to banks, secured by oil and gas properties, interest ranging from 7.125% to 8.0% due June 1999, April 2003 and September 2003............................................................. 31,894 31,975 Other .................................................................. 33,866 3,905 ------------- ----------- Total other debt............................................................. $ 492,379 $ 140,280 ============= ===========
As of March 31, 1999 the debt maturing over the next five years is as follows: 2000 - $119,005; 2001 - $161,183; 2002 - $71,397; 2003 - $24,503; and 2004 - $10,514. 15 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 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 WHICH 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. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO FORWARD LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. Overview of Second Quarter of Fiscal 1999 On February 4, 1999 the Company acquired JLA, a company primarily involved in small ticket equipment leasing. In September 1998, the Company acquired Atlas, a company primarily involved in energy finance through the syndication of oil and gas properties. Results of operations include the operations of JLA and Atlas from their respective dates of purchase, and accordingly leasing and energy operations are not comparable to the similar periods of the prior year (see Note 4 of the Notes to Consolidated Financial Statements). The Company's gross revenues were $36.2 million in the second quarter of fiscal 1999, an increase of $14.9 million (70%) from $21.3 million in the second quarter of fiscal 1998. The increase in total revenues was due to increases in energy revenues and revenues from leasing operations, partially offset by a decrease in real estate finance revenues. Energy revenues increased $12.5 million, to $14.0 million from $1.5 million, as a result of the acquisition of Atlas. Leasing revenues increased $7.8 million, to $11.2 million from $3.5 million, as a result of the acquisition of JLA and the continued growth of the small ticket equipment leasing business. Real estate finance (commercial and residential mortgage loans) revenues were $10.2 million in the second quarter of fiscal 1999, a decrease of $5.7 million (36%) from $15.9 million in the second quarter of fiscal 1998. Real estate finance (commercial and residential mortgage loans) and equipment leasing revenues were 59% and 91% of total revenues in the second quarter of fiscal 1999 and 1998, respectively As of March 31, 1999, total assets were $787.5 million. Real estate finance assets were 37% and 50% and equipment leasing assets were 44% and 6% of total assets at March 31, 1999 and September 30, 1998, respectively. Energy assets were 11% and 21% of total assets at March 31, 1999 and September 30, 1998, respectively. 16 Results of Operations: Real Estate Finance The following table sets forth certain information relating to the revenues recognized and cost and expenses incurred in the Company's real estate finance operations during the periods indicated:
Three Months Six Months Ended March 31, Ended March 31, -------------------------- -------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands) Revenues: Commercial mortgage loan acquisition and resolution: Interest.................................... $ 3,654 $ 2,009 $ 7,370 $ 4,731 Accreted discount........................... 2,659 1,931 5,605 3,597 Fees........................................ 3,440 1,880 4,409 3,655 Gains on sales of senior lien interests and loans....................... - 7,935 2,370 9,463 Loan payments in excess of carrying value............................ 14 - 14 - ----------- ----------- ----------- ----------- 9,767 13,755 19,768 21,446 ----------- ----------- ----------- ----------- Residential mortgage lending: Gains on sales of residential mortgage loans............................ 125 1,216 462 2,637 Interest and other income................... 318 904 836 1,184 ----------- ----------- ----------- ----------- 443 2,120 1,298 3,821 ----------- ----------- ----------- ----------- $ 10,210 $ 15,875 $ 21,066 $ 25,267 =========== =========== =========== =========== Costs and Expenses: Commercial mortgage loan acquisition and resolution............................ $ 1,174 $ 484 $ 1,652 $ 864 Residential mortgage lending................ 1,097 2,501 2,610 3,644 ----------- ----------- ----------- ----------- $ 2,271 $ 2,985 $ 4,262 $ 4,508 =========== =========== =========== ===========
