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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 September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-4408
RESOURCE AMERICA, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 72-0654145
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
--------------------------------------
(Title of class)
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. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing price of such stock on December 15, 2000, was
approximately $155 million.
The number of outstanding shares of the registrant's common stock on December
15, 2000 was 17,448,125.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for registrant's 2001 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
ON FORM 10-K
PART I Page
----
Item 1: Business.................................................................................. 3
Item 2: Properties................................................................................ 26
Item 3: Legal Proceedings......................................................................... 26
Item 4: Submission of Matters to a Vote of Security Holders....................................... 26
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters..................... 27
Item 6: Selected Financial Data................................................................... 28
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operation.............................................................. 29
Item 7A: Quantitative and Qualitative Disclosures About Market Risk................................ 38
Item 8: Financial Statements and Supplementary Data............................................... 41
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................................................ 75
PART III
Item 10: Directors and Executive Officers of the Registrant........................................ 76
Item 11: Executive Compensation.................................................................... 76
Item 12: Security Ownership of Certain Beneficial Owners and Management............................ 76
Item 13: Certain Relationships and Related Transactions............................................ 76
PART IV
Item 14: Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................................................... 77
SIGNATURES ...................................................................................... 83
2
PART I
ITEM 1. BUSINESS
General
We operate energy and real estate finance businesses through our
subsidiaries, Atlas America, Inc. and Resource Properties, Inc. In energy, we
drill for and produce natural gas in the Appalachian Basin and, as of September
30, 2000, owned interests, either directly or through partnerships managed by us
in 4,067 wells. In addition, we own 100% of the general partner and a majority
of the limited partner interest in Atlas Pipeline Partners, L.P., a publicly
traded (AMEX symbol "APL") master limited partnership that owns natural gas
pipeline systems in the Appalachian Basin. Our interest in Atlas Pipeline
includes the right to receive incentive distributions if the partnership meets
or exceeds its minimum quarterly distribution obligations. In real estate, we
own and manage a portfolio of commercial loans on office buildings, multifamily
housing, commercial and hotel properties located primarily in the Washington
D.C.-Baltimore, Philadelphia, and Chicago metropolitan areas. We also sponsored
and own approximately 14% of the common shares of RAIT Investment Trust (AMEX
symbol "RAS"), a real estate investment trust. For information regarding each of
our businesses, you should review Note 18 of the notes to consolidated financial
statements.
During the past two fiscal years, our energy business has undergone a
significant expansion through an increased commitment of corporate assets and
management resources and the acquisitions of The Atlas Group (now Atlas America,
Inc.) in September 1998 and Viking Resources Corporation in August 1999. Our
revenues from energy operations have risen substantially, from $6.7 million in
fiscal 1998 to $55.1 million in fiscal 1999 and $70.6 million in fiscal 2000.
Our energy business now accounts for 71% of our total revenues, as compared to
51% of total revenues in fiscal 1999 and 10% in fiscal 1998, and 30% of our
total assets and 39% of non-cash assets, as compared to 26% of total assets and
27% of non-cash assets in fiscal 1999 and 23% of total assets and 28% of
non-cash assets in fiscal 1998.
Concurrently we have been reducing our involvement in financial
activities. In August 2000, we sold our small ticket equipment leasing business
to subsidiaries of ABN AMRO Bank, N.V. for $583.0 million, including the
assumption of approximately $431.0 million in debt payable to third parties. In
November 2000, we disposed of Fidelity Mortgage Funding, Inc., our residential
mortgage lending business. In fiscal 2000 we did not acquire any new real estate
loans.
Energy Operations
General
Our energy operations are concentrated in the Western New York, Eastern
Ohio and Western Pennsylvania region of the Appalachian Basin. As of September
30, 2000:
o We had, either directly or through partnerships and joint ventures
managed by us, interests in 4,067 wells (including royalty or
overriding royalty interest in 540 wells), of which we operate
3,472 wells.
o Wells in which we have an interest produced, net to our interest,
approximately 17,600 thousand cubic feet ("mcf") of natural gas
per day.
o We owned proved reserves of approximately 124 billion cubic feet
equivalent ("bcfe") of natural gas and oil with a net present
value of $140.8 million. (Net present value is defined as the
pre-tax future net revenues from the reserves priced at
approximately $4.49 per mcf of natural gas and $26.84 per barrel
of oil, discounted at 10% over the productive life of the
reserves).
o We had an interest in 396,000 gross acres (325,000 net acres) of
undeveloped properties.
o We owned and operated, directly or through our Atlas Pipeline
subsidiary, over 900 miles of gas gathering systems and pipelines.
Since 1976, we or our predecessors have financed our development and
production operations through private and, since 1992, public drilling
partnerships sponsored by us. We act as the managing general partner of each of
these partnerships, contribute the leases on which the partnership drills, and
contribute a proportionate share of the partnership's cash capital. We retain a
percentage interest in the wells through our general partner's interest,
generally between 25% and 32% and receive a monthly administrative fee. In
3
addition, we typically act as the drilling contractor and operator of the wells
drilled by the partnerships on a fee basis. In the fiscal year ended September
30, 2000, we obtained funding of $30.3 million through two private and one
public investment partnerships.
Natural gas produced from wells we operate is collected in gas
gathering pipeline systems owned and operated by Atlas Pipeline. We sell the
natural gas produced to customers such as gas brokers and local utilities under
a variety of contractual arrangements. We sell oil produced to regional oil
refining companies at the prevailing spot price for Appalachian crude oil.
Industry Overview
Natural gas is the second largest energy source in the United States,
after liquid petroleum. The 22 trillion cubic feet of natural gas consumed in
1999 represented approximately 23% of the total energy used in the United
States. The Appalachian Basin (in which substantially all of our wells are
located) accounted for 3.2% of total 1999 domestic natural gas production, or
627 billion cubic feet ("bcf"). Furthermore, according to the Energy Information
Administration of the U.S. Department of Energy, the Appalachian Basin holds
8,707 bcf of economically recoverable reserves representing approximately 6% of
total domestic reserves as of December 31, 1998. Although the potential to find
recoverable quantities of oil and gas exists at depths below 6,500 feet, the
vast majority of wells in Appalachia produce from depths between 1,000 and 6,500
feet. Companies drilling at these depths, including us, have historically
realized well completion rates of greater than 90% and well production periods
that last longer than 20 years. The Appalachian Basin is strategically located
near the energy consuming population centers in the Mid-Atlantic and
Northeastern United States, which generally allows Appalachian producers to sell
their natural gas at a premium to the benchmark price for natural gas on the New
York Mercantile Exchange.
Business Strategy
Our goal is to expand our natural gas reserves, production and
revenues. Our strategy to achieve these goals includes the following key
elements:
o Acquiring additional oil and gas leasehold acreage in the
Appalachian Basin.
o Developing leasehold acreage currently in our inventory.
o Acquiring other small capitalization energy companies through
merger, consolidation or purchase.
o Increasing the amount of development financing provided by our
drilling partnerships.
o Testing deeper formations on leasehold acreage on which we already
have drilled wells.
4
Exploration, Development and Operation
The following table sets forth information as of September 30, 2000
regarding productive natural gas and oil wells in which we have a working
interest:
Number of Productive Wells
-----------------------------------
Gross(1) Net(1)
------------ -------------
Oil wells......................................................... 313 178
Gas wells......................................................... 3,214 1,672
-------- ---------
Total ................................................... 3,527 1,850
======== =========
- -------------
(1) Includes our equity interest in wells owned by 85 partnerships and various
joint ventures. Does not include our royalty or overriding interests in 540
other wells.
As of December 15, 2000, we were in the process of drilling 46 gross
(12 net) wells.
The following table sets forth the quantities of natural gas and oil
produced (net to our interest), average sales prices, and average production
(lifting) costs per equivalent unit of production, for the periods indicated:
Production Average Sales Price Average Lifting
Fiscal ----------------------------- --------------------------- Cost per
Period Oil(bbls) Gas(mcf) per bbl per mcf mcfe(1)(2)
- ------ --------- -------- ------- ------- ------------
2000 195,974 6,440,154 $24.50 $3.15 $0.95
1999(3) 85,045 4,342,430 $14.57 $2.37 $0.99
1998(4) 48,113 1,485,008 $14.38 $2.66 $1.13
- -------------
(1) "mcfe" means a thousand cubic feet equivalent. Oil production is converted
to mcfe at the rate of six mcf per barrel ("bbl").
(2) Lifting costs include labor to operate the wells and related equipment,
repairs and maintenance, materials and supplies, property taxes, insurance
and gathering charges.
(3) Includes production relating to Viking Resources for only the one month
period from August 31, 1999, the date of its acquisition, to the end of the
fiscal year.
(4) Excludes production relating to Atlas America and Viking Resources, which
we did not acquire until the end of the 1998 and 1999 fiscal years,
respectively.
5
We are not, nor are the partnerships and joint ventures we manage,
obligated to provide any fixed quantities of oil or gas in the future under
existing contracts.
The following table sets forth information with respect to the number
of wells for which drilling was completed at any time during fiscal 2000, 1999
and 1998, regardless of when drilling was initiated.
