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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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: 1-14998
ATLAS PIPELINE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 23-3011077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
311 Rouser Road
Moon Township, Pennsylvania 15108
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (412) 262-2830
Securities registered pursuant to Section 12(b) of the Act:
Common Units of Limited Partnership Interest
Securities registered pursuant to Section 12(g) of the Act:
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
None
As of April 21, 2000, there were outstanding 1,500,000 Common
Units and 1,641,026 Subordinated Units
The aggregate market value of the equity securities held by non-affiliates of
the registrant, based on the closing price on April 25, 2000 was approximately
$19,125,000.
EXPLANATORY NOTE
This report is being filed pursuant to Rule 15d-2 under the Securities Exchange
Act of 1934 and contains only certified financial statements as required by
Rule 15d-2. The registrant is not filing statements of income and cash flows for
itself because it had no operations during the fiscal year end.
ATLAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
ON FORM 10-K
Page
INDEX TO FINANCIAL STATEMENTS............................................................................. 3
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 5
SIGNATURES................................................................................................ 88
2
INDEX TO FINANCIAL STATEMENTS
Page
----
REGISTRANT'S FINANCIAL STATEMENTS
ATLAS PIPELINE PARTNERS, L.P.
BALANCE SHEET
Report of Independent Certified Public Accountants................................................................ 5
Balance Sheet as of December 31, 1999............................................................................. 6
Notes to Balance Sheet............................................................................................ 7
ATLAS PIPELINE PARTNERS, L.P.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Introduction...................................................................................................... 8
Pro Forma Balance Sheet as of December 31, 1999................................................................... 9
Pro Forma Statement of Operations for the year ended December 31, 1999............................................ 10
Pro Forma Statement of Operations for the year ended December 31, 1998............................................ 11
Notes to Pro Forma Financial Statements........................................................................... 12
ATLAS PIPELINE PARTNERS GP, LLC
BALANCE SHEET
Report of Independent Certified Public Accountants................................................................ 14
Balance Sheet as of December 31, 1999............................................................................. 15
Notes to Balance Sheet............................................................................................ 16
HISTORICAL OPERATING FINANCIAL STATEMENTS
RESOURCE AMERICA, INC. GATHERING OPERATIONS
COMBINED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants................................................................ 17
Combined Balance Sheets as of December 31, 1999 and 1998.......................................................... 18
Combined Statements of Operations for the years ended December 31, 1999, 1998 and 1997............................ 19
Combined Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997............................ 20
Notes to Combined Financial Statements............................................................................ 21
VIKING RESOURCES CORPORATION GATHERING OPERATIONS
FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants................................................................ 25
Statements of Assets and Liability as of August 31, 1999 (unaudited) and December 31, 1998 and 1997............... 26
Statements of Operations for the eight months ended August 31, 1999 and 1998 (unaudited) and
the years ended December 31, 1998, 1997, and 1996............................................................... 27
Statements of Cash Flows for the eight months ended August 31, 1999 and 1998 (unaudited) and
the years ended December 31, 1998, 1997, and 1996............................................................... 28
Notes to Financial Statements.................................................................................... 29
THE ATLAS GROUP, INC. GATHERING OPERATIONS
COMBINED FINANCIAL STATEMENTS
Report of Certified Public Independent Accountants................................................................ 33
Combined Balance Sheet as of September 30, 1998 .................................................................. 34
Combined Statements of Operations for the nine months ended September 29, 1998 and
the year ended December 31, 1997................................................................................ 35
Combined Statements of Cash Flows for the nine months ended September 29, 1998 and
the year ended December 31, 1997................................................................................ 36
Notes to Combined Financial Statements............................................................................ 37
3
INDEX TO FINANCIAL STATEMENTS
(Continued)
Page
----
OBLIGORS' FINANCIAL STATEMENTS
ATLAS AMERICA, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of December 31, 1999 (unaudited).................................................. 40
Consolidated Statements of Operations for the three months ended December 31, 1999
and 1998 (unaudited).......................................................................................... 41
Consolidated Statements of Cash Flows for the three months ended December 31, 1999
and 1998 (unaudited).......................................................................................... 42
Notes to Consolidated Financial Statements (unaudited).......................................................... 43
ATLAS AMERICA, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants.............................................................. 44
Consolidated Balance Sheets as of September 30, 1999 and 1998................................................... 45
Consolidated Statement of Operations for the year ended September 30, 1999...................................... 46
Consolidated Statements of Changes in Stockholder's Equity for the year ended September 30, 1999................ 47
Consolidated Statement of Cash Flows for the year ended September 30, 1999...................................... 48
Notes to Consolidated Financial Statements...................................................................... 49
THE ATLAS GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.................................................................................... 58
Consolidated Statements of Financial Position as of June 30, 1998 and July 31, 1997............................. 59
Consolidated Statements of Income for the eleven months ended June 30, 1998 and the year
ended July 31, 1997........................................................................................... 60
Consolidated Statements of Cash Flows for the eleven months ended June 30, 1998 and the year
ended July 31, 1997........................................................................................... 61
Notes to Consolidated Financial Statements...................................................................... 62
RESOURCE ENERGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet at December 31, 1999 (unaudited)..................................................... 71
Consolidated Statements of Operations for the three months ended December 31, 1999
and 1998 (unaudited).......................................................................................... 72
Consolidated Statements of Cash Flows for the three months ended December 31, 1999
and 1998 (unaudited).......................................................................................... 73
Notes to Consolidated Financial Statements (unaudited).......................................................... 74
RESOURCE ENERGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants.............................................................. 75
Consolidated Balance Sheets as of September 30, 1999 and 1998................................................... 76
Consolidated Statements of Operations for the years ended September 30, 1999, 1998 and 1997..................... 77
Consolidated Statements of Changes in Stockholder's Equity for the years ended September 30, 1999,
1998 and 1997................................................................................................. 78
Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998 and 1997..................... 79
Notes to Consolidated Financial Statements...................................................................... 80
4
ITEM 14. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Certified Public Accountants
Partners
Atlas Pipeline Partners, L.P.
We have audited the accompanying balance sheet of Atlas Pipeline
Partners, L.P. (the "Partnership") (a development stage partnership) as of
December 31, 1999. This balance sheet is the responsibility of the Partnership's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the Partnership, as of December 31,
1999 in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
- ---------------------
Cleveland, Ohio
April 21, 2000
5
ATLAS PIPELINE PARTNERS, L.P.
(A DEVELOPMENT STAGE PARTNERSHIP)
BALANCE SHEET
December 31, 1999
ASSETS
CURRENT ASSET
Cash.................................................................................... $ 1,000
========
PARTNERS' EQUITY
PARTNERS' EQUITY................................................................................. $ 1,000
========
See notes to balance sheet
6
ATLAS PIPELINE PARTNERS, L.P.