Commercial Mortgage Loan Acquisition and Resolution Revenues from commercial mortgage loan acquisition and resolution operations decreased to $9.8 million and $19.8 million in the second quarter and six months ended March 31, 1999; a decrease of $4.0 million (29%) for the quarter and $1.7 million (8%) for the six months ended March 31, 1999, from $13.8 million and $21.4 million in the second quarter and six months ended March 31, 1998. The decrease in the second quarter of fiscal 1999 was attributable to the following: (i) A decrease of $7.9 million in gains from sales of senior lien interests and loans because, prior to January 1, 1999, most of the company's transactions involving the sale or financing of senior lien interests of its commercial mortgage loans were structured to meet the criteria for sale under generally accepted accounting principles. Effective January 1, 1999, the Company made a strategic decision to structure future transactions so as to retain the entire commercial mortgage loans originated on its balance sheet rather than selling senior lien interests in such loans. Prior to January 1, 17 1999, most of the transactions involving the sale or refinancing of senior lien interests of its commercial mortgage loans were structured to meet the criteria for sale under generally accepted accounting principles. Thus, for most of its transactions, as described above, that were completed prior to such date, the Company recorded a gain on sale. The cash flows available to the Company, which are generally based on the appraised value and the cash flows of the property underlying the Company's commercial mortgage loans, are unaffected by these modifications. The primary effect from this move to emphasize refinancing is a shift from the recognition of an immediate gain upon the sale of a senior lien interest in commercial mortgage loans receivable to the recognition of interest income over the life of the loans receivable. The Company was repaid $83,000 on a commercial mortgage loan which was in excess of the loan's carrying value of $69,000 and recorded a gain of $14,000 in the quarter ended March 31, 1999 as compared to sales of senior lien interests in seven loans sold to unaffiliated third parties resulting in proceeds of $11.5 million and a gain of $4.8 million in the quarter ended March 31, 1998. In addition, in the quarter ended March 31, 1998, proceeds of $20.2 million from the sale to RAIT of ten mortgage loans and senior lien interests in two other loans, resulted in a gain of $3.1 million. (ii) An increase of $2.4 million (60%) in interest income (including an increase of $728,000 of accretion of discount) resulting from an increase of $75.8 million in the average book value of loans outstanding during the period to $231.6 million as compared to $155.8 million for the same period in the prior fiscal year. (iii) An increase of $1.6 million in fee income (83%) resulting from a one-time fee of $3.4 million earned in the second quarter of fiscal 1999, as compared to the second quarter of fiscal 1998 when the Company received a one-time fee of $1.9 million. In recent years and especially during fiscal 1998, the Company's resources have increased considerably, enabling the Company to acquire loans much larger than those it had previously acquired and to increase the amount of its average net investment in loans. For loans acquired through the fiscal year ended September 30, 1997, the average receivable balance for loans acquired was $6.1 million and the average investment cost was $3.2 million. During the year ended September 30, 1998, the average receivable balance for loans acquired was $37.2 million and the average investment cost was $27.8 million. During the second quarter and six months ended March 31, 1999, the Company acquired one and three loans for a total cost of $74.4 million and $79.9 million, as compared to the purchase and origination of one and five loans for a cost of $78.6 million and $142.2 million, during the second quarter and six months ended March 31, 1998. The one loan acquired during the quarter ended March 31, 1999 had an outstanding receivable balance of $126.0 million. The one loan acquired during the quarter ended March 31, 1998, had an outstanding receivable balance of $128.0 million. The Company does not, however, pursue a fixed policy of seeking larger loans and, accordingly, will acquire larger loans only when attractive opportunities are presented and the Company has, or can obtain (through loan financing, sale of senior lien interests in existing loans or other means) sufficient investment funds. The Company continues to seek and acquire smaller loans. Gains on sale of loans, senior lien interests in loans, and loan payments in excess of carrying value (if any) and the amount of fees received (if any) vary from transaction to transaction and there may be significant variations in the Company's gain on sale and fee income from period to period. As a consequence of the foregoing, the Company's yield (gross commercial mortgage loan acquisition and resolution revenues, including gains resulting from refinancings, sales of loans and sales of senior lien interests in loans, divided by the book value of average loan receivables) decreased to 17% in the quarter ended March 31, 1999 as compared to 38% in the quarter ended March 31, 1998. 