Exploratory Wells Development Wells
----------------------------------------- ---------------------------------------
Productive Dry Productive Dry
--------------- --------------- --------------- --------------
Fiscal
Period Gross Net Gross Net Gross Net Gross Net
- ------ ----- --- ----- --- ----- --- ----- ---
2000 - - 1.0 .18 155.0 41.2 3 .80
1999(1) - - 1.0 .20 145.0 41.9 - -
1998(2) 1.0 .25 2.0 .75 3.0 3.0 - -
- ----------
(1) Includes wells drilled by Viking Resources only since August 31, 1999, the
date of its acquisition.
(2) Excludes wells drilled by Atlas America, which was not acquired until the
end of the 1998 fiscal year.
6
We provide, on a fee basis, a variety of well services to wells we
operate and to wells operated by independent third parties. These services
include well operations, petroleum engineering, well maintenance and well work
over and are provided at rates in conformity with general industry standards.
Oil and Gas Reserve Information
The following tables summarize information regarding our estimated
proved natural gas and oil reserves as of September 30, 2000, 1999 and 1998. All
of the reserves are located in the United States. The estimates relating to our
proved natural gas and oil reserves and future net revenues of natural gas and
oil reserves are based upon reports prepared by Wright & Company, Inc. In
accordance with SEC guidelines, the standardized and SEC PV-10 estimates of
future net cash flows from proved reserves are made using natural gas and oil
sales prices in effect as of the dates of the estimates and are held constant
throughout the life of the properties. Our estimates of proved reserves were
based upon the following weighted average prices:
Years Ended September 30,
----------------------------------------
2000 1999 1998
--------- -------- ----------
Natural gas (per mcf).................................................. $ 4.49 $ 2.91 $ 2.47
Oil (per bbl).......................................................... $ 26.84 $ 20.92 $ 13.40
Reserve estimates are imprecise and may be expected to change as
additional information becomes available. Furthermore, estimates of oil and
natural gas reserves, of necessity, are projections based on engineering data,
and there are uncertainties inherent in the interpretation of this data as well
as the projection of future rates of production and the timing of development
expenditures. Reservoir engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in an
exact way, and the accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and judgment.
Reserve reports of other engineers might differ from the reports of Wright &
Company. Results of drilling, testing and production subsequent to the date of
the estimate may justify revision of this estimate. Future prices received from
the sale of natural gas and oil may be different from those used by Wright &
Company in preparing its reports. The amounts and timing of future operating and
development costs may also differ from those used. Accordingly, we cannot assure
you that the reserves set forth in the following tables will ultimately be
produced nor can we assure you that the proved undeveloped reserves will be
developed within the periods anticipated. You should not construe the discounted
future net cash inflows as representative of the fair market value of our proved
natural gas and oil properties. Discounted future net cash inflows are based
upon projected cash inflows which do not provide for changes in natural gas and
oil prices or for escalation of expenses and capital costs. The meaningfulness
of these estimates is highly dependent upon the accuracy of the assumptions upon
which they were based.
All natural gas reserves are evaluated at constant temperature and
pressure, which can affect the measurement of natural gas reserves. We deducted
operating costs, development costs and some production-related and ad valorem
taxes in arriving at the estimated future cash flows. We made no provision for
income taxes, and based the estimates on operating methods and existing
conditions prevailing at the dates indicated above. We cannot assure you that
these estimates are accurate predictions of future net cash flows from natural
gas and oil reserves or their present value.
7
For additional information concerning our natural gas and oil reserves
and estimates of future net revenues, see Note 19 of the notes to consolidated
financial statements included in this report.
Proved Natural Gas and Oil Reserves
Years Ended September 30,
------------------------------------------
2000 1999 1998
-------- -------- --------
Natural gas reserves (mmcf) (1):
Proved developed reserves ........................................... 74,333 66,216 49,868
Proved undeveloped reserves ......................................... 38,810 41,956 40,016
-------- -------- --------
Total proved reserves of natural gas ................................ 113,143 108,172 89,884
-------- -------- --------
Oil reserves (mbbl) (2):
Proved developed reserves ........................................... 1,767 1,685 573
Proved undeveloped reserves ......................................... -- -- --
-------- -------- --------
Total proved reserves of oil ........................................ 1,767 1,685 573
-------- -------- --------
Total proved reserves (mmcfe) (3): ..................................... 123,745 118,282 93,322
======== ======== ========
PV-10 estimate of cash flows of proved reserves (in thousands)
Proved developed reserves ........................................... $122,852 $ 66,134 $ 43,581
Proved undeveloped reserves ......................................... 17,929 9,083 5,570
-------- -------- --------
Total PV-10 estimate ............................................ $140,781 $ 75,217 $ 49,151
======== ======== ========
- -------------
(1) "mmcf" means a million cubic feet.
(2) "mbbl" means a thousand barrels.
(3) "mmcfe" means a million cubic feet equivalent. Oil production is converted
to mcfe at the rate of six mcf per barrel.
Developed and Undeveloped Acreage
The following table sets forth information about our developed and
undeveloped natural gas and oil acreage as of September 30, 2000. The
information in this table includes our equity interest in acreage owned by
partnerships sponsored by us.
Developed Acreage Undeveloped Acreage
------------------- --------------------
Gross Net Gross Net
-------- --------- -------- --------
Arkansas............................................... 2,560 403 - -
Kansas................................................. 160 20 - -
Kentucky............................................... 9,676 4,838 4,712 2,356
Louisiana.............................................. 1,819 206 - -
Mississippi............................................ 40 3 2,410 241
New York............................................... 22,454 16,840 13,379 13,379
Ohio................................................... 106,893 82,575 49,862 46,973
Oklahoma............................................... 4,883 715 1,470 147
Pennsylvania........................................... 52,170 51,701 94,009 94,009
Texas.................................................. 5,160 369 603 151
Utah................................................... 160 37 4,954 1,151
West Virginia............................................ 1,348 674 17,304 8,652
-------- --------- -------- --------
207,323 158,381 188,703 167,059
======== ========= ======== ========
The terms of our oil and gas leases on our developed acreage generally
extend for the life of wells on our developed acreage, while the terms of our
oil and gas leases vary from less than one year to five years. Rentals of
approximately $394,000 were paid in fiscal 2000 to maintain our leases.
8
We believe that we hold good and indefeasible title to our properties,
in accordance with standards generally accepted in the natural gas industry,
subject to exceptions stated in the opinions of counsel employed by us in the
various areas in which we conduct our activities; we do not believe that these
exceptions detract substantially from our use of any property. As is customary
in the natural gas industry, only a perfunctory title examination is conducted
at the time we acquire a property. Before we commence drilling operations, we
conduct an extensive title examination; curative work is performed with respect
to defects which we deem significant. We have obtained title examinations for
substantially all of our managed producing properties. No single property
represents a material portion of our holdings.
Our properties are subject to royalty, overriding royalty and other
outstanding interests customary in the industry. Our properties are also subject
to burdens such as liens incident to operating agreements, current taxes,
development obligations under natural gas and oil leases, farm-out arrangements
and other encumbrances, easements and restrictions. We do not believe that any
of these burdens will materially interfere with our use of our properties.
Financing Our Drilling Activities
Since our acquisition of Atlas America and Viking Resources, a
substantial portion of our capital resources for drilling operations have been
derived from our sponsored drilling partnerships. Accordingly, the amount of
development activities we undertake depends upon our ability to obtain investor
subscriptions to the partnerships. During fiscal 2000, our drilling
partnerships invested $39.9 million in drilling and completing wells, of which
we contributed $9.6 million. In fiscal 1999, drilling partnerships invested
$38.8 million in drilling and completing wells, of which we contributed $9.4
million.
Our drilling partnerships are generally structured so that, upon
formation of the partnership, we contribute leaseholds to the partnership, enter
into a drilling and well operating agreement and become the general or managing
partner of the partnership.
As general partner, we typically receive an interest in partnership net
revenues in proportion to our contributed capital (including the costs of leases
contributed), which increases as specified target levels of distributions to
investors are met. Our interests in partnerships formed during the past three
fiscal years range from 25.0% to 31.7%. We also receive monthly operating fees
of approximately $275 per well and monthly administrative fees of $75 per well.
Pipeline Operations
In February 2000, we sold substantially all of our pipeline systems to
Atlas Pipeline for $16.6 million in cash and 1,641,026 subordinated units of
limited partnership interest. As of September 30, 2000, our subordinated units
constituted a 51% interest in Atlas Pipeline. Atlas Pipeline Partners GP, LLC,
an indirect wholly-owned subsidiary of ours, is the general partner of Atlas
Pipeline and, on a consolidated basis, has a 2% interest in Atlas Pipeline.
Atlas Pipeline Partners GP manages the activities of Atlas Pipeline using Atlas
America and Viking Resources personnel who act as its officers and employees. At
September 30, 2000, Atlas Pipeline owned approximately 900 miles of intrastate
gathering systems located in Eastern Ohio, Western New York and Western
Pennsylvania, to which 3,013 natural gas wells were connected.
Our limited partnership interests are a special class of interest in
Atlas Pipeline under which our rights to distributions are subordinated to those
of the publicly-held common units. The subordination period extends until
December 31, 2004 and will continue beyond that date if financial tests
specified in the partnership agreement are not met. Our interests also include a
right to receive incentive distributions if the partnership meets or exceeds its
minimum quarterly distribution obligations to the common and subordinated units
as follows:
o of the first $.10 per unit available for distribution in excess of
the minimum quarterly distribution of $.42, 85% goes to all
unitholders (including to us as subordinated unitholders) and 15%
goes to us as general partner;
o of the next $.08 per unit available for distribution, 75% goes to
all unitholders and 25% goes to us as general partner, and
o after that, 50% goes to all unitholders and 50% goes to us as
general partner.