(A DEVELOPMENT STAGE PARTNERSHIP)
NOTES TO BALANCE SHEET
December 31, 1999
NOTE 1 -- NATURE OF OPERATIONS
Atlas Pipeline Partners, L.P. ("the Partnership") is a Delaware limited
partnership that was formed May 6, 1999, by subsidiaries of Resource America,
Inc. ("RAI"), to acquire the gathering operations of RAI and to sell limited
partnership units. These gathering operations operate 888 miles of gas gathering
pipelines located in Pennsylvania, Ohio and New York. RAI is a publicly traded
company (trading under the symbol REXI on the NASDAQ system) operating in the
real estate finance, leasing, and energy sectors. The Partnership is a
development stage company and has not commenced significant operations.
NOTE 2 -- SUBSEQUENT EVENT
In January 2000, Atlas Pipeline Partners, L.P. completed its initial
public offering of 1.5 million of its common units at a price of $13 per unit
and subsequently acquired the gathering operations of RAI.
7
ATLAS PIPELINE PARTNERS, L.P.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Following are the unaudited pro forma financial statements of Atlas
Pipeline Partners, L.P. ("Atlas Pipeline"), as of December 31, 1999 and for the
years ended December 31, 1999 and 1998. The unaudited pro forma balance sheet
assumes that the registrant's initial public offering and the acquisition of the
natural gas pipeline gathering systems occurred as of December 31, 1999, and the
statements of operations assume the offering and transaction occurred January 1,
1998. The transaction adjustments are presented in the notes to the unaudited
pro forma financial statements. The unaudited pro forma financial statements and
accompanying notes should be read together with the Financial Statements and
related notes included elsewhere.
Atlas Pipeline accounted for the acquisition of the gathering systems
in the unaudited pro forma financial statements as a "drop-down" transaction in
accordance with the guidance of Emerging Issues Task Force Statement No. 87-21,
"Changing Accounting Basis in Master Limited Partnership Transactions." Based on
such guidance, the assets acquired from the gathering operations of Resource
America, Inc. and The Atlas Group, Inc. were recorded at historical cost.
The pro forma balance sheet and the pro forma statements of operations
are unaudited and were derived by adjusting the historical financial statements
of the gathering operations of Resource America, Inc. ("RAI") and its
wholly-owned subsidiaries, The Atlas Group, Inc., and Viking Resources
Corporation. Atlas Pipeline is a newly formed limited partnership which acquired
the net assets related to the gathering operations of RAI and its
above-mentioned Subsidiaries in January 2000. Atlas Pipeline is providing
unaudited pro forma financial statements for informational purposes only. They
should not be construed as indicative of Atlas Pipeline's financial position or
results of operations had the transactions been consummated on the dates
assumed. Moreover, they do not project Atlas Pipeline's financial position or
results of operations for any future date or period.
8
ATLAS PIPELINE PARTNERS, L.P.
PRO FORMA BALANCE SHEET (UNAUDITED)
December 31, 1999
(in thousands)
Historical
Atlas Pro Forma and
Pipeline Offering Pro Forma
Partners Adjustments As Adjusted
ASSETS
Cash and cash equivalents.................................................... $ 1 $ 17,385 A $ 750
(16,636) B
Property and equipment
Gas gathering and transmission facilities.................................... - 15,760 B 15,760
Less - accumulated depreciation and amortization............................. - - -
---------- ---------- ----------
- 15,760 15,760
---------- ---------- ----------
$ 1 $ 16,509 $ 16,510
========== ========== ==========
LIABILITIES
Advances from parent......................................................... $ - $ (12,970) B $ -
12,970 B
Accounts payable............................................................. - (874) B -
874 B
PARTNERS' EQUITY
Common units................................................................. 17,393 A 17,393
Subordinated units........................................................... - (876) B (876)
General partner interest .................................................... 1 (8) A (7)
---------- ---------- ----------
$ 1 $ 16,509 $ 16,510
========== ========== ==========
See notes to pro forma financial statements
9
ATLAS PIPELINE PARTNERS, L.P.
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(in thousands, except per unit amount)
Historical Historical
Resource Viking
America Resources Pro Forma and
Gathering Gathering Offering Pro Forma
Operations Operations Adjustments As Adjusted
Revenues:
Transportation and compression revenue..................... $ 3,541 $ 509 $ 3,386 C $ 7,436
Costs and expenses:
Transportation and compression............................. 695 83 - 778
General and administrative................................. 417 77 - 494
Property tax............................................... 16 3 - 19
Interest expense........................................... 397 - (397) D -
Depreciation and amortization.............................. 680 45 (725) E 1,051
1,051 F
----------- ----------- ---------
Total costs and expenses................................. 2,205 208 (71) 2,342
----------- ----------- ---------- -----------
Income from operations........................................ 1,336 301 3,457 5,094
Provision (benefit) for income taxes.......................... 532 120 (652) G -
----------- ----------- --------- -----------
Net income.................................................... $ 804 $ 181 $ 4,109 $ 5,094
=========== =========== ========= ===========
Net income per unit........................................... $ 1.59
===========
See notes to pro forma financial statements
10
ATLAS PIPELINE PARTNERS, L.P.
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(in thousands, except per unit amount)
Historical
---------------------------------------------
Resource Viking Atlas
America Resources Group
Gathering Corporation Gathering
Operations Operations Operations
Year Year Nine Months Additional
Ended Ended Ended Pro Forma Pro Forma
December 31, December 31, September 29, Pro Forma and Offering as
1998 1998 1998 Adjustments Adjustments Adjusted
------------- -------------- ------------ ----------- ----------- --------
Revenues:
Transportation and compression
revenue.......................... $ 1,022 $ 769 $ 2,026 $ - $ 3,300C $ 7,117
Costs and expenses:
Transportation and compression..... 191 71 315 - - 577
General and administrative......... 90 116 355 - - 561
Property tax expense............... 39 9 1 - - 49
Interest expense................... 79 - 277 - (356)D -
Depreciation and amortization ..... 275 49 1,098 (1,422)E - 1,051
1,051 F
--------- --------- --------- ----------- --------- -----------
Total costs and expenses......... 674 245 2,046 (371) (356) 2,238
--------- --------- --------- ----------- --------- -----------
Income (loss) from operations......... 348 524 (20) 371 3,656 4,879
Provision (benefit) for income taxes.. 138 210 (8) 145 (485)G -
--------- --------- --------- ----------- --------- -----------
Net income (loss)..................... $ 210 $ 314 $ (12) $ 226 $ 4,141 $ 4,879
========= ========= ========= =========== ========= ===========
Net income per unit................... $ 1.52
==========
See notes to pro forma financial statements
11
ATLAS PIPELINE PARTNERS, L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
The accompanying pro forma financial statements include the gathering
operations pipeline assets, liabilities, equity and operations of Atlas America,
Inc., Viking Resources Corporation ("VRC"), and Resource Energy, Inc.,
wholly-owned subsidiaries of Resource America, Inc. These gathering operations
operate gas gathering pipelines located in Pennsylvania, Ohio and New York.
Resource America is a publicly traded company (trading under the symbol REXI on
the NASDAQ system) operating in the real estate finance, leasing, and energy
sectors.