18 Costs and expenses of the Company's commercial mortgage loan operations were $1.2 million in the quarter ended March 31, 1999, an increase of $690,000 (143%) from $484,000 in the quarter ended March 31, 1998. The increase was primarily a result of hiring additional personnel and increased compensation to existing employees. As a result of the foregoing, the Company's operating profit from commercial mortgage loan acquisition and resolution operations decreased to $9.1 million and $18.6 million in the second quarter and six months ended March 31, 1999, as compared to $13.3 million and $20.6 million in the second quarter and six months ended March 31, 1998, respectively. Residential Mortgage Lending The Company originated 68 and 208 residential mortgage loans aggregating $5.4 and $13.7 million during the quarter and six months ended March 31, 1999, as compared to the origination and purchase of 490 and 790 residential mortgage loans at a total cost of $20.7 million and $35.2 million during the quarter and six months ended March 31, 1998. The Company sold residential mortgage loans with a book value of $7.7 million and $16.6 million resulting in gains of $125,000 and $462,000 during the quarter and six months ended March 31, 1999. The Company sold loans aggregating $21.8 million and $33.1 million resulting in gains of $1.2 million and $2.6 million during the quarter and six months ended March 31, 1998. The Company opportunisitically purchases residential mortgage loans although its focus is on residential mortgage loan originations. Interest income and fees from origination activities were $318,000 and $836,000 during the quarter and six months ended March 31, 1999 as compared to $904,000 and $1.2 million during the quarter and six months ended March 31, 1998. The decrease in interest and fee income is the result of a decrease in originations due to the termination of high loan to value loan products previously offered, reflecting changes in the mortgage industry, in particular, the availability to residential mortgage lending programs of institutional financing. Costs and expenses incurred by residential mortgage operations aggregated $1.1 million and $2.6 million for the quarter and six months ended March 31, 1999 as compared to $2.5 million and $3.6 million for the quarter and six months ended March 31, 1998. The decrease in costs and expenses is primarily the result of the Company shifting its focus away from direct mail advertising as the source of loan originations to telemarketing and electronic commerce as well as staff reductions. Additionally, the Company incurred $229,000 and $468,000 of depreciation, $0 and $29,000 of interest expense and $39,000 and $79,000 in the provision for possible losses in the quarter and six months ended March 31, 1999 as compared to $209,000 and $358,000 of depreciation, $69,000 and $164,000 of interest expense, and $166,000 and $182,000 in the provision for possible losses for the quarter and six months ended March 31, 1998. In summary, the Company's residential mortgage operations incurred losses from operations of $922,000 and $1.9 million for the quarter and six months ended March 31, 1999 as compared to $825,000 and $527,000 for the quarter and six months ended March 31, 1998. During fiscal 1998, the Company had a program for originating "125 loans" which terminated at the end of the fiscal year. At March 31, 1999, the Company held $3.3 million of "125 loans", all of which are held for sale. 19 Results of Operations: Equipment Leasing The following table sets forth certain information relating to the revenues recognized and costs and expenses incurred in the Company's equipment leasing operations during the periods indicated:
Three Months Six Months Ended March 31, Ended March 31, ------------------------- --------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands) Revenues: Small ticket leasing - Gains on sales of leases.................... $ 2,605 $ 2,095 $ 4,849 $ 3,883 Interest and fees........................... 8,135 761 9,537 1,362 Partnership management........................... 402 445 1,075 976 Lease finance placement and advisory services........................... 98 151 185 403 ----------- ----------- ----------- ----------- $ 11,240 $ 3,452 $ 15,646 $ 6,624 =========== =========== =========== =========== Costs and Expense: Small ticket leasing............................. $ 2,735 $ 931 $ 4,154 $ 1,728 Partnership management........................... 482 381 925 719 Lease finance placement and advisory services........................... 88 153 259 343 ----------- ----------- ----------- ----------- $ 3,305 $ 1,465 $ 5,338 $ 2,790 =========== =========== =========== ===========
The Company experienced continued growth in its leasing business during the second fiscal quarter and six months ended March 31, 1999 as compared to the second fiscal quarter and six months ended March 31, 1998. This growth was further accelerated by the JLA acquisition on February 4, 1999. The results of operations of JLA are included in the Company's consolidated results of operations from February 4, 1999. During the second quarter and six month ended March 31, 1999, the Company originated 4,457 and 7,678 leases having a cost of $75.4 million and $115.1 million, as compared to 1,798 and 3,341 leases having a cost of $17.0 million and $33.0 million during the second quarter and six months ended March 31, 1998,respectively. In the second quarter of fiscal 1999, the Company sold leases with a book value of approximately $55.8 million in return for cash of $58.4 million, resulting in gains on sale of $2.6 million. In the second quarter of fiscal 1998, the Company sold leases with a book value of $17.7 million in return for cash of $15.4 million and a note with a face value of $4.4 million resulting in gains on sale of $2.1 million. Payment on the note is subject to the level of lease delinquencies and realization of residuals on the leases sold. 20 During the quarter ended June 30, 1998, the