9
In connection with our sale of the gathering systems to Atlas Pipeline,
we entered into agreements that:
o Require us to connect wells owned or controlled by us that are
within specified distances of Atlas Pipeline's gathering systems
to those gathering systems and to drill and connect a minimum of
225 wells (including wells drilled from January 1, 1999).
o Require us to provide stand-by construction financing to Atlas
Pipeline for gathering system extensions and additions to a
maximum of $1.5 million per year for five years.
o Require us to pay gathering fees to Atlas Pipeline for natural gas
gathered by the gathering systems equal to the greater of $.35 per
mcf ($.40 per mcf in certain instances) or 16% of the gross sales
price of the natural gas transport. For the quarter ended
September 30, 2000, these gathering fees averaged $.71 per mcf.
o Require us to support a minimum quarterly distribution by Atlas
Pipeline to holders of non-subordinated units of $0.42 per unit
(an aggregate of $1.68 per fiscal year) until February 2003. We
have established a letter of credit administered by PNC Bank to
support our obligation. The face amount of the letter of credit as
of September 30, 2000 is $5.7 million. The required face amount of
the letter of credit reduces $630,000 per quarter.
At September 30, 2000, we had drilled all of the required 225 wells. We
have not been required to provide any construction financing or distribution
support.
Sources and Availability of Raw Materials
We contract for drilling rigs and purchase goods necessary for the
drilling and completion of wells from a substantial number of drillers and
suppliers, none of which supplies a significant portion of our annual needs.
During fiscal 2000, we faced no shortage of these goods and services. We
anticipate that natural gas price increases that have occurred after the end of
fiscal 2000 may increase the demand for drilling rigs and other goods. This may
result in an increase in our costs, decreased availability of rigs or goods, or
both which could adversely affect our energy operations.
Major Customers
During fiscal 2000, gas sales to three purchasers accounted for 37%,
11% and 11%, respectively, of our total production revenues. Also during fiscal
2000, oil sales to one purchaser accounted for 17% of such revenues. During
fiscal 1999, gas sales to two purchasers accounted for 26% and 14%,
respectively, and during fiscal 1998 such sales to two purchasers accounted for
35% and 15% respectively.
Competition
The oil and gas business is intensely competitive in all of its
aspects. Competition arises not only from numerous domestic and foreign sources
of natural gas and oil but also from other industries that supply alternative
sources of energy. Moreover, competition is intense for the acquisition of
leases considered favorable for the development of natural gas and oil in
commercial quantities. Product availability and price are the principal means of
competition in selling oil and natural gas. Many of our competitors possess
greater financial resources than ours. While it is impossible for us to
accurately determine our comparative industry position, we do not consider our
operations to be a significant factor in the industry.
Markets
The availability of a ready market for natural gas and oil produced by
us, and the price obtained, will depend upon numerous factors beyond our
control, including the extent of domestic production, import of foreign natural
gas and oil, political instability in oil and gas producing countries and
regions, market demand, the effect of federal regulation on the sale of natural
gas and oil in interstate commerce, other governmental regulation of the
production and transportation of natural gas and oil and the proximity,
availability and capacity of pipelines and other required facilities. Currently,
there appears to be at least a near-term imbalance between the supply of natural
gas and consumer demand. This imbalance has caused substantial increases in the
current price of natural gas through December 15, 2000. We cannot predict
whether or for how long these conditions will last, or their impact on our
business strategy of acquiring additional natural gas properties and energy
companies.
10
Governmental Regulation
Our energy business and the energy industry in general are heavily
regulated, including regulation of production, environmental quality and
pollution control, and pipeline construction and operation. State and federal
regulations generally are intended to prevent waste, protect rights to produce
natural gas and oil between owners in a common reservoir and control
contamination of the environment. Failure to comply with regulatory requirements
can result in substantial fines and other penalties. We believe that we are in
substantial compliance with applicable regulatory requirements. The following
discussion of the regulation of the United States energy industry is not
intended to constitute a complete discussion of the various statutes, rules,
regulations and environmental orders to which our operations may be subject.
Regulation of Exploration and Production. Many states require permits
for drilling operations, drilling bonds and reports concerning operations, and
impose requirements concerning the location of wells, the method of drilling and
casing wells, the surface use and restoration of properties on which wells are
drilled, the plugging and abandoning of wells and the disposal of fluids used in
connection with operations. Many states also impose various conservation
requirements, including regulation of the size of drilling and spacing (or
proration) units, the density of wells which may be drilled and the unitization
or pooling of properties. In this regard, some states allow the forced pooling
or integration of tracts to facilitate exploration while other states rely
primarily or exclusively on voluntary pooling of lands and leases. In areas
where pooling is voluntary, it may be more difficult to form units and,
therefore, more difficult to develop a project if the operator owns less than
100% of the leasehold. In addition, some state conservation laws establish
requirements regarding production rates and generally prohibit the venting or
flaring of natural gas. The effect of these regulations may limit the amount we
can produce and may limit the number of wells or the locations at which we can
drill. The regulatory burden on the energy industry increases our costs of doing
business and, consequently, affects our profitability. Inasmuch as such laws and
regulations are frequently expanded, amended and reinterpreted, we are unable to
predict the future cost or impact of complying with such regulations.
Regulation of Pipelines. While natural gas pipelines generally are
subject to regulation by the Federal Energy Regulatory Commission under the
Natural Gas Act of 1938, because Atlas Pipeline's individual gathering systems
perform primarily a gathering function, as opposed to the transportation of
natural gas in interstate commerce, Atlas Pipeline believes that it is not
subject to regulation under the Natural Gas Act. However, Atlas Pipeline
delivers a significant portion of the natural gas it transports to interstate
pipelines subject to FERC regulation. The regulation principally involves
transportation rates and service conditions which affect revenues we receive for
our natural gas production. Through a series of initiatives by FERC, the
interstate natural gas transportation and marketing system has been
substantially restructured to increase competition. In particular, in Order No.
636, FERC required that interstate pipelines provide transportation separate, or
"unbundled," from their sales activities, and required that interstate pipelines
provide transportation on an open access basis that is equal for all natural gas
suppliers. Although Order No. 636 does not directly regulate our production and
marketing activities, it does affect how buyers and sellers gain access to the
necessary transportation facilities and how we and our competitors sell natural
gas in the marketplace. The courts have largely affirmed the significant
features of Order No. 636 and the numerous related orders pertaining to
individual pipelines, although some appeals remain pending and FERC continues to
review and modify its regulations regarding the transportation of natural gas.
For example, FERC has recently begun a broad review of its transportation
regulations, including how its regulations operate in conjunction with state
proposals for retail natural gas marketing restructuring, whether to eliminate
cost-of-service based rates for short-term transportation, whether to allocate
all short-term capacity on the basis of competitive auctions, and whether
changes to its long-term transportation service policies may be appropriate to
avoid a market bias toward short-term contracts. We cannot predict what action
FERC will take on these matters, nor can we accurately predict whether FERC's
actions will achieve the goal of increasing competition in markets in which our
natural gas is sold. However, we do not believe that any action taken will
affect us in a way that materially differs from the way it affects other natural
gas produces, gatherers and marketers.
State-level regulation for pipeline operations in Ohio, New York and
Pennsylvania is generally through the Public Utility Commission of Ohio, the New
York Public Service Commission and the Pennsylvania Public Utilities Commission,
respectively. Atlas Pipeline has been granted an exemption from regulation by
the Public Utility Commission of Ohio, and is not subject to New York or
Pennsylvania regulation since it does not provide service to the public
generally.
11
Environmental and Safety Regulation. Under the Comprehensive
Environmental Response, Compensation and Liability Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act, the Oil Pollution Act
of 1990, the Clean Air Act, and other federal and state laws relating to the
environment, owners and operators of wells producing natural gas or oil, and
pipelines, can be liable for fines, penalties and clean-up costs for pollution
caused by the wells or the pipelines. Moreover, the owners' or operators'
liability can extend to pollution costs from situations that occurred prior to
their acquisition of the assets. Natural gas pipelines are also subject to
safety regulation under the Natural Gas Pipeline Safety Act of 1968 and the
Pipeline Safety Act of 1992 which, among other things, dictate the type of
pipeline, quality of pipeline, depth, methods of welding and other
construction-related standards. The state public utility regulators referenced
above have either adopted federal standards or promulgated their own safety
requirements consistent with the federal regulations.
We do not anticipate that we will be required in the near future to
expend amounts that are material in relation to our revenues by reason of
environmental laws and regulations, but inasmuch as these laws and regulations
change frequently, we cannot predict the ultimate cost of compliance. We cannot
assure you that more stringent laws and regulations protecting the environment
will not be adopted or that we will not otherwise incur material expenses in
connection with environmental laws and regulations in the future.
Energy Technology
We own a 50% interest in Optiron Corporation, with a right, through
conversion of a note from Optiron, to increase that interest to 68.5%, in
Optiron Corporation. Optiron's business, which focuses on providing the energy
industry with information management software, currently offers one principal
product, the ReadiSystem(TM) (Retail Energy Automated Data Integration). The
ReadiSystem(TM) consolidates all billing and customer account information into a
single source and features online bill paying for customers, flexible invoice
generation, account and payment history tracking, management of payment
adjustments, delinquent customer tracking and production of collection notices
and service/work order dispatching and tracking. The technology also provides
accounting and management reporting functions. Although originally designed for
natural gas and electric utility companies, we believe that the ReadiSystem(TM)
can be used by other mass market distribution companies such as
telecommunications and water utility companies.