On September 29, 1998, Resource America acquired all of the common
stock of Atlas America, formerly The Atlas Group, Inc., in exchange for
2,063,496 shares of Resource America's common stock and the assumption of Atlas
America's debt. The acquisition was recorded under the purchase method of
accounting and, accordingly, the results of the gas gathering operations of
Atlas America are included in these pro forma financial statements commencing
January 1, 1998. The purchase price has been allocated to gathering assets
acquired and related liabilities assumed based on the fair market value at the
date of acquisition. The pro forma statement of operations for the year ended
December 31, 1998 includes the historical results for Atlas gathering operations
for the nine months ended September 30, 1998. The three months of
post-acquisition operations is included in the Resource America gathering
operations results.
On August 31, 1999, Resource America acquired all of the common stock
of VRC in exchange for 1,243,684 shares of Resource America's common stock,
$29.0 million in cash and the assumption of VRC debt. The acquisition was
recorded under the purchase method of accounting and, accordingly, the results
of the gas gathering and transportation operations of VRC are included in these
financial statements commencing January 1, 1998. The purchase price has been
allocated to pipeline assets acquired and liabilities assumed based on the fair
market value at the date of acquisition. The pro forma statement of operations
for the year ended December 31, 1999 includes the historical results for Viking
Resources gathering operations for the eight months ended August 31, 1999. The
four months of post-acquisition operations is included in the Resource America
gathering operations results.
The pro forma and offering adjustments have been prepared as if the
acquisition of the gathering systems had taken place on December 31, 1999, in
the case of the pro forma balance sheet, or as of January 1, 1998 in the case of
the pro forma income statement for the years ended December 31, 1999 and 1998.
A. Reflects the estimated net proceeds to the Partnership of $17.4
million from the issuance and sale of 1.5 million common units at
an initial public offering price of $13.00 per common unit, net of
underwriters' discounts and commissions of approximately $1.4
million and offering expenses of approximately $750,000. Upon
completion of the offering, Atlas Pipeline will have $750,000 of
working capital.
B. Reflects the transaction by which Atlas Pipeline will obtain
ownership of the assets of Resource America gathering operations
at net book value in exchange for cash of $2.8 million, the
assumption of $13.0 million in debt, a $874,000 payment to two
affiliated partnerships from whom a portion of the gathering
systems will be acquired and 1,641,026 subordinated units. As this
transaction is between entities under common control, it has been
recorded at historical net book value of $15.8 million, with the
incremental amount of $876,000 recorded as a reduction in
partners' equity relating to the subordinated units.
C. Reflects the pro forma revenues from the master natural gas
gathering agreement effective upon consummation of the offering
pursuant to which Atlas Pipeline will transport natural gas
production. Pro forma revenues from such agreements were
calculated based on Resource America Gathering Operations
historical natural gas production volumes.
D. Reflects the elimination of historical interest expense paid to
Resource America as such loans will not be assumed.
E. Reflects the elimination of historical depreciation and
amortization expense.
F. Reflects pro forma depreciation expense based on the fair value
assigned to the assets in allocating the purchase price paid by
Resource America for The Atlas Group, Inc. and an assessment of
the remaining useful lives of those assets at the date of
acquisition.
G. Reflects the elimination of the historical income tax provision as
income taxes will be borne by the partners and not Atlas Pipeline.
12
ATLAS PIPELINE PARTNERS, L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
Pro Forma Net Income Per Unit
Pro forma net income per unit is determined by dividing the pro forma
net income that would have been allocated to the common and subordinated
unitholders, which is 98% of pro forma net income, by the number of common and
subordinated units expected to be outstanding at the closing of the offering.
For purposes of this calculation, the minimum quarterly cash distribution was
assumed to have been paid to both common and subordinated unitholders and the
number of common and subordinated units outstanding, 3,205,129, was assumed to
have been outstanding the entire period. Pursuant to the partnership agreement,
to the extent that the minimum quarterly distribution is exceeded, the general
partner is entitled to certain incentive distributions which will result in less
income proportionately being allocated to the common and subordinated
unitholders. Basic and diluted pro forma net income per common and subordinated
units are equal as there are no dilutive units.
Distribution of Cash Upon Liquidation
Following the beginning of Atlas Pipeline's dissolution and
liquidation, assets will be sold or otherwise disposed of and the partners'
capital account balances will be adjusted to reflect any resulting gain or loss.
The proceeds of liquidation will first be applied to the payment of its
creditors in the order of priority provided in the partnership agreement and by
law. After that, the proceeds will be distributed to the unitholders and the
general partner in accordance with their capital account balances, as so
adjusted.
13
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Atlas Pipeline Partners GP, LLC
We have audited the accompanying balance sheet of Atlas Pipeline
Partners GP, LLC (the "Company") (a development stage company) as of December
31, 1999. This balance sheet is the responsibility of the Company's management.
Our responsibility is to express an opinion on this balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of the Company, as of December 31,
1999 in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Cleveland, Ohio
April 21, 2000
14
ATLAS PIPELINE PARTNERS GP, LLC
(A Development Stage Company)
BALANCE SHEET
December 31, 1999
ASSETS
CURRENT ASSET
Cash.................................................................................... $ 1,000
========
STOCKHOLDER'S EQUITY
STOCKHOLDER'S EQUITY............................................................................. $ 1,000
========
See notes to balance sheet
15
ATLAS PIPELINE PARTNERS GP, LLC
(A Development Stage Company)
NOTES TO BALANCE SHEET
December 31, 1999
NOTE 1 -- NATURE OF OPERATIONS
Atlas Pipeline Partners GP, LLC (an indirect wholly owned subsidiary of
Resource America, Inc. ("RAI")) is a Delaware corporation that was formed
November 18, 1999 to become the general partner and manage the operations and
activities of Atlas Pipeline Partners, L.P. a partnership formed to acquire RAI
gas gathering operations. RAI gathering operations operate 888 miles of gas
gathering pipelines located in Pennsylvania, Ohio and New York. RAI is a
publicly traded company (trading under the symbol REXI on the NASDAQ system)
operating in the real estate finance, leasing, and energy sectors.
Atlas Pipeline Partners GP, LLC, Inc. is a development stage company
and has not commenced significant operations.
NOTE 2 -- SUBSEQUENT EVENT
In January 2000, Atlas Pipeline Partners, L.P. completed its initial
public offering of 1.5 million of its common units at a price of $13 per unit
and subsequently acquired RAI's gas gathering operations.
16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Resource America, Inc.