Company began to retain for its own account the residual interests of leases sold. Prior to this quarter the Company had sold its residual interests, primarily for promissory notes (aggregating $13.1 million at March 31, 1999). The Company anticipates that it will continue to retain residual interests for its own account; however, there is no established Company policy as to the retention or sale of residuals and, accordingly, the Company may determine to sell residuals in the future. The effect of retaining residuals is to reduce revenues recognized from the sale of leases at the time of sale while increasing revenues anticipated to be derived in the future from the realization of residuals. At March 31, 1999, estimated unrealized residuals approximated $19.1 million. Revenues from equipment leasing increased to $11.2 million and $15.6 million in the second quarter and six months ended March 31, 1999, from $3.5 million and $6.6 million in the second quarter and six months ended March 31, 1998, an increase of $7.8 million (226%) and $9.0 million (136%), respectively. The increase in revenues during the second quarter of fiscal 1999 was attributable to (i) an increase in interest and fee income of $7.4 million (969%) resulting from the acquisition of JLA with its seasoned on-balance sheet lease portfolio which provided $6.5 million of interest income from the date it was acquired through March 31, 1999, as well as increased volume of lease originations and (ii) an increase in the gains on sales of leases of $510,000 (24%) resulting from the increased number of leases originated and sold. Equipment leasing costs and expenses were $3.3 million and $5.3 million in the second quarter and six months ended March 31, 1999, an increase of $1.8 million (125%) and $2.5 million (91%) from $1.5 million and $2.8 million in the second quarter and six months ended March 31, 1998. The increase was primarily a result of higher operating costs associated with the increase in lease originations and the inclusion of the costs ($1.6 million) of JLA's from the date it was acquired through March 31, 1999. Results of Operations: Energy and Energy Finance The following table sets forth certain information relating to revenues recognized and costs and expenses incurred in the Company's energy and energy finance operations during the periods indicated:
Three Months Six Months Ended March 31, Ended March 31, --------------------------- --------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands) Revenues: Production.................................. $ 2,410 $ 1,048 $ 4,930 $ 2,280 Well Construction........................... 8,240 - 18,641 - Well Services............................... 2,201 487 4,406 1,070 Gain on sales of assets..................... 1,151 - 1,151 - ----------- ----------- ----------- ----------- $ 14,002 $ 1,535 $ 29,128 $ 3,350 =========== =========== =========== =========== Costs and Expenses: Exploration and Production.................. $ 948 $ 571 $ 2,270 $ 1,145 Well Construction........................... 6,562 - 15,875 - Well Services............................... 480 299 1,191 608 ----------- ----------- ----------- ----------- $ 7,990 $ 870 $ 19,336 $ 1,753 =========== =========== =========== ===========
Revenues and costs and expenses from gas marketing operations, which were acquired in the Atlas acquisition, have been omitted from the above table, as the Company, in accordance with its intent at the date of acquisition, disposed of these operations in March 1999. 21 A comparison of the Company's revenues, daily production volumes, and average sales prices follows:
Three Months Six Months Ended March 31, Ended March 31, -------------------------- --------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenues (in thoursands) (1) Gas ............................................ $ 2,198 $ 891 $ 4,487 $ 1,908 Oil ............................................ $ 200 $ 148 $ 372 $ 349 Production volumes Gas (thousands of cubic feet ("mcf")/day......... 10,584 3,535 10,553 3,870 Oil (barrels (`bbls")/day)....................... 223 112 188 118 Average sales price Gas (per mcf).................................... $ 2.31 $ 2.80 $ 2.34 $ 2.71 Oil (per bbl).................................... $ 9.95 $ 14.75 $ 10.86 $ 16.22
(1) Excludes sales of residual gas and sales to landowners. Natural gas revenues were $2.2 million and $4.5 million in the second quarter and six months ended March 31, 1999, an increase of $1.3 million (147%) and $2.6 million (135%) from $0.9 million and $1.9 million in the second quarter and six months ended March 31, 1998 due to a 199% increase in production volumes, partially offset by a 17% decrease in the price received per mcf. Without the addition of Atlas, natural gas revenues would have decreased $64,000 (7%), despite a 2% increase in production volumes as compared to the period of fiscal 1998, due to a 9% decrease in price received per mcf. Oil revenues were $200,000 and $372,000 in the second quarter and six months ended March 31, 1999 an increase of $51,000 (35%) and $23,000 (7%) from $148,000 and $349,000 in the second quarter and six months ended March 31, 1998, due to a 100% increase in production volumes, partially offset by a 33% decrease in the average sales price of oil during the second quarter of fiscal 1999 as compared to the second quarter of fiscal 1998. Without the addition of Atlas, oil revenues would have increased $35,000 (23%) due to an 80% increase in production volumes as compared to fiscal 1998, partially offset by a 31% decrease in the average sales price of oil. Well construction revenues and expenses represents the billings and costs associated with the completion of 39 and 92 wells by Atlas in the second quarter and six months ended March 31, 1999, respectively. Well services revenues and related costs increased significantly as a result of an increase in the number of wells operated from approximately 900 to approximately 2,200 after the acquisition of Atlas. 