Real Estate Finance
General
From fiscal 1991 through fiscal 1999, we sought to purchase and resolve
troubled commercial real estate loans at discounts to their outstanding loan
balances and the appraised value of their underlying properties. During fiscal
2000, we determined to concentrate our real estate finance activities on
managing our existing loan portfolio and did not acquire any new loans. As part
of the management process, we anticipate that we may sell selected portfolio
loans in appropriate circumstances.
At September 30, 2000, our loan portfolio consisted of 38 loans with
aggregate outstanding loan balances of $691.4 million. These loans were acquired
at an investment cost of $447.3 million, including subsequent advances. During
the fiscal years ended September 30, 2000, 1999 and 1998, the yield on our net
investment in our portfolio loans equaled 9%, 22% and 40%, respectively,
including gains on sale of senior lien interests in, and gains, if any,
resulting from refinancing of, the loans. Gross profit from our real estate
finance activities for the same periods was $11.8 million, $35.3 million and
$43.7 million, respectively. For these purposes, we calculate gross profit as
revenues from loan activities minus costs, including interest, provision for
possible losses and less depreciation and amortization, without allocation of
corporate overhead.
We seek to reduce the amount of our capital invested in portfolio
loans, and to enhance our returns, through borrower refinancing of the
properties underlying our loans. Before January 1, 1999, we also sought to sell
senior lien interests; since that date, we have sought to structure our senior
lien transactions as financings rather than sales. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Results of
12
Operations: Real Estate Finance." During fiscal 2000, borrowers refinanced three
loans, incurring $129.5 million in new senior lien indebtedness. At September
30, 2000, senior lenders held outstanding obligations of $351.9 million.
Pursuant to agreements with most borrowers, we generally retain the excess of
operating cash flow over required debt service on senior lien obligations as
debt service on the outstanding balance of our loans.
As a result of the troubled nature of our portfolio loans at the time
of their acquisition, they are typically subject to forbearance agreements
pursuant to which we defer foreclosure or other action on a loan so long as the
terms of the agreement are met. Generally, our forbearance agreements require:
o payment of all revenues from the property into an operating
account controlled by us or our managing agent;
o payment of all property expenses (including debt service, taxes,
operational expenses and maintenance costs) from the operating
account, after our review and approval;
o receipt by us of specified minimum monthly payments;
o retention by us of all cash flow above the minimum monthly payment
and application to accrued but unpaid debt service;
o appointment of a property manager acceptable to us;
o receipt of our approval before concluding any material contract or
commercial lease; and
o submission of monthly cash flow statements and occupancy reports.
We may alter these arrangements in appropriate circumstances. Where a
borrower has refinanced a portfolio loan (or where we acquired a loan subject to
existing senior debt), we may agree that the revenues be paid to an account
controlled by the senior lienor, with the excess over amounts payable to the
senior lienor being paid directly to us. As of September 30, 2000, revenues are
being paid directly to senior lienholders with respect to one loan (loan 7 in
the table under "Loan Status,"). Where the property is being managed by
Brandywine Construction and Management, Inc., a property manager affiliated with
us, we may direct that property revenues be paid to Brandywine as our managing
agent. As of September 30, 2000, revenues are being paid to Brandywine with
respect to two loans (loans 25 and 30). Where we believe that operating problems
with respect to an underlying property have been substantially resolved, we may
permit the borrower to retain revenues and pay property expenses directly. As of
September 30, 2000, we permitted borrowers with respect to seven loans (loans
24, 31, 32, 41, 47, 50 and 51) to do so.
As a result of the requirement of retaining a property management firm
acceptable to us, Brandywine has assumed responsibility for supervisory and, in
many cases, day-to-day management of the underlying properties with respect to
substantially all of our portfolio loans as of September 30, 2000. In ten
instances, the president of Brandywine (or an entity affiliated with him) has
also acted as the general partner, president or trustee of the borrower.
The minimum payments required under a forbearance agreement are
normally materially less than the debt service payments called for by the
original terms of the loan. The difference between the minimum required payments
under the forbearance agreement and the payments called for by the original loan
terms continues to accrue but, except for amounts recognized as an accretion of
discount, are not recognized as revenue until actually paid. See "Business -
Real Estate Finance: Accounting for Discounted Loans".
When we refinance or sell a senior loan interest, the forbearance
agreement typically will remain in effect, subject to any modifications required
by the refinance lender or senior lien holder.
At the end of a forbearance agreement, the borrower must pay the loan
in full. The borrower's ability to do so, however, will depend upon a number of
factors, including prevailing conditions at the underlying property, the state
of real estate and financial markets (generally and as regards to the particular
property), and general economic conditions. If the borrower does not or cannot
repay the loan, we anticipate it will seek to sell the property underlying the
13
loan or otherwise liquidate the loan. Alternatively, where we already control
all of the cash flow and other economic benefits from the property, or where we
believe that the cost of foreclosure is more than any benefit we could obtain
from foreclosure, we may continue our forbearance.
Business Strategy
We seek to increase the income and value of the properties underlying
our portfolio loans. To achieve our goal, we employ experienced property
managers either to manage the properties directly or to supervise local property
managers. We encourage our managers to take an active management role to
increase rents, improve property conditions and, where possible, achieve cost
efficiencies in property operations. We may sell portfolio loans as appropriate
opportunities arise.
Refinancings
In refinancings, we reduce the amount outstanding on our loan by the
amount of net refinancing proceeds and either convert the outstanding balance of
the original note into the stated principal amount of an amended note on the
same terms as the original note, or retain the original loan obligation as paid
down by the amount of refinance proceeds we receive. The interest rate on the
refinancing is typically less than the interest rate on our retained interest.
Before January 1, 1999, we sought to sell senior lien interests in our
loans. Although we made a strategic decision to structure our transactions after
that date as financings, we retain the right to sell a senior interest in a loan
where it is economically advantageous to do so. When we sell a senior lien
interest, the outstanding balance of our loan at the time of sale remains
outstanding, including as a part of that balance the amount of the senior lien
interest. Thus, our remaining interest effectively "wraps around" the senior
lien interest.
As of September 30, 2000, senior lien interests with an aggregate
balance of $12.0 million relating to seven portfolio loans obligate us, in the
event of a default on a loan, to replace the loan with a performing loan. One
other senior lien interest obligates us, upon its maturity in fiscal 2003, to
repurchase the senior lien interest (if not already paid off) at a price equal
to the outstanding balance of the senior lien interest plus accrued interest.
The aggregate outstanding balance will be $2.5 million at maturity, assuming all
debt service payments have been made. See "Business - Real Estate Finance: Loan
Status."
After a refinancing or sale of a senior lien interest, our retained
interest will usually be secured by a subordinate lien on the property. In some
situations, however, our retained interest may not be formally secured by a
mortgage because of conditions imposed by the senior lender. In these
situations, we may be protected by a judgment lien, an unrecorded deed-in-lieu
of foreclosure, the borrower's covenant not to further encumber the property
without our consent, a pledge of the borrower's equity or a similar device. Our
retained interests in seven loans aggregating $31.0 million and constituting
16.9%, by book value, of our loan portfolio as of September 30, 2000 are not
secured by a lien on the underlying property.
Loan Status
At September 30, 2000, our loan portfolio consisted of 38 loans. We
acquired 32 of these loans as first mortgage liens and six loans as junior lien
obligations. As of September 30, 2000:
o We had sold senior lien interests in 16 loans, including senior
interests in three loans initially acquired as junior lien loans.
o We had purchased senior lien interests in two loans initially
acquired as junior lien loans.
o Borrowers with respect to 17 loans had obtained refinancing.
After these sales, acquisitions and refinancings, we hold subordinated
interests in 32 loans.
The following table sets forth information about our portfolio loans,
grouped by the type of property underlying the loans, as of September 30, 2000.
14
Loan Type of
Number Property Location Seller/Originator
------ -------- -------- -----------------
Office Properties
005 Office Pennsylvania Shawmut Bank(8)
011(10) Office Washington, D.C. First Union Bank(8)
014 Office Washington, D.C. Nomura/Cargill/Eastdil Realty(11)
020 Office New Jersey Cargill/Eastdil Realty(11)
026(10) Office Pennsylvania The Metropolitan Fund/First Trust Bank
029(10) Office Pennsylvania Castine Associates, L.P.(12)
035(14)(10) Office Pennsylvania Hudson United Bank (8)
036 Office North Carolina Union Labor Life Insurance Co.
044(16) Office Washington, D.C. Dai-Ichi Kangyo Bank
046 Office Pennsylvania Corestates Bank, N.A.
048(18) Office Pennsylvania Institutional Property Assets
049(19) Office Maryland Bre/Maryland
053(20)(32) Office Washington, D.C. Sumitomo Bank, Limited
Office Totals
Multifamily Properties
001(21) Multifamily Pennsylvania Alpha Petroleum Pension Fund
003 Multifamily New Jersey RAM Enterprises/Glenn Industries Pension Plan
015 Condo/Multifamily North Carolina First Bank/ SouthTrust Bank
021(10)(22) Multifamily Pennsylvania Bruin Holdings/Berkley Federal Savings Bank
022 Multifamily Pennsylvania FirsTrust FSB
024 Multifamily Pennsylvania U.S. Dept. of Housing and Urban Development
028 Condo/Multifamily North Carolina First Bank/South Trust Bank
031 Multifamily Connecticut John Hancock Mutual Life Ins. Co.
032(16) Multifamily New Jersey John Hancock Mutual Life Ins. Co.