We have audited the accompanying combined balance sheets of Resource
America, Inc. Gathering Operations as of December 31, 1999 and 1998, and the
related combined statements of operations and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined financial position of Resource
America, Inc. Gathering Operations as of December 31, 1999 and 1998, and the
combined results of their operations and their combined cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
/s/ Grant Thorton LLP
Cleveland, Ohio
April 21, 2000
17
RESOURCE AMERICA, INC. GATHERING OPERATIONS
COMBINED BALANCE SHEETS
December 31,
1999 1998
--------------- -------------
ASSETS
Cash and cash equivalents......................................................... $ 3,000 $ 9,000
Accounts receivable - affiliates.................................................. 374,000 250,000
--------------- -------------
Total current assets......................................................... 377,000 259,000
Property and equipment (at cost)
Gas gathering and transmission facilities...................................... 16,744,000 8,078,000
Less - accumulated depreciation................................................ (1,858,000) (1,266,000)
--------------- -------------
Net property and equipment................................................. 14,886,000 6,812,000
Goodwill (net of accumulated amortization of $110,000 at December 31, 1999
and $22,000 at December 31, 1998).............................................. 2,480,000 2,568,000
--------------- -------------
$ 17,743,000 $ 9,639,000
=============== =============
LIABILITIES AND COMBINED EQUITY
Accounts payable and accrued liabilities.......................................... $ 33,000 $ 47,000
--------------- -------------
Total current liabilities ................................................... 33,000 47,000
Advances from parent.............................................................. 12,970,000 6,599,000
Combined equity................................................................... 4,740,000 2,993,000
--------------- -------------
$ 17,743,000 $ 9,639,000
=============== =============
See accompanying notes to combined financial statements
18
RESOURCE AMERICA, INC. GATHERING OPERATIONS
COMBINED STATEMENTS OF OPERATIONS
Years Ended
December 31,
1999 1998 1997
----------- ------------- -------------
Revenues:
Transportation and compression revenue-affiliates......................... $ 3,541,000 $ 1,022,000 $ 349,000
Costs and expenses:
Transportation and compression............................................ 711,000 191,000 81,000
General and administration................................................ 417,000 129,000 45,000
Interest expense.......................................................... 397,000 79,000 -
Depreciation and amortization............................................. 680,000 275,000 172,000
----------- ------------- -------------
Total costs and expenses.................................................. 2,205,000 674,000 298,000
----------- ------------- -------------
Income from operations....................................................... 1,336,000 348,000 51,000
Provision for income taxes................................................... 532,000 138,000 19,000
----------- ------------- -------------
Net income .................................................................. $ 804,000 $ 210,000 $ 32,000
=========== ============= =============
See accompanying notes to combined financial statements
19
RESOURCE AMERICA, INC. GATHERING OPERATIONS
COMBINED STATEMENTS OF CASH FLOWS
Years Ended
December 31,
1999 1998 1997
------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................... $ 804,000 $ 210,000 $ 32,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................. 680,000 275,000 172,000
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable................................ (124,000) (14,000) 5,000
Increase (decrease) in accounts payable and accrued liabilities........... (14,000) (64,000) -
------------ ------------- -------------
Net cash provided by operating activities................................. 1,346,000 407,000 209,000
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash acquired in business acquisition.................................... - 10,000 -
Capital expenditures......................................................... (1,366,000) (402,000) (19,000)
------------- ------------- --------------
Cash used in investing activities......................................... (1,366,000) (392,000) (19,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances (to) from parent.................................................... 14,000 (6,000) (190,000)
------------ ------------- -------------
Cash used in financing activities......................................... 14,000 (6,000) (190,000)
Increase (decrease) in cash and cash equivalents............................. (6,000) 9,000 -
Cash and cash equivalents, beginning of period............................... 9,000 - -
------------ ------------- -------------
Cash and cash equivalents, end of period..................................... $ 3,000 $ 9,000 $ -
============ ============= =============
See accompanying notes to combined financial statements
20
RESOURCE AMERICA, INC. GATHERING OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
The accompanying combined financial statements include the pipeline
assets, liabilities, equity, and operations of the wholly owned subsidiaries of
AIC, Inc. ("AIC") and the pipeline operating divisions of Resource Energy, Inc.
("REI") and Viking Resources Corporation ("VRC"). These entities operate 888
miles of gas gathering pipelines located in Pennsylvania, Ohio and New York. AIC
is a wholly owned subsidiary of Atlas America, Inc. ("ATLAS"). REI, ATLAS, and
VRC are wholly owned subsidiaries of Resource America, Inc. ("RAI"). AIC and REI
and VRC will be referred to as Gathering Operations. RAI is a publicly traded
company (trading under the symbol REXI on the NASDAQ system) operating in the
real estate finance, leasing, and energy sectors.
In January 2000, RAI sold the net assets of the Gathering Operations to
Atlas Pipeline Partners, L.P., a newly formed limited partnership, in connection
with its initial public offering of limited partnership units. See Note 5.
On September 29, 1998, RAI acquired all of the common stock of ATLAS,
formerly The Atlas Group, Inc., in exchange for 2,063,496 shares of RAI's common
stock and the assumption of ATLAS debt. The acquisition was recorded under the
purchase method of accounting and accordingly the results of the gas gathering
and transportation operations of ATLAS are included in these financial
statements commencing September 30, 1998. The purchase price has been allocated
to pipeline assets acquired and liabilities assumed based on the fair market
value at the date of acquisition.
The following unaudited pro forma information is presented to show the
effect on revenue and net income had the acquisition been consummated on January
1, 1998:
Year Ended
December 31,
1998
-------------
(in thousands)
Revenue......................................................... $ 3,048
Net income...................................................... 490
On August 31, 1999, RAI acquired all of the common stock of VRC in
exchange for 1,243,684 shares of RAI's common stock, $29.0 million in cash and
the assumption of VRC debt. The acquisition was recorded under the purchase
method of accounting and, accordingly, the results of the gas gathering and
transportation operations of VRC are included in these financial statements
commencing September 1, 1999. The purchase price has been allocated to pipeline
assets acquired and liabilities assumed based on the fair market value at the
date of acquisition.
The following unaudited pro forma information is presented to show the
effect on revenue and net income had the acquisition been consummated on January
1, 1998:
Years Ended
December 31,
------------------------
1999 1998
------------ --------
(in thousands)
Revenue................................................ $ 4,050 $ 3,817
Net income............................................. 985 729
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying financial statement follows.
21
RESOURCE AMERICA, INC. GATHERING OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Use of Estimates
Preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Property and Equipment
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives. Gas gathering and transmission facilities are depreciated over 15 or 25
years using the double declining balance and straight-line methods. Other
equipment is depreciated over 5 to 10 years using the straight-line methods.
Impairment of Long-Lived Assets
The Gathering Operations reviews its long-lived assets for impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be recoverable. If it is determined that an asset's estimated future
cash flows will not be sufficient to recover its carrying amount, an impairment
charge will be recorded to reduce the carrying amount for that asset to its
estimated fair value.
Goodwill
Goodwill is associated with the purchase of the pipeline assets of
Atlas and is being amortized over a period of 30 years, using the straight line
method.
Federal Income Taxes
The Gathering Operations are included in the consolidated federal
income tax return of RAI. Income taxes are calculated as if the Gathering
Operations had filed a return on a separate company basis utilizing a statutory
rate of 34%. Deferred taxes represent deferred tax assets or liabilities which
are recognized based on the temporary differences between the tax basis of the
Gathering Operations assets and liabilities and the amounts reported in the
financial statements. These amounts are owed to RAI and are included in Advances
from Parent. Separate company state tax returns are filed in those states in
which subsidiaries and divisions of Atlas, REI, and VRC are registered to do
business.
Revenue Recognition
Revenues are recognized at the time the natural gas is transmitted
through the pipelines.
Fair Value of Financial Instruments
For cash and cash equivalents, receivable and payables, the carrying
amounts approximate fair value because of the short maturity of these
instruments.
Accounts Receivable - Affiliates
The Gathering Operations are affiliated with other companies which are
subsidiaries of AIC and limited partnerships controlled by AIC, REI, and VRC.