22 A comparison of the Company's production costs as a percentage of oil and gas sales, and the production cost per equivalent unit for oil and gas, for the three and six months ended March 31, 1999 and 1998 are as follows:
Three Months Six Months Ended March 31, Ended March 31, ------------------------ ------------------------ 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands) Production Costs As a percent of sales............................ 35% 43% 41% 43% Gas (mcf)........................................ $ .84 $ 1.21 $ 0.94 $ 1.18 Oil (bbl)........................................ $ 4.93 $ 7.27 $ 5.64 $ 6.80
The decrease in production costs as a percent of sales is a result of lower operating costs on the wells associated with the Atlas acquisition. Production costs were $843,000 million and $2.0 million in the second quarter and six months ended March 31, 1999 an increase of $386,000 (84%) and $974,000 (100%) from $457,000 and $976,000 in the second quarter and six months ended March 31, 1998 as a result of the costs associated with the wells acquired through Atlas. Amortization of oil and gas properties as a percentage of oil and gas production revenues was 25% in both the second quarter and six months ended March 31, 1999 compared to 20% and 17% in the second quarter and six months ended March 31, 1998. The variance from period to period is directly attributable to changes in the Company's oil and gas reserve quantities, product prices and fluctuations in the depletable cost basis of oil and gas properties. Results of Operations: Other Revenues, Costs and Expenses Interest and other income was $759,000 and $1.7 million in the second quarter and six months ended March 31, 1999, an increase of $316,000 (71%) and $588,000 (51%) as compared to $443,000 and $1.1 million during the second quarter and six months ended March 31, 1998. This increase was primarily due to the recognition of dividend income of $426,000 from RAIT in the second quarter of fiscal 1999. RAIT paid a $135,000 dividend in the second quarter of fiscal 1998. General and administrative expenses were $2.0 million and $2.9 million in the second quarter and six months ended March 31, 1999, an increase of $672,000 (52%) and $733,000 (33%) as compared to $1.3 million and $2.2 million for the second quarter and six months ended March 31, 1998, primarily as a result of the hiring of additional corporate staff and increases in the compensation and benefits of senior officers along with the Company's continued growth in its existing business lines and recent acquisitions as described in Note 4. Depreciation, depletion and amortization was $2.1 million and $3.9 million in the second quarter and six months ended March 31, 1999, an increase of $1.4 million (197%) and $2.6 million (217%) as compared to $708,000 and $1.2 million during the second quarter and six months ended March 31, 1998. The increase was primarily attributable to the oil and gas properties acquired as part of the Atlas acquisition. Interest expense was $7.1 million and $11.1 million in the second quarter and six months ended March 31, 1999, an increase of $2.9 million (70%) and $3.1 million (38%) as compared to $4.2 million and $8.0 million during the second quarter and six months ended March 31, 1998. The increase was primarily attributable to JLA's on-balance sheet borrowings. Provision for possible losses were $1.4 million and $1.9 million in the second quarter and six months ended March 31, 1999 an increase of $727,000 (117%) and $986,000 (105%) as compared to a provision of $623,000 and $941,000 in the second quarter and six months ended March 31, 1998. The increase in the second quarter of fiscal 1999 primarily relates to equipment leasing ($724,000) and reflects the increases in lease originations. In establishing the Company's allowance for possible losses in connection with its real estate finance and equipment leasing operations, the Company considers among other things, the historic performance of the Company's loan or lease portfolios, industry standards and experience regarding losses in similar loans or leases and payment history on specific loans and leases, as well as general economic conditions in the United States, in the borrower's or lessee's geographic area and in its specific industry. 