034 Multifamily Pennsylvania Resource America, Inc.
037(31) Multifamily Florida Howe, Soloman & Hall Financial, Inc.
041 Multifamily Connecticut J.E. Robert Companies
042 Multifamily Pennsylvania Fannie Mae(23)
043(24) Multifamily Pennsylvania Downingtown National Bank
047(10) Multifamily New Jersey Credit Suisse First Boston Mortgage Capital, Inc.
050 Multifamily Illinois J.E. Roberts Companies
051 Multifamily Illinois J.E. Roberts Companies
054(26) Multifamily Connecticut Resource America, Inc.
Multifamily Totals
Commercial Properties
007 Single User/Retail Minnesota Prudential Insurance, Alpha Petroleum Pension Fund
013(10)(27) Single User/CommercialCalifornia California Federal Bank, FSB
017(10)(28) Single User/Retail West Virginia Triester Investments(8)
018 Single User/Retail California Emigrant Savings Bank/ Walter R. Samuels & Jay Furman(29)
033 Single User/Retail Virginia Brambilla, LTD
Commercial Totals
Hotel Properties
025 Hotel/Commercial Georgia Bankers Trust Co.
030 Hotel Nebraska CNA Insurance
Hotel Totals
Fiscal Value
Year Outstanding of Property
Loan Loan Underlying
Acquired Receivable(1) Loan(2)
-------- ------------- -------
Office Properties
1993 $ 8,425,072 $ 1,700,000
1995 1,691,890 1,500,000
1995 19,872,000 14,000,000
1996 8,082,379 4,600,000
1997 9,801,128 5,000,000
1997 8,767,634 4,025,000
1997 2,536,126 2,550,000
1997 4,978,742 4,150,000
1998 107,214,122 98,000,000
1998 6,061,494 5,300,000
1998 68,601,530 65,000,000
1998 103,038,924 99,000,000
1999 128,452,325 86,700,000
------------ ------------
Office Totals $477,523,366 $391,525,000
------------ ------------
Multifamily Properties
1991&99 9,564,294 5,350,000
1993 3,212,109 1,350,000
1995&97 5,302,906 5,019,500
1996&97 7,569,827 3,868,130
1996 6,080,003 4,300,000
1996 3,326,094 3,800,000
1997 505,795 455,500
1997 12,257,174 12,500,000
1997 12,854,851 13,278,000
1997 426,352 450,000
1997 8,628,535 3,500,000
1998 20,987,573 21,000,000
1998 6,336,986 5,740,000
1998 2,177,130 2,275,000
1998 2,629,051 3,375,000
1998 50,306,758 23,400,000
1998 24,612,352 24,000,000
1999 1,600,000 2,000,000
------------ ------------
Multifamily Totals $178,377,790 $135,661,130
------------ ------------
Commercial Properties
1993 5,049,726 2,545,000
1994 2,792,769 2,600,000
1996 1,627,864 1,900,000
1996 3,062,264 6,400,000
1997&99 4,657,837 2,650,000
------------ -----------
Commercial Totals $ 17,190,460 $ 16,095,000
------------ ------------
Hotel Properties
1997 7,512,818 8,000,000
1997 10,792,885 6,300,000
------------ -----------
Hotel Totals $ 18,305,703 $ 14,300,000
------------ ------------
Balance as of September 30, 2000 $691,397,319 $557,581,130
============ ============
15
Maturity
Resource America's of Loan/
Ratio of Proceeds from Net Interest in Expiration
Cost of Refinancing or Outstanding of
Cost of Investment to Sale of Senior Net Book Value Loan Forbearance
Investment(3) Appraised Value Lien Interests Investment(4) of Investment(5) Receivables(6) Agreement(7)
- ------------- --------------- ---------------- ------------- ---------------- -------------- ------------
$ 1,348,851 79% $ 940,000(9) $ 408,851 $ 952,562 $ 7,585,072 02/07/01
1,189,904 79% 660,000(9) 529,904 762,172 1,006,890 06/01/00(12a)
12,539,475 90% 6,487,000 6,052,475 7,546,955 13,231,989 11/30/98(12a)
3,317,878 72% 2,562,000 755,878 2,502,670 5,731,199 02/07/01
2,609,410 52% 2,231,693 377,717 1,824,851 7,674,329 09/30/03
3,088,476 77% 2,625,000(13) 463,476 1,385,290 6,219,579 07/01/02
1,841,889 72% 1,750,000(15) 91,889 789,907 810,107 09/25/02
3,094,950 75% 1,750,000(15) 1,344,950 2,008,853 3,254,241 12/31/11
79,990,948 82% 71,500,000(17) 8,490,948 20,692,832 27,349,128 08/01/08
3,995,859 75% 0 3,995,859 4,054,704 6,061,494 09/30/14
60,620,417 93% 44,000,000 16,620,417 19,612,890 25,639,531 08/01/08
90,190,604 91% 60,000,000 30,190,604 38,282,501 43,038,924 04/01/11
70,612,010 81% 65,000,000 5,612,010 11,769,066 55,167,726 01/15/06
- ------------- ------------ ------------- ------------ ------------
$ 334,440,671 $259,505,693 $ 74,934,978 $112,185,253 $202,770,209
- ------------- ------------ ------------- ------------ ------------
4,763,730 89% 0 4,763,730 5,253,412 9,564,294 08/01/21
1,122,353 83% 627,000 495,353 102,212 2,616,505 01/01/03
2,079,434 41% 3,000,000 (920,566) 2,355,734 2,362,602 03/23/09
2,531,574 65% 3,695,674(9) (15) (1,164,100) 757,219 4,719,242 07/01/16
2,471,782 57% 3,435,000 (963,218) 986,849 2,682,874 05/03/29
2,743,136 72% 2,318,750 424,386 795,627 896,073 11/01/22
451,510 99% 0 451,510 485,820 505,795 03/23/09
4,788,642 38% 9,375,000 (4,586,358) 1,628,209 3,007,271 10/14/14
7,404,156 56% 6,000,000(17) 1,404,156 5,410,620 7,410,085 09/01/05
401,500 89% 0 401,500 424,183 426,352 10/01/02
2,807,945 80% 2,096,000(9) 711,945 1,206,266 6,532,535 06/01/10
14,733,084 70% 14,100,000 633,084 7,176,034 7,130,129 01/01/09
4,287,056 75% 4,450,000 (162,944) 1,290,701 1,889,738 07/12/30
1,589,381 70% 1,000,000(25) 589,381 1,044,588 1,177,130 07/01/02
2,656,969 79% 1,800,000(15) 856,969 1,019,572 846,098 02/01/05
18,654,699 80% 15,350,000 3,304,699 7,921,612 35,097,805 09/30/09
17,375,252 72% 0 17,375,252 19,281,718 24,612,352 09/30/02
1,140,666 57% 0 1,140,666 1,600,000 1,600,000 04/01/11
- ------------- ------------ ------------- ------------ ------------
$ 92,002,869 $ 67,247,424 $ 24,755,445 $ 58,740,376 $113,076,880
- ------------- ------------ ------------- ------------ ------------
1,359,055 53% 2,099,000 (739,945) 719,958 3,095,160 12/31/14
1,701,049 65% 1,975,000(9) (273,951) 515,718 792,769 05/01/01
894,660 47% 1,000,000(15) (105,340) 567,741 652,753 12/31/16
2,427,268 38% 1,969,000(9) 458,268 975,739 1,093,264
12/01/00(12a)
2,425,090 92% 1,800,000(15) 625,090 951,239 2,957,034 02/01/21
- ------------- ------------ -------------- ------------ ------------
$ 8,807,122 $ 8,843,000 $ (35,878) $ 3,730,395 $ 8,590,980
- ------------- ------------ -------------- ------------ ------------
7,062,222 88% 875,000(30) 6,187,222 7,900,909 6,637,818 12/31/15
5,022,695 80% 2,400,000(9) 2,622,695 3,383,314 8,392,885 09/30/02
- ------------- ------------ -------------- ------------ ------------
$ 12,084,917 $ 3,275,000 $ 8,809,917 $ 11,284,223 $ 15,030,703
- ------------- ------------ ------------- ------------ ------------
$ 447,335,579 $338,871,117 $ 108,464,462 $185,940,247 $339,468,772
============= ============ ============= ============ ============
16
(1) Consists of the original stated or face value of the obligation plus
interest and the amount of the senior lien interest at September 30, 2000.
(2) We generally obtain appraisals on each of the properties underlying our
portfolio loans at least once every three years. Accordingly, appraisal
dates range from 1997 - 2000, except with respect to loan 3. However,
after the end of fiscal 2000, the property underlying loan 3 was sold and
our loan was repaid.
(3) Consists of the original cost of our investment, including the amount of
any senior lien obligation to which the property remains subject, plus
subsequent advances, but excludes the proceeds to us from the sale of
senior lien interests or borrower refinancings.
(4) Represents the unrecovered costs of our investment, calculated as the cash
investment made in acquiring the loan plus subsequent advances, less cash
received from the sale of a senior lien interest in or borrower
refinancing of the loan. Negative amounts represent our receipt of
proceeds from the sale of senior lien interests or borrower refinancings
in excess of our investment.