The Gathering Operations are dependent upon the resources and services provided
by AIC, REI, VRC and these affiliates. Accounts receivable represent the net
balance due from these affiliates and includes reimbursements of Gathering
Operations expenses to be reimbursed, which have been paid by these affiliates.
22
RESOURCE AMERICA, INC. GATHERING OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Cash Flow Statements
For purposes of the statement of cash flows, all highly liquid debt
instruments purchased with a maturity of three months or less are considered to
be cash equivalents.
Supplemental Disclosure of Cash Flow Information
Information for the years ended December 31, 1999, 1998 and 1997 is as
follows:
Years Ended
------------------------------------------------
December 31,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
Cash paid for:
Interest................................................................ $ 389,000 $ 79,000 $ -
============= ============= =============
Income taxes............................................................ $ 403,000 $ 207,000 $ 17,000
============= ============= =============
Details of Viking Acquisition at August 31, 1999
Fair value of assets acquired........................................................... $ 7,407,000
Liabilities assumed..................................................................... (6,464,000)
Capital contributed..................................................................... ( 943,000)
-----------------
Net cash acquired....................................................................... $ 0
=================
Details of Atlas Acquisition at September 29, 1998
Fair value of assets acquired........................................................... $ 7,786,000
Liabilities assumed..................................................................... (5,308,000)
Capital contributed..................................................................... (2,488,000)
-----------------
Net cash acquired....................................................................... $ (10,000)
=================
Expense Allocation
RAI allocated certain direct and indirect general and administrative
expenses to the Gathering Operations during each of the years presented.
Indirect costs were allocated based on the number of employees. The types of
indirect expenses allocated to the Gathering Operations during this period
consisted of salaries and benefits, legal, office rent, utilities, telephone
services, data processing services, and office supplies. Management believes
that the method used to allocate these expenses is reasonable.
New Accounting Standards
Effective January 1999, the Gathering Operations became subject to the
provisions of Statement of Financial Accounting Standards No. 130. (SFAS 130).
SFAS 130, "Reporting Comprehensive Income" requires disclosure of comprehensive
income and its components. Comprehensive income includes net income and all
other changes in 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". The Gathering
Operations have no material elements of comprehensive income, other than net
income to report.
23
RESOURCE AMERICA, INC. GATHERING OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
In June 1998 the Financial Accounting Standards Board (FASB) issued
statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging". SFAS 133 will require the Company to
recognize all derivatives as either assets or liabilities in its consolidated
balance sheet and to measure those instruments at fair value. The Company is
required to adopt SFAS 133 effective October 1, 2000. The effect of adopting
SFAS 133 on the Company's consolidated financial position, results of operations
and cash flows will be dependent on the extent of future hedging activities and
fluctuations in interest rates.
NOTE 3 -- INCOME TAXES
As discussed in Note 2, the Gathering Operations results are included
in RAI's consolidated federal income tax return. The amounts presented below
were calculated as if the Gathering Operations filed a separate federal income
tax return. The provision for income taxes for each period consists of the
following:
Years Ended
------------------------------------------------
December 31,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
Federal...................................................................... $ 414,000 $ 118,000 $ 17,000
State and local.............................................................. 118,000 20,000 2,000
------------- ------------- -------------
$ 532,000 $ 138,000 $ 19,000
============= ============= =============
RAI records current and deferred tax assets and liabilities on its
books and the Gathering Operations allocation was settled through increases or
decreases to Advances from parent. At December 31, 1999 the Gathering Operations
deferred tax asset, related to depreciation of property and equipment, would
have approximated $1.6 million. At December 31, 1998 the deferred tax asset
would have approximated $1.3 million.
NOTE 4 -- COMBINED EQUITY
The following is a reconciliation of the combined equity balance of Gathering
Operations:
Years Ended
------------------------------------------------
December 31,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
Balance, beginning of period................................................. $ 2,993,000 $ 295,000 $ 263,000
Net income................................................................... 804,000 210,000 32,000
Capital contribution in connection with acquisitions......................... 943,000 2,488,000 -
------------- ------------- -------------
Balance, end of period....................................................... $ 4,740,000 $ 2,993,000 $ 295,000
============= ============= =============
NOTE 5 -- SUBSEQUENT EVENT
As described in Note 1, RAI sold its gas gathering and transmission
facilities to Atlas Pipeline Partners, L.P., a newly formed limited partnership.
In connection therewith, in January 2000, Atlas Pipeline Partners, L.P.
completed its initial public offering of 1.5 million limited partnership common
units at $13.00 per unit. As a result, RAI no longer has gathering operations.
24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Resource America, Inc.
We have audited the accompanying Statement of Assets and Liability of
Viking Resources Corporation Gathering Operations (a division of Viking
Resources Corporation) as of December 31, 1998 and 1997, and the related
statements of operations and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Viking Resources
Corporation Gathering Operations (a division of Viking Resources Corporation) as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
Ernst & Young LLP
October 8, 1999
Cleveland, Ohio
25
VIKING RESOURCES CORPORATION GATHERING OPERATIONS
STATEMENTS OF ASSETS AND LIABILITY
December 31,
August 31, --------------------------------
1999 1998 1997
----------- -------------- ------------
(unaudited)
Assets
Accounts receivable--affiliates.......................................... $ 107,000 $ 113,000 $ 96,000
----------- ----------- -----------
Total current assets................................................. 107,000 113,000 96,000
Property and equipment (at cost):
Gas gathering and transmission facilities............................ 1,454,000 1,401,000 682,000
Less--accumulated depreciation........................................ (629,000) (584,000) (536,000)
----------- ----------- -----------
Net property and equipment.............................................. 825,000 817,000 146,000
Total assets......................................................... $ 932,000 $ 930,000 $ 242,000
=========== =========== ===========
Liabilities
Advances from Viking Resources Corporation.............................. $ 932,000 $ 930,000 $ 242,000
=========== =========== ===========
See accompanying notes to financial statements.
26
VIKING RESOURCES CORPORATION GATHERING OPERATIONS
STATEMENTS OF OPERATIONS
Eight Months Ended Years Ended
------------------------- ---------------------------------------
August 31, December 31,
------------------------- ---------------------------------------
1999 1998 1998 1997 1996
------------ ---------- ----------- ----------- ---------
(unaudited)
Revenues
Transportation and compression
Revenue - affiliates........................... $ 509,000 $ 437,000 $ 769,000 $ 640,000 $ 557,000
Costs and expenses
Transportation and compression.................... 83,000 48,000 71,000 60,000 50,000
General and administration........................ 77,000 77,000 116,000 101,000 103,000
Property tax expense.............................. 3,000 5,000 9,000 7,000 6,000
Depreciation and amortization..................... 45,000 32,000 49,000 17,000 24,000
----------- ----------- ----------- ----------- -----------
Total costs and expenses....................... 208,000 162,000 245,000 185,000 183,000
Income from operations............................ 301,000 275,000 524,000 455,000 374,000
Provision for income taxes........................ 120,000 110,000 210,000 182,000 150,000
----------- ----------- ----------- ----------- -----------
Net income........................................ $ 181,000 $ 165,000 $ 314,000 $ 273,000 $ 224,000
=========== =========== =========== =========== ===========
See accompanying notes to financial statements.
27
VIKING RESOURCES CORPORATION GATHERING OPERATIONS
STATEMENTS OF CASH FLOWS
Eight Months Ended Years Ended
-------------------------- -----------------------------------------
August 31, December 31,
-------------------------- -----------------------------------------
1999 1998 1998 1997 1996
------------ ------------ ----------- ----------- -----------
(unaudited)
Cash flows from operating activities
Net income........................................ $ 181,000 $ 165,000 $ 314,000 $ 273,000 $ 224,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 45,000 32,000 49,000 17,000 24,000
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable-
affiliates............................... 6,000 1,000 (17,000) (7,000) (25,000)
----------- ----------- ----------- ------------ -----------
Net cash provided by operating activities......... 232,000 198,000 346,000 283,000 223,000
Cash flows from investing activities
Capital expenditures.............................. (53,000) (576,000) (720,000) (127,000) -
----------- ----------- ----------- ----------- -----------
Cash used in investing activities................. (53,000) (576,000) (720,000) (127,000) -
Cash flows from financing activities
Net intercompany activity with Viking
Resources Corporation.......................... (179,000) 378,000 374,000 (156,000) (223,000)
----------- ----------- ----------- ----------- -----------
Cash used in (provided by) financing activities... (179,000) 378,000 374,000 (156,000) (223,000)
Increase in cash and cash equivalents............. - - - - -
Cash and cash equivalents, beginning of period.... - - - - -
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of period.......... $ - $ - $ - $ - $ -
=========== =========== =========== =========== ===========
See accompanying notes to financial statements.
28
VIKING RESOURCES CORPORATION GATHERING OPERATIONS
NOTES TO FINANCIAL STATEMENTS
EIGHT MONTHS ENDED AUGUST 31, 1999 AND AUGUST 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
NOTE 1 - NATURE OF OPERATIONS
The accompanying financial statements include the pipeline assets,
equity, and operations of Viking Resources Corporation ("VRC"). VRC operates gas
gathering pipelines and related equipment located in Pennsylvania and Ohio.
VRC's pipeline operations are referred to as Viking Gathering Operations. Viking
Gathering Operations is a division of VRC and has no separate legal status.
On August 31, 1999, Resource America, Inc. ("RAI") acquired all of the
common stock of VRC (see Note 5).
RAI intends to sell the net assets of its Gathering Operations and the
Viking Gathering Operations to Atlas Pipeline Partners, L.P., a newly formed
limited partnership, in connection with its initial public offering of limited
partnership units.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying financial statement follows.
Use of Estimates
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Property and Equipment
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives. Gas gathering and transmission facilities are depreciated over five or
twenty two years using the straight-line method. Other equipment is depreciated
over five years using the straight-line method.
Impairment of Long-Lived Assets
Viking Gathering Operations reviews its long-lived assets for
impairment whenever events or circumstances indicate that the carrying amount of
an asset may not be recoverable. If it is determined that an asset's estimated
future cash flows will not be sufficient to recover its carrying amount, an
impairment charge will be recorded to reduce the carrying amount for that asset
to its estimated fair value.
Federal Income Taxes
Viking Gathering Operations is included in the consolidated federal
income tax return of VRC. Federal income taxes have been provided as if Viking
Gathering Operations had filed a return on a separate company basis utilizing a
statutory rate of 34%. Deferred income taxes represent deferred tax assets or
liabilities which are recognized based on the temporary differences between the
tax basis of Viking Gathering Operations assets and liabilities and the amounts
reported in the financial statements. These amounts are owed to/due from VRC and
are included in Advances from Viking Resources Corporation in the accompanying
balance sheet. Separate company state tax returns are filed in those states in
which VRC is registered to do business.
29
VIKING RESOURCES CORPORATION GATHERING OPERATIONS
NOTES TO FINANCIAL STATEMENTS
EIGHT MONTHS ENDED AUGUST 31, 1999 AND AUGUST 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 - (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Revenue Recognition
Revenues are recognized at the time the natural gas is transmitted
through the pipelines.
Revenue and Accounts Receivable-Affiliates
Viking Gathering Operations is affiliated with various limited
partnerships managed by VRC. Viking Gathering Operations derives substantially
all of its revenue from VRC and its affiliated limited partnerships and is
dependent upon the resources and services provided by VRC. Accounts
Receivable--Affiliates represents the net balance due from VRC and the limited
partnerships managed by VRC and includes transportation fees and reimbursements
of Viking Gathering Operations expenses such as compression and maintenance
costs. The outstanding receivable balance does not bear interest.
The carrying amounts of accounts receivable approximate fair value
because of the short maturity of these instruments.
Cash Flow Statements
For purposes of the statement of cash flows, all highly liquid debt
instruments purchased with a maturity of three months or less are considered to
be cash equivalents.
For the eight months ended August 31, 1999 and 1998 and the years ended
December 31, 1998, 1997 and 1996, the cash paid by the Gathering Operations for
income taxes equals the provision for income taxes, which is included in the
intercompany liability.
Expense Allocation
VRC allocated certain direct and indirect general and administrative
expenses to Viking Gathering Operations during the years ended December 31,
1998, 1997 and 1996 and the eight months ended August 31, 1999 and 1998,
respectively. Indirect costs were allocated based on the number of employees.
The types of indirect expenses allocated to Viking Gathering Operations during
this period consisted of salaries and benefits, legal, office rent, utilities,
telephone services, data processing services, and office supplies.
The allocation of these costs for the years ended December 31, 1998,
1997 and 1996 and for the eight months ended August 31, 1999 and 1998 amounted
to $17,200, $14,100 and $14,800 and $18,500 and $15,500, respectively.
Management believes that the method used to allocate these expenses is
reasonable. However, the above amounts are not necessarily indicative of the
level of expenses that might have been incurred had Viking Gathering Operations
been operating as a stand-alone entity.
Advances from Viking Resources Corporation
The advances from VRC represent the cumulative net amount of
investments and all other transactions between Viking Gathering Operations and
VRC. The account does not bear interest and had an average balance of $626,000
in 1998 and $184,000 in 1997.
30
VIKING RESOURCES CORPORATION GATHERING OPERATIONS
NOTES TO FINANCIAL STATEMENTS
EIGHT MONTHS ENDED AUGUST 31, 1999 AND AUGUST 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 - (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
New Accounting Standards
Effective January 1999, Viking Gathering Operations became subject to
the provisions of Statement of Financial Accounting Standards No. 130. SFAS
130, "Reporting Comprehensive Income" requires disclosure of comprehensive
income and its components. Comprehensive income includes net income and all
other changes in 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". Viking Gathering
Operations has no material elements of comprehensive income, other than net
income, to report.
In June 1998 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging." SFAS 133 will require the Company to
recognize all derivatives as either assets or liabilities in its balance sheet
and to measure those instruments at fair value. The Company is required to adopt
SFAS 133 effective October 1, 2000. The effect of adopting SFAS 133 on the
Company's financial position, results of operations and cash flows will be
dependent on the extent of future hedging activities and fluctuations in
interest rates.
NOTE 3 - INCOME TAXES
As discussed in Note 2, the results of operations of Viking Gathering
Operations are included in VRC's consolidated federal income tax return. The
amounts presented below were calculated as if Viking Gathering Operations filed
a separate federal income tax return. The provision for income taxes for each
period consists of the following:
Eight Months Ended Years Ended
August 31, December 31,
1999 1998 1998 1997 1996
---------- ---------- ----------- ----------- ---------
(unaudited)
Federal........................................... $ 102,000 $ 93,000 $ 178,000 $ 155,000 $ 127,000
State and local................................... 18,000 17,000 32,000 27,000 23,000
----------- ----------- ----------- ----------- -----------
$ 120,000 $ 110,000 $ 210,000 $ 182,000 $ 150,000
=========== =========== =========== =========== ===========
VRC records current and deferred tax assets and liabilities on its
books and Viking Gathering Operations allocation was settled through increases
or decreases in the advances from Viking Resources Corporation. At December 31,
1998 and 1997 Viking Gathering Operations would have recorded a deferred tax
liability of approximately $7,000 and a deferred tax asset of approximately
$2,000, respectively, related primarily to depreciation of property and
equipment.
NOTE 4 - YEAR 2000 (UNAUDITED)
Viking Gathering operations utilizes VRC's computer systems to process
all of its transactions. Viking Gathering Operations has been informed that VRC
utilizes unmodified vendor software and management of VRC believes that
appropriate actions have been taken to upgrade its existing software and systems
in order for it to be Year 2000 compliant. Costs associated with making the
systems Year 2000 compliant have not been material.
31
VIKING RESOURCES CORPORATION GATHERING OPERATIONS
NOTES TO FINANCIAL STATEMENTS
EIGHT MONTHS ENDED AUGUST 31, 1999 AND AUGUST 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 - (Continued)
NOTE 5 - SALE OF COMPANY
On August 31, 1999, Resource America, Inc. ("RAI") acquired all of the
common stock of VRC, in exchange for 1,243,684 shares of RAI's common stock,
$29.0 million in cash and the assumption of VRC debt. RAI is a publicly traded
company (trading under the symbol REXI on the NASDAQ system) operating in the
real estate finance, leasing, and energy sectors. As a result of this
acquisition, VRC became a wholly owned subsidiary of RAI. The acquisition will
be recorded under the purchase method of accounting. The purchase price will be
allocated to pipeline assets acquired and liabilities assumed based on the fair
market value at the date of acquisition. The accompanying financial statements
are presented based on VRC's historical cost.
32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Atlas America, Inc.
We have audited the accompanying combined balance sheet of The Atlas
Group, Inc.'s Gathering Operations as of September 29, 1998 and the related
combined statements of operations and cash flows for the nine-month period ended
September 29, 1998 and the years ended December 31, 1997. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of The
Atlas Group, Inc.'s Gathering Operations as of September 29, 1998 and the
combined results of their operations and their combined cash flows for the
nine-month period ended September 29, 1998 and the year ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Cleveland, Ohio
July 14, 1999
33
THE ATLAS GROUP, INC. GATHERING OPERATIONS (see Note 1)
COMBINED BALANCE SHEET
September 30,1998
ASSETS
Cash and cash equivalents.............................................. $ 18,000
Accounts receivable - affiliates....................................... 193,000
---------------
Total current assets.............................................. 211,000
Property and equipment (at cost)
Gas gathering and transmission facilities........................... 20,162,000
Land................................................................ 20,000
Less - accumulated depreciation..................................... (11,918,000)
---------------
Net property and equipment........................................ 8,264,000
---------------
$ 8,475,000
===============
LIABILITIES AND COMBINED EQUITY
Accounts payable and accrued liabilities............................... $ 110,000
---------------
Total current liabilities......................................... 110,000
Advances from parent................................................... 5,168,000
Other long-term liabilities............................................ 410,000
Combined equity........................................................ 2,787,000
---------------
$ 8,475,000
===============
See accompanying notes to combined financial statements
34
THE ATLAS GROUP, INC. GATHERING OPERATIONS (see Note 1)
COMBINED STATEMENTS OF OPERATIONS
Nine Months Ended Year Ended
September 29, December 31,
------------ -------------
1998 1997
------------ -------------
Revenues:
Transportation and compression revenue - affiliates.. $ 2,026,000 $ 2,578,000
Costs and expenses:
Transportation and compression....................... 315,000 479,000
General and administration........................... 356,000 289,000
Interest expense..................................... 277,000 370,000
Depreciation and amortization........................ 1,098,000 1,188,000
------------ -------------
Total costs and expenses........................... 2,046,000 2,326,000
------------ -------------
Income (loss) from operations........................... (20,000) 252,000
Provision (benefit) for income taxes.................... (8,000) 101,000
------------- -------------
Net income (loss)....................................... $ (12,000) $ 151,000
============= =============
See accompanying notes to combined financial statements
35
THE ATLAS GROUP, INC. GATHERING OPERATIONS (see Note 1)
COMBINED STATEMENTS OF CASH FLOWS
Nine Months Ended Year Ended
September 29, December 31,
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ........................................ $ (12,000) $ 151,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 1,098,000 1,188,000
Change in operating assets and liabilities:
Increase (decrease) in accounts receivable............. 20,000 (17,000)
Increase (decrease) in accounts payable and accrued
liabilities............................................ 69,000 (270,000)
------------- -------------
Net cash provided by operating activities............ 1,175,000 1,052,000
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (1,236,000) (1,108,000)
(Increase) decrease in other assets....................... - 71,000
------------- -------------
Cash used in investing activities...................... (1,236,000) (1,037,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments to) advances from parent...................... 61,000 (33,000)
Decrease in other long-term liabilities................... (12,000) -
-------------- -------------
Cash provided by (used in) financing activities........ 49,000 (33,000)
Decrease in cash and cash equivalents..................... (12,000) (18,000)
Cash and cash equivalents at the beginning of period...... 30,000 48,000
------------- -------------
Cash and cash equivalents at the end of period............ $ 18,000 $ 30,000
============= =============
See accompanying notes to combined financial statements
36
THE ATLAS GROUP, INC. GATHERING OPERATIONS (see Note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
The accompanying combined financial statements include the pipeline
assets, liabilities, equity, and operations of the wholly owned subsidiaries of
AIC, Inc. ("AIC") which is a wholly owned subsidiary of The Atlas Group, Inc.
("AGI"). These entities operate approximately 650 miles of gas gathering
pipelines located in Pennsylvania and Ohio. AGI will be referred to as Gathering
Operations. On September 29, 1998, RAI acquired all of the common stock of AGI
in exchange for 2,063,496 shares of RAI's common stock and the assumption of AGI
debt. RAI is a publicly traded company (trading under the symbol REXI on the
NASDAQ system) operating in the real estate finance, leasing, and energy
sectors. After the acquisition, AGI was merged into Atlas America, Inc.
("ATLAS"), a newly formed subsidiary of RAI formed in June 1998 to acquire AGI.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying combined financial statements follows.
Use of Estimates
Preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Property and Equipment
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives. Gas gathering and transmission facilities are depreciated over 15 or 25
years using the double declining balance method. Other equipment is depreciated
over 10 years using the straight-line method.
Impairment of Long-Lived Assets
Gathering Operations reviews its long-lived assets for impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be recoverable. If it is determined that an asset's estimated future
cash flows will not be sufficient to recover its carrying amount, an impairment
charge will be recorded to reduce the carrying amount for that asset to its
estimated fair value.
Federal Income Taxes
Gathering Operations was included in the consolidated federal income
tax return of AGI. Income taxes are calculated as if the Gathering Operations
had filed a return on a separate company basis utilizing a statutory rate of
34%. Deferred taxes represent deferred tax assets or liabilities which are
recognized based on the temporary differences between the tax basis of the
Gathering Operations assets and liabilities and the amounts reported in the
financial statements. These amounts are owed to AGI and are included in advances
from parent. Separate company state tax returns are filed in those states in
which subsidiaries and divisions of AGI are registered to do business.
Revenue Recognition
Revenues are recognized at the time the natural gas is transmitted
through the pipelines.
37
THE ATLAS GROUP, INC. GATHERING OPERATIONS (see Note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Fair Value of Financial Instruments
For cash and cash equivalents, receivable and payables, the carrying amounts
approximate fair value because of the short maturity of these instruments. For
long-term debt, the fair value approximates historically recorded cost, since
interest rates approximate market.
Accounts Receivable - Affiliates
Gathering Operations is an affiliate to other companies which are
subsidiaries of AGI. Gathering Operations is dependent upon the resources and
services provided by AGI. Accounts receivable represent the net balance due from
these affiliates and include reimbursements of Gathering Operations expenses
due from these affiliates.
Cash Flow Statements
For purposes of the statement of cash flows, the Gathering Operations
consider all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Supplemental Disclosure of Cash Flow Information
Information for the nine months ended September 29, 1998 and the year
ended December 31, 1997 is as follows:
Nine Months Ended Year Ended
September 29, December 31,
--------------------- -------------
1998 1997
--------------------- -------------
Cash Paid for:
Interest.............................................. $ 276,000 $ 435,000
============== =============
Income taxes.......................................... $ 0 $ 67,000
============== =============
Expense Allocation
AGI allocated certain direct and indirect general and administrative
expenses to the Gathering Operations during the year ended December 31, 1997 and
the nine months ended September 29, 1998, respectively. Indirect costs were
allocated based on the number of employees. The types of indirect expenses
allocated to the Gathering Operations during this period consisted of salaries
and benefits, legal, office rent, utilities, telephone services, data processing
services, and office supplies. Management believes that the method used to
allocate these expenses is reasonable.
New Accounting Standards
Effective October 1, 1998, the Gathering Operations became subject to
the provisions of Statement of Financial Accounting Standards No. 130 (SFAS
130). SFAS 130, "Reporting Comprehensive Income" requires disclosure of
comprehensive income and its components. Comprehensive income includes net
income and all other changes in 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".
The Gathering Operations has no material elements of comprehensive income, other
than net income to report.
38
THE ATLAS GROUP, INC. GATHERING OPERATIONS (see Note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging. SFAS 133 will require the Company to
recognize all derivatives as either assets or liabilities in its consolidated
balance sheet and to measure those instruments at fair value. The Company is
required to adopt SFAS 133 effective October 1, 2000. The effect of adopting
SFAS 133 on the Company's consolidated financial position, results of operations
and cash flows will be dependent on the extent of future hedging activities and
fluctuations in interest rates.
NOTE 3 - INCOME TAXES
As discussed in Note 2, the Gathering Operations results are included
in AGI's consolidated federal income tax return. The amounts presented below
were calculated as if the Gathering Operations filed a separate federal income
tax return. The provision (benefit) for income taxes for each period consists of
the following:
Nine Months Ended Year Ended
September 29, December 31,
----------------------- -------------
1998 1997
----------------------- -------------
Federal........................................................... $ (7,000) $ 86,000
State and local................................................... (1,000) 15,000
------------- -------------
$ (8,000) $ 101,000
============= =============
AGI records current and deferred tax assets and liabilities on its
books and the Gathering Operations allocation was settled through increases or
decreases to Advances from Parent. At September 29, 1998, the Gathering
Operations deferred tax asset, related to depreciation of property and
equipment, would have approximated $492,000.
NOTE 4 - COMBINED EQUITY
The following is a reconciliation of the combined equity balance of the
Gathering Operations:
Nine Months Ended Year Ended
September 29, December 31,
---------------- -------------
1998 1997
---------------- -------------
Balance, beginning of period...................................... $ 2,799,000 $ 2,648,000
Net income (loss)................................................. (12,000) 151,000
------------- -------------
Balance, end of period............................................ $ 2,787,000 $ 2,799,000
============= =============
39
ATLAS AMERICA, INC.
(A Wholly-Owned Subsidiary of Resource America, Inc.)
CONSOLIDATED BALANCE SHEET
(unaudited)
(in thousands, except share data)
December 31,
1999
ASSETS
Cash and cash equivalents................................................................................. $ 10,486
Accounts and other receivables............................................................................ 13,172
Prepaid expenses and other current assets................................................................. 383
-------------
Total current assets................................................................................. 24,041
Property, plant and equipment - at cost
Oil and gas properties and equipment (successful efforts).............................................. 26,465
Gas gathering and transmission facilities.............................................................. 6,865
Other.................................................................................................. 4,280
-------------
37,610
Less - accumulated depreciation, depletion and amortization............................................ (3,041)
-------------
Net property, plant and equipment.................................................................... 34,569
Goodwill (net)............................................................................................ 21,469
Contract rights and other intangibles..................................................................... 13,583
-------------
$ 93,662
=============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable - trade.................................................................................. $ 7,114
Accrued liabilities....................................................................................... 8,281
Investor funds raised..................................................................................... 9,086
Current portion of long-term debt......................................................................... 1,819
-------------
Total current liabilities............................................................................ 26,300
Long-term debt............................................................................................ 20,151
Other long-term liabilities............................................................................... 646
Advances from parent...................................................................................... 2,349
Commitments and contingencies............................................................................. -
Stockholder's equity
Common stock, $.01 par value, 100 shares authorized and outstanding.................................... 1
Additional paid-in capital............................................................................. 38,725
Retained earnings...................................................................................... 5,490
-------------
Total stockholder's equity........................................................................... 44,216
-------------
$ 93,662
=============
See accompanying notes to consolidated financial statements
40
ATLAS AMERICA, INC.
(A Wholly-Owned Subsidiary of Resource America, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
Three Months Ended
December 31,
1999 1998
----------- -----------
Revenues:
Well construction................................................................... $ 7,153 $ 10,401
Oil and gas production.............................................................. 2,131 1,438
Well services....................................................................... 2,187 1,720
Interest and other income........................................................... 237 87
----------- -----------
11,708 13,646
Costs and expenses:
Well construction................................................................... 5,836 8,313
Oil and gas production.............................................................. 677 208
Well services....................................................................... 578 107
Exploration......................................................................... 456 105
General and administrative.......................................................... 1,441 1,372
Depreciation, depletion and amortization............................................