23 The effective tax rate increased to 34% in the quarter ended March 31, 1999 from 31% in the quarter ended March 31, 1998. The fiscal 1999 increase resulted from: (i) an increase in the statutory rate due to an increase in the Company's pre-tax earnings; (ii) an increase in amortization of goodwill, attributable to the Company's acquisition of Atlas, which is not deductible for tax purposes; (iii) a decrease in tax exempt interest in relation to pre-tax income; and (iv) an increase in state income taxes. These increases in the effective tax rate were partially offset by increased tax credits. Liquidity and Capital Resources During the past three fiscal years, the Company has derived its capital resources from three main sources: public and private offerings of debt and equity securities, lines of credit and purchase facilities extended by banks and other institutional lenders with respect to equipment leasing, residential mortgage and energy operations, and sales of senior lien interests in or borrower refinancings of commercial mortgage loans held in the Company's portfolio. The Company has employed its available capital resources primarily in the expansion of its real estate finance and equipment leasing businesses, and expects that it will continue to do so for the foreseeable future. However, through its acquisition of Atlas, the Company has significantly expanded its oil and gas operations and, as a result, may direct capital resources to oil and gas operations as other opportunities arise or as the Company's oil and gas business develops. The Company believes that its future growth and earnings will be materially dependent upon its ability to continue to generate capital resources from prior sources or to identify new sources. During the last half of calendar 1998, capital markets in the United States were unstable, resulting in a loss of liquidity in credit markets and significant drops in the prices of certain securities in the equity markets. The effects of this instability were particularly pronounced for finance companies such as the Company. Although the liquidity of the credit markets has improved in recent months, the price of the Company's stock has not significantly recovered from the substantial decrease in price that occurred in August 1998, which has impeded the Company's access to the equity capital markets. Accordingly, the Company anticipates that generating additional capital resources on terms similar to those available to it during the last three fiscal years may be restricted and the Company's ability to generate continued growth in its real estate finance and equipment leasing operations may be restricted. Any such restriction could adversely affect the Company's earnings potential. The Company's conduit securitization facilities, which are at variable rates of interest, require the Company to enter into interest rate swap agreements for the benefit of the purchaser of the leases. Such swap agreements effectively provide for the payment by the Company of a fixed rate of interest from the pool of securitized leases to the bank conduit purchasing the leases, notwithstanding the payment by the conduit of a variable rate of interest on the commercial paper issued by it. The Company does not hold or issue interest rate swap agreements or any other derivative financial instruments for trading purposes. At the time of each securitization, the Company's special purpose subsidiary assigns its right, title and interest in the interest rate swap agreement to the purchaser of the leases. At March 31, 1999, the uncollected balance of the leases sold under the securitization facilities was approximately $514.7 million. Related interest rate swap agreements outstanding at March 31, 1999 had an aggregate notional value of approximately $393.6 million, required payments based on fixed rates ranging from 5.19% to 7.0%. Sources and (uses) of cash for the six month periods ended March 31, 1999 and 1998 were as follows:
Six Months Ended March 31, -------------------------- 1999 1998 ---- ---- (in thousands) Used in operations...................................$ (2,566) $ (10,272) (Used in) investing activities....................... (98,385) (95,988) (Used in) provided by financing activities........... 67,176 59,606 ---------- ---------- $ (33,775) $ (46,654) =========== ===========
The Company had $44.3 million in cash and cash equivalents on hand at March 31, 1999, as compared to $78.1 million at September 30, 1998. The Company's ratio of earnings to fixed charges was 1.4 to 1.0 in the quarter ended March 31, 1999 as compared to 3.2 to 1.0 in the quarter ended March 31, 1998. 24 Cash used in operating activities in the first six months of fiscal 1999 decreased $7.7 million as compared to the first six months of fiscal 1998, primarily as a result a decrease in gains on asset dispositions in relation to net income. The Company's cash used in investing activities increased $2.4 million in the six months ended March 31, 1999 as compared to the six months ended March 31, 1998. This decrease resulted primarily from a decrease in the amount of cash used to fund real estate finance activities. In commercial mortgage loan activities, the Company invested $74.4 million and $79.9 million in the acquisition or origination of three loans and five loans in the six months ended March 31, 1999 and 1998, respectively. In addition, the Company advanced funds on existing commercial loans of $1.8 million and $5.3 million in the same respective periods. Cash proceeds received upon refinancings or sales of senior lien interests and loans amounted to $8.6 million and $68.5 million in the six months ended March 31, 1999 and 1998, respectively. These proceeds reflect the sale of senior lien interests in or refinancing of three and nineteen loans, respectively. In small ticket leasing, the Company invested $115.1 million and $33.0 million in the origination of 7,678 and 3,341 leases during the six months ended March 31, 1999 and 1998, respectively. Cash proceeds received upon sales of leases amounted to $89.7 million and $27.8 million during the six months ended March 31, 1999 and 1998, respectively. The Company invested $13.7 million and $34.7 million in 208 and 790 residential mortgage loans during the six months ended March 31, 1999 and 1998, respectively. During that period, the Company received cash proceeds from the sale of some of these loans of $17.0 million and $22.8 million. The Company's cash flow provided by financing activities increased $7.6 million during the six months ended March 31, 1999 as compared to the six months ended March 31, 1998, primarily as a result of increased borrowings. Computer Systems and Year 2000 Issues Based upon a recent assessment by the Company, the Company has in place Year 2000 capable systems for its commercial mortgage loan, equipment leasing and residential mortgage loan operations. The Company believes that the systems for its energy operations (excluding those of Atlas) have completed approximately 85% of the necessary remediation processes and that remediation (including testing) will be completed in June 1999. The Company believes that its embedded systems (such as natural gas monitoring systems and telephones) are Year 2000 compliant or, if not, are either not date dependent or would not materially affect the Company's operations. With respect to Atlas' systems, as a result of the Company's post-acquisition assessment, it has determined to merge Atlas' systems with those of the Company thereby largely eliminating remediation requirements. The Company anticipates that the merger of the systems will be completed by September 30, 1999. As of March 31, 1999, the Company's cost in remediation of its systems has not been material. The Company anticipates that its remaining remediation costs (including costs relating to Atlas' systems) will not exceed $100,000. The Company has initiated communications with all of its significant business partners through a Vendor Readiness Survey to determine their Year 2000 compliance. Responses are evaluated as they are received to determine if additional action is required to ensure compliance of the business partner. As of March 31, 1999, all of the Company's principal business partners have advised the Company that they are Year 2000 compliant or have initiated programs that will render them Year 2000 compliant in a timely fashion. 25 As a result of its internal assessment and survey of its business partners, the Company currently does not believe that Year 2000 matters will have a material impact on its business, financial condition or results of operations. To the extent that any of its business partners are materially affected by Year 2000 problems, the Company intends to seek alternative firms providing the same services that are Year 2000 compliant. In view of the responses from its current business partners, the Company will identify alternative firms on an as-needed basis. There can be no assurance, however, that the Company would be able to make appropriate arrangements should the need arise and, accordingly, it is uncertain whether or to what extent the Company may be affected if problems with its business partners arise. The Company is aware of the potential for claims against it and other companies for damages for products and services that were not Year 2000 compliant. Since the Company is neither a hardware manufacturer nor a software developer, the Company believes that it does not have significant exposure to liability for such claims. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk See Item 2, "Management Discussion and Analysis of Financial Condition and Results of Operations", and Notes 4, 5, 6, and 7 of Notes to the Consolidated Financial Statements (unaudited). PART II. OTHER INFORMATION ITEM 6. Exhibits And Reports On Form 8-K (a) Exhibits: 27 Financial Data Schedule. (b) Reports on Form 8-K During the quarter for which this report is being filed. The Registrant filed a current report on Form 8-K dated February 9, 1999 and Form 8-K/A dated April 20, 1999 regarding the acquisition of JLA Credit Corporation. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RESOURCE AMERICA, INC. (Registrant) Date: May 14, 1999 By: /s/ Steven J. Kessler ------------ ------------------------------------ STEVEN J. KESSLER Senior Vice President and Chief Financial Officer Date: May 14, 1999 By: /s/ Nancy J. McGurk ------------ -------------------------- NANCY J. McGURK Vice President-Finance and Chief Accounting Officer 27 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS SEP-30-1999 OCT-01-1998 MAR-31-1999 44,305 9,822 21,597 21 0 0 66,980 18,942 787,505 0 500,574 231 0 0 247,046 787,505 4,930 67,572 2,270 28,936 6,803 1,927 11,123 18,783 6,338 12,445 0 291 0 12,736 .58 .56
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