(5) Represents the book cost of our investment after accretion of discount and
allocation of gains from the sale of a senior lien interest in, or
borrower refinancing of the loan, but excludes an allowance for possible
losses of $2.0 million. For a discussion of accretion of discount and
allocation of gains, see "- Accounting for Discounted Loans."
(6) Consists of the amount set forth in the column "Outstanding Loan
Receivable" less senior lien interests at September 30, 2000.
(7) With respect to loans 7, 14, 17, 25, 27, 30, 31, 32, 34, 37, 42, 44, 46,
47, 48, 49, 53 and 54, the date given is for the maturity of our interest
in the loan. For loan 43, the date given is the expiration date of the
forbearance agreement with respect to the loan in the original principal
amount of $404,026 (see Note (24) below). For the remaining loans, the
date given is the expiration date of the related forbearance agreement.
(8) Successor by merger to the seller.
(9) Senior lien interest sold subject to the right of the holder, upon
default, to require us to substitute a performing loan.
(10) With respect to loans 13, 17 and 26, the president of Brandywine is the
general partner of the borrower; with respect to loan 29, he is the
general partner for the sole limited partner of the borrower; and with
respect to loan 11, he is the president of the borrower. With respect to
loan 35, he is the president of the general partner of the borrower. In
addition, with respect to loan 21, which consists of 22 separate mortgage
loans on 36 individual condominium units in a single building, the
president of Brandywine is the trustee of one borrower (for 11 mortgage
loans) and the president of the general partner of another borrower (for
four mortgage loans).
(11) Seller was a partnership of these entities.
(12) From 1993 to October 1997, one of our executive officers served as the
general partner of the seller.
(12a) We are attempting to maximize our return by selling the properties
underlying these loans in cooperation with the borrowers. In the meantime,
we continue to forbear from exercising our remedies with respect to these
loans since we believe we receive all of the economic benefit from the
properties without having to incur the expense of foreclosure.
(13) Represents a senior lien interest sold to an institution. We have the
obligation to repurchase this interest on or after March 31, 2003.
(14) The borrower is a limited partnership formed in 1991. The general partner
of the partnership is owned by the president of Brandywine; our chairman
and his wife beneficially own a 49% limited partnership interest in the
partnership and our former executive vice president and vice chairman
beneficially owns a 1% limited partnership interest.
(15) Senior lien interest sold subject to the right of the holder, upon default
by borrower, to require us to substitute a performing loan.
(16) See note 3 to Consolidated Financial Statements, "- Relationships with
RAIT."
(17) A senior lien interest was sold to RAIT. See "Business - Real Estate
Finance: Sponsorship of Real Estate Investment Trust."
(18) The borrower is a partnership in which Brandywine owns an 11% interest and
RAIT owns an 89% interest.
(19) The borrower is a limited liability company whose manager is a corporation
of which our former vice chairman and current director of the Company is
the sole shareholder, officer and director. The chairman, two directors of
the Company and the president of Brandywine are equal limited partners
(25% each) of a partnership that is a 59% limited partner of the managing
partner which has a (99)% interest in the sole member of the borrower.
(20) We jointly purchased this loan with RAIT, which contributed $10.0 million
of the purchase price. RAIT's interest was subsequently paid down to $8.3
million.
17
(21) We acquired a first mortgage loan at face value from RAIT. The loan is
secured by property in which we have held a subordinate interest since
1991.
(22) Consists of 22 separate mortgage loans on 36 individual condominium units
in a single building. Nine of such loans are due July 1, 2016, nine are
due January 1, 2015, one is due October 1, 2007, one is due July 7, 2003,
one is due May 5, 2001 and one due October 9, 2001. The president of
Brandywine and his wife own general and limited partnership interests in
the borrowers of some of these loans. The borrower with respect to other
loans is a trust, the trustee of which is the president of Brandywine and
the beneficiary of which is a limited partnership for which one of our
directors is general partner.
(23) Original lending institution.
(24) Consists of two related loans to one borrower secured by a single property
in the original principal amounts of $1.6 million and $404,026.
(25) Senior lien interest sold to a limited partnership in which our chairman
and our former executive vice president and vice chairman and current
director beneficially own a 14.4% limited partnership interest.
(26) Construction loan with a maximum borrowing of $1.6 million.
(27) Our chairman and his wife beneficially own a 40% limited partnership
interest in the borrower.
(28) Consists of a series of notes becoming due yearly through December 31,
2016.
(29) Amounts advanced by us were used in part to directly repay the loan of
Emigrant Savings Bank; the balance was applied to purchase a note held by
Messrs. Samuels and Furman.
(30) In May 1999, we borrowed $875,000 from a limited partnership in which our
chairman and our former executive vice president and vice chairman and
current director beneficially own a 22% limited partnership interest. The
loan is secured by a first priority lien on loan 25. Accordingly, the debt
is included in the cost of investment carried on our books.
(31) The borrower is a limited partnership of which our former executive vice
president and vice chairman and current director is the president of the
general partner and our chairman, two of our directors and the president
of Brandywine are equal limited partners of the borrower.
(32) One of our subsidiaries is the manager of the borrower.
18
The following table sets forth average monthly cash flow from the
properties underlying our portfolio loans, average monthly debt service payable
to senior lienholders and refinance lenders, average monthly payments with
respect to our retained interest and cash flow coverage (the ratio of cash flow
from the properties to debt service payable on senior lien interests) for the
three months ended September 30, 2000. The loans are grouped by the type of
property underlying the loans.
Average Monthly Average Monthly
Interest Principal
Payment on Debt Payment on Debt Average Monthly
Average Service on Service on Payment to
Loan Monthly Cash Flow Refinancing or Refinancing or Resource America's Cash Flow
Number from Property(1) Senior Lien Interests Senior Lien Interest Interest Coverage
------ ----------------- ---------------------- --------------------- ------------------ ---------
Office
- ------
005 $ 7,593 $ 6,825 $ 0 $ 768 1.11
011 9,572 5,566 0 4,006 1.72
014 76,098 44,510 18,223 13,365 1.21
020 41,560 17,903 1,624 22,033 2.13
026 31,885 17,694 3,906 10,285 1.48
029 31,695 19,419 2,835 9,441 1.42
035 24,914 14,408 1,494 9,012 1.57
036(5) 3,604 14,396 1,506 (12,298) N/A
044 716,096 489,013 67,088 159,995 1.29
046 31,900 0 0 31,900 N/A
048 393,288 245,728 42,586 104,974 1.36
049 744,170 378,000 72,000 294,170 1.65
053 712,961 554,717 37,923 120,321 1.20
----------- ----------- ----------- ----------
Office Totals $ 2,825,336 $ 1,808,180 $ 249,184 $ 767,973 1.37
=========== =========== =========== ==========
Multifamily
- -----------
001 $ 26,473 $ 0 $ 0 $ 26,473 N/A
003 6,296 4,735 1,323 238 1.04
015&028(2)(6) 21,442 19,995 3,680 (2,233) N/A
021(4) 15,261 24,329 536 (9,604) N/A
022 27,744 22,045 2,623 3,076 1.12
024 25,926 15,804 2,158 7,964 1.44
031 85,355 60,034 10,901 14,420 1.20
032 105,407 54,927 23,878 26,602 1.34
034 3,422 0 0 3,422 N/A
037 25,630 17,030 0 8,600 1.50
041 132,500 86,115 13,490 32,895 1.33
042 55,267 22,424 2 752 30,091 2.20
043 12,096 8,343 0 3,753 1.45
047 17,876 14,883 1,474 1,519 1.09
050 147,916 100,854 11,137 35,925 1.32
051 77,292 0 0 77,292 N/A
054 18,085 0 0 18,085 N/A
----------- ----------- ----------- ----------
Multifamily Totals $ 803,988 $ 451,519 $ 73,951 $ 278,518 1.53
=========== =========== =========== ==========
Commercial
- ----------
007 $ 20,400 $ 14,423 $ 5,977 $ 0 1.00
013 25,023 15,833 0 9,190 1.58
017 10,690 8,142 945 1,603 1.18
018(3) 26,443 15,998 0 10,445 1.65
033 21,940 14,258 5,084 2,598 1.13
----------- ----------- ----------- ----------
Commercial Totals $ 104,496 $ 68,654 $ 12,006 $ 23,836 1.30
=========== =========== =========== ==========
Hotel
- -----
025 $ 46,659 $ 7,292 $ 0 $ 39,367 6.40
030(7) 0 0 0 0 N/A
----------- ----------- ----------- ----------
Hotel Totals $ 46,659 $ 7,292 $ 0 $ 39,367 6.40
=========== =========== =========== ==========
Total Properties $ 3,780,479 $ 2,335,645 $ 335,141 $1,109,695 1.42
=========== =========== =========== ==========
19
(1) Cash flow consists of revenues from property operations less operating
expenses, including real estate and other taxes pertaining to the property
and its operations, and before depreciation, amortization and capital
expenditures.
(2) The properties underlying loans 15 and 28 are different condominium units
in the same building and, accordingly, are combined for cash flow purposes.
(3) Includes one-twelfth of an annual payment of $120,000 received in December
of each year.
(4) Loan 21 consists of 22 separate mortgage loans on 36 individual condominium
units. During fiscal 2000 we were repaid, and recorded gains on, four of
the units and held two units vacant in anticipation of future repayments.
Accordingly, cash flow from the property decreased while debt service on
refinancing or senior lien interests remained constant.
(5) In the quarter ending 12/30/99, the property underlying this loan lost its
biggest tenant, accounting for approximately 53% of the total square
footage. The space is marketed for lease and is currently unoccupied.
(6) The property underlying these loans is located in an area that has recently
seen an increase in construction of similar residential properties. Due to
the new construction in the area, the property's vacancy rate has
increased, consequently, cash flow has decreased.
(7) The property underlying the loan is a hotel property located in Omaha,
Nebraska. The forbearance agreement requires minimum monthly payments of
cash flows from the property based on net operating income. During fiscal
2000, there was a temporary economic decline in the Omaha market,
consequently, cash flows have been negatively impacted. We anticipate
resumption of cash flows within the next fiscal period.
Investments in Real Estate Ventures
In fiscal 1999, we became the owner of a hotel property in Savannah,
Georgia as a result of receiving a deed-in-lieu of foreclosure. Our carrying
cost in this property was $4.6 million at September 30, 2000. Also in fiscal
1999, the borrower with respect to an office property in Philadelphia,
Pennsylvania, exercised its right under the loan documents to satisfy its loan
by paying us $29.6 million in cash and giving us a 50% equity interest in the
property. Our carrying cost in this property is $11.4 million at September 30,
2000.
Accounting for Discounted Loans
We accrete the difference between our cost basis in a portfolio loan
and the sum of projected cash flows from the loan into interest income over the
estimated life of the loan using the interest method, which results in a level
rate of interest over the life of the loan. We review projected cash flow, which
include amounts realizable from the underlying property, on a quarterly basis.
Changes to projected cash flows reduce or increase the amounts accreted into
interest income over the remaining life of the loan.
We record our investments in portfolio loans at cost, which is
significantly discounted from the stated principal amount of, and accrued
interest and penalties (collectively, the face value) on the loans. This
discount from face value, as adjusted to give effect to refinancings and sales
of senior lien interests, totaled $156.5 million, $158.3 million and $139.7
million at September 30, 2000, 1999 and 1998, respectively. We review on a
quarterly basis the carrying value of our loans to determine whether it is
greater than the sum of the future projected cash flows. If we determine that
carrying value is greater, we provide an appropriate allowance through a charge
to operations. In establishing our allowance for possible losses, we also
consider the historic performance of our loan portfolio, characteristics of the
loans and their underlying properties, industry statistics and experience
regarding losses in similar loans, payment history on specific loans as well as
general economic conditions in the United States, in the borrower's geographic
area or in the borrower's (or its tenants') specific industries. For the year
ended September 30, 2000, we recorded a provision for possible losses of
$936,000, which increased our allowance for possible losses at September 30,
2000 to $2.0 million.
20
Depending on the structure of the transaction, we can recognize gains
or losses on the sale of a senior lien interest in a loan. These gains and
losses are calculated by allocating our cost basis between the portion of the
loan sold and the portion retained based upon the fair value of those respective
portions on the date of sale. Gains resulting from the refinancing of a property
by its owners arise only when the financing proceeds exceed the carried cost of
our investment in the loan. Any gain recognized on a sale of a senior lien
interest or a refinancing is credited to income at the time of the sale or
refinancing.
Before January 1, 1999, most of our financing transactions involving
the sale of senior lien interests in our loans were structured to meet the
criteria for sale under generally accepted accounting principles. Thus, for
transactions that were completed before January 1, 1999, we recorded gains on
sale. Effective January 1, 1999, we made a strategic decision to structure
future transactions as financings. The cash flows available to us, which are
generally derived from the cash flows on the properties underlying our portfolio
loans were unaffected by the modification. The primary effect of the change is
that, instead of recognizing an immediate gain on the sale of a senior lien
interest, we retain our full investment in the loan on our books, recognize
interest income over the life of the loan, record as debt the proceeds from the
senior lien interest and recognize interest expense on that debt.
Sponsorship of Real Estate Investment Trust
We are the sponsor and a 14% shareholder of RAIT Investment Trust
("RAIT"), a real estate investment trust that began operations in January 1998.
RAIT acquires or originates commercial mortgage loans in situations that
generally do not conform to the underwriting standards of institutional lenders
or sources that provide financing through securitization. Betsy Z. Cohen, spouse
of our chairman, chief executive officer and president, Edward E. Cohen, and
mother of Daniel G. Cohen, one of our directors, is the chairman and chief
executive officer of RAIT. Jonathan Z. Cohen, another son of Mr. and Mrs. Cohen
and one of our senior vice presidents, is our nominee to RAIT's board of
trustees and is the secretary of RAIT. Scott F. Schaeffer, president of RAIT, is
one of our directors; Mr. Schaeffer was, until September 13, 2000, our executive
vice president and vice chairman of our Board of Directors.
Our relationship with RAIT is subject to the following:
o So long as we own 5% or more of RAIT's common shares, we will have
the right to nominate one person to RAIT's board of trustees.
o RAIT's declaration of trust permits it to acquire loans from us to
a maximum of 30% of RAIT's investments (on a cost basis),
excluding investments acquired from us at the time of RAIT's
initial public offering.
o If we sponsor a real estate investment trust with investment
objectives similar to those of RAIT, our representative on RAIT's
board of trustees must recuse himself or herself from considering
or voting upon matters relating to financings which may be deemed
to be within the lending guidelines of both RAIT and the real
estate investment trust we are then sponsoring.
For transactions between RAIT and us, see Part III, Item 13 of this
report, and Note 3, "Certain Relationships and Related Party
Transactions-Relationship with RAIT" in Notes to Consolidated Financial
Statements.
Partnership Management
Through our subsidiary, F.L. Partnership Management, Inc. we act as the
general partner and manager of five public limited partnerships formed between
1986 and 1990. These partnerships had total assets at September 30, 2000 of
$33.8 million, including $2.2 million (book value) of equipment with an original
cost of $13.4 million, and investments in direct financing leases of $18.1
million. The partnerships primarily lease computers and related peripheral
equipment to investment-grade, middle-market and capital-intensive companies.
The principal stated objective of each of the limited partnerships is to
generate leasing revenues for distribution to the investors in the partnerships.
The partnerships commenced their liquidation periods at various times between
December 1995 and December 1998.
21
We receive management fees and an interest in partnership cash
distributions for our services as general partner. Management fees range from 4%
to 6% of gross rents except for full-payout leases where management fees range
from 2% to 3% of gross rents. In four of the partnerships, management fees are
subordinated to the receipt by limited partners of a cumulative annual cash
distribution of 11% (one partnership) or 12% (three partnerships) of the limited
partners' aggregate investment. Our general partner's interest in cash
distributions is 3.5% (one partnership) and 1% (four partnerships). The
partnerships reimburse us for specified expenses related to administration of
the partnerships, including costs of non-executive personnel, legal, accounting
and third-party contractor fees and costs and costs of equipment used in a
partnership's behalf.
Discontinued Operations
Residential Mortgage
On September 28, 1999, we adopted a plan to discontinue our residential
mortgage lending business. The business was disposed of in November 2000.
Accordingly, our financial statements report the business as a discontinued
operation for the years ended September 30, 2000, 1999 and 1998. Net assets of
the discontinued operation at September 30, 2000 consisted primarily of loan
receivables.
Equipment Leasing
On August 1, 2000, we sold our small ticket equipment leasing
subsidiary, Fidelity Leasing, to European American Bank and AEL Leasing Co.,
Inc., subsidiaries of ABN AMRO Bank, N.V. We received total consideration of
$152.2 million, including repayment of indebtedness of Fidelity Leasing to us;
the purchasers also assumed approximately $431.0 million in debt payable to
third parties and other liabilities. Of the $152.2 million consideration, $16.0
million was paid by a non-interest bearing promissory note. The promissory note
is payable to the extent that payments are made on a pool of Fidelity Leasing
lease receivables and refunds are received with respect to certain tax
receivables. The lease receivable pool consists of receivables that, as of June
30, 2000, were aged more than 90 days or on Fidelity Leasing's "watch list," or
had an outstanding balance of $200,000 or more that would have been rated "not
pass" under the purchasers' credit policies. In addition, $10.0 million was
placed in escrow until March 31, 2004 as security for our indemnification
obligations to the purchasers. In connection with the sale, we made $15.5
million of payments to Fidelity Leasing's management and incurred $3.4 million
in expenses.
Credit Facilities and Senior Notes
The following is a summary of the terms of our credit facilities
outstanding as of September 30, 2000 and of our senior notes:
Credit Facilities
We have an $18.0 million revolving credit facility with Hudson United
Bank, formerly Jefferson Bank, for our real estate finance operations. The
facility expires in February 2001. The facility bears interest at the prime rate
reported in The Wall Street Journal plus .75%, and is secured by our interest in
certain commercial loans. As amended in December 1999, credit availability is
based upon the amount of assets pledged as security for the facility and is
subject to the lender's approval of additional collateral. Credit availability
at September 30, 2000 was $7.0 million, all of which had been drawn at that
date.
22
We also established an $18.0 million line of credit with Sovereign
Bank. The facility bears interest at the prime rate reported in The Wall Street
Journal and expires in July 2002. The facility is secured by our interest in
certain of our portfolio loans and real estate and by certain bonds held by us.
Credit availability is based on the value of the collateral pledged as security
and was $18.0 million as of September 30, 2000, all of which had been drawn at
that date. The facility imposes limitations on the incurrence of future
indebtedness by our subsidiaries whose properties were pledged, and on sales,
transfers or leases of their assets, and requires the subsidiaries to maintain
both a specified level of equity and a specified debt service coverage ratio.
At the same time, we established a similar $5.0 million line of credit
with Sovereign Bank. This facility bears interest at the same rate as the $18.0
million line of credit and also expires in July 2002. The facility is secured by
a pledge of our RAIT common shares and by a guaranty from the subsidiaries
involved in the $18.0 million line of credit. Credit availability is based on
the value of those shares and was $5.0 million as of September 30, 2000, all of
which had been drawn at that date. The facility restricts us from making loans
to our affiliates (except for subsidiaries) other than:
o existing loans,
o loans in connection with lease transactions in an aggregate not to
exceed $50,000 in any fiscal year, and
o loans to RAIT made in the ordinary course of business.
In September 1999, our energy subsidiaries, Atlas America, Resource
Energy and Viking Resources, entered into a $40.0 million revolving credit
facility administered by PNC Bank. Credit availability under the facility, as
amended in February 2000, is based on the proved developed producing, proved
developed non-producing and proved undeveloped natural gas and oil reserves
attributable to the borrowers' wells and the borrowers' projected fees and
revenues from the operation of wells and management of drilling partnerships,
and was $40.0 million at September 30, 2000. Up to $10.0 million of the
borrowings under the facility may be in the form of standby letters of credit. A
letter of credit in the original amount of $7.5 million was issued to Atlas
Pipeline under this facility to secure our obligation to support, through
February 2003, minimum quarterly distributions by Atlas Pipeline to holders of
its non-subordinated units. The letter of credit reduces each quarter as the
distribution support obligation reduces. Borrowings under the facility are
secured by the assets of the borrowers and their subsidiaries, including the
stock of subsidiaries and interests in Atlas Pipeline Partners GP and Atlas
Pipeline. Loans under the facility bear interest at one of the following two
rates, at the borrowers' election, which increase as the amount outstanding
under the facility increases:
o the PNC Bank prime rate plus 0 to 75 basis points, or
o the Eurodollar rate plus 150 and 225 basis points.
Draws under any letter of credit bear interest at the PNC Bank prime
rate plus 0 to 75 basis points.
The credit facility contains financial covenants, including
requirements that we maintain:
o a current ratio of .85 to 1.0,
o a ratio of earnings to fixed charges of 1.5 to 1.0, increasing to
2.0 to 1.0 in September 2000 and 2.5 to 1.0 in March 2002, and
o a leverage ratio of not less than 3.0 to 1.0.
In addition, the facility prohibits the borrowers' exploration expenses
from exceeding 20% of capital expenditures and limits sales, leases or transfers
of property by the borrowers and the incurrence of additional indebtedness. The
facility terminates in June 2003, when all outstanding borrowings must be
repaid.
At September 30, 2000, $29.5 million of the facility (including the
letter of credit, which had an outstanding balance of $5.7 million at such date)
had been drawn.
23
Senior Notes
Our 12% senior notes are unsecured general obligations with interest
payable only until maturity on August 1, 2004. The senior notes are not subject
to mandatory redemption except upon a change in control, as defined in the
indenture governing the senior notes, when the noteholders have the right to
require us to redeem the senior notes at 101% of principal amount plus accrued
interest. There is no sinking fund for the senior notes. At our option, we may
redeem the senior notes in whole or in part on or after August 1, 2002 at a
price of 106% of principal amount (through July 31, 2003) and 103% of principal
amount (through July 31, 2004), plus accrued interest to the date of redemption.
At September 30, 2000, $80.4 million of these notes were outstanding.
The indenture contains covenants that, among other things, require us
to maintain certain levels of net worth (generally, an amount equal to $200.0
million plus a cumulative 25% of our consolidated net income less an adjustment
based upon the principal amount of senior notes we repurchase) and liquid assets
(generally, an amount equal to 100% of required interest payments for the next
succeeding interest payment date); and limit our ability to:
o incur indebtedness, but excluding secured indebtedness used to
acquire assets or refinance acquisitions;
o pay dividends or make other distributions in excess of 25% of
aggregate consolidated net income, offset by 100% of any deficit,
on a cumulative basis;
o engage in specified transactions with affiliates;
o dispose of subsidiaries;
o create liens and guarantees with respect to pari passu or junior
indebtedness;
o enter into any arrangement that would impose restrictions on the
ability of subsidiaries to make dividend and other payments to us
except in connection with specified indebtedness;
o merge, consolidate or sell all or substantially all of our assets;
o incur additional indebtedness if our "leverage ratio" exceeds 2.0
to 1.0; or
o incur pari passu or junior indebtedness with a maturity date prior
to that of the senior notes.
As defined by the indenture, the leverage ratio is the ratio of all
indebtedness (excluding debt used to acquire assets, obligations to repurchase
loans or other financial assets sold by us, guarantees of either of the
foregoing, non-recourse debt and certain securities issued by securitization
entities, as defined in the indenture) to our consolidated net worth.
Employees
As of September 30, 2000, we employed 199 persons, including 13 in
general corporate, 176 in energy, 8 in partnership management and 2 in real
estate finance.
Risk Factors
Statements made by us in written or oral form to various persons,
including statements made in filings with the SEC, that are not strictly
historical facts are "forward-looking" statements that are based on current
expectations about our business and assumptions made by management. These
statements are subject to risks and uncertainties that exist in our operations
and business environment that could result in actual outcomes and results that
are materially different than predicted. The following includes some, but not
all, of those factors or uncertainties:
24
General
o Unforeseen interest rate increases will increase our interest
costs under our four credit facilities as well as interest costs
relating to some of the senior lien interests encumbering our
portfolio loans. This could have many material adverse effects,
including reduction of net revenues from both our energy and real
estate finance operations.
Energy
o Historically, the markets for natural gas and oil have been
volatile and are likely to continue to be volatile in the future.
Prices for natural gas and oil are subject to wide fluctuation in
response to relatively minor changes in the supply of and demand
for natural gas and oil, market uncertainty and other factors over
which we have no control. Depending on the purchasers' needs, the
price obtainable for our natural gas, or the amount of natural gas
which we are able to sell, our energy revenues and our ability to
obtain financing for our drilling and development operations
through sponsored drilling partnerships may be materially
adversely affected. While the effect of the current imbalance
between the supply of natural gas and consumer demand has
substantially increased prices for natural gas, we cannot predict
the duration of these conditions. Generally, however, while the
increased prices for natural gas increase our revenues, they may
make it more difficult, or more expensive, to drill and complete
wells due to potentially increased competition for drilling rigs
and related materials, whose services we obtain through
subcontracting, or to execute our business strategy of acquiring
additional natural gas properties and energy companies.
o The energy business involves operating hazards such as well
blowouts, cratering, explosions, uncontrollable flows of oil,
natural gas or well fluids, fires, formations with abnormal
pressures, pipeline ruptures or spills, pollution, releases of
toxic gas and other environmental hazards and risks, any of which
could result in substantial losses to us. In addition, we may be
liable for environmental damage caused by previous owners of
properties purchased or leased by us. As a result, we may incur
substantial liabilities to third parties or governmental entities
which could materially adversely affect our results of operations
or financial condition. In accordance with customary industry
practices, we maintain insurance against some, but not all, of
such risks and losses. We may elect to self-insure if we believe
that insurance, although available, is excessively costly relative
to the risks presented. The occurrence of an event that is not
covered, or not fully covered, by insurance could have a material
adverse effect on our business, financial condition and results of
operations. In addition, pollution and environmental risks
generally are not fully insurable.
o Although wells we drill are generally to formations that have a
high probability of resulting in commercially productive natural
gas reservoirs, the amount of recoverable reserves may vary
significantly from well to well. We may drill wells that, while
productive, do not produce sufficient net revenues to return a
profit after drilling, operating and other costs. If we do not
drill productive and profitable wells, our ability to finance our
drilling activities through drilling partnerships or otherwise
could be materially impaired, which would materially adversely
affect the financial condition and future revenues of our energy
business.
o We account for our energy properties under the successful efforts
method. The carrying value of our energy properties is reviewed
quarterly under standards outlined in FASB 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." Under these rules, the assets carrying value
(ignoring deferred income taxes) is compared with expected
undiscounted future pre-tax cash flows. The calculation of these
future cash flows may include adjustments for expected prices,
costs and production volumes. Impairment is limited to the assets
fair market value. Although "market conditions" ultimately
establish an assets fair value, the assets' future pre-tax cash
flows, using an appropriate discount rate is often used as a
standard. We may be required to write-down the carrying value of
our energy properties when natural gas and oil prices are
depressed or unusually volatile. If a write-down is required, it
could result in a material charge to earnings, but would not
impact cash flow from operating activities. Once incurred, a
write-down of natural gas and oil properties is not reversible at
a later date.
o The estimates of our proved natural gas and oil reserves and the
estimated future net revenues referred to immediately above are
based upon reserve reports that rely upon various assumptions,
including assumptions required by the SEC, as to natural gas and
oil prices, drilling and operating expenses, capital expenditures,
taxes and availability of funds. Such estimates are inherently
25
imprecise. Actual future production, natural gas and oil prices,
revenues, taxes, development expenditures, operating expenses and
quantities of recoverable natural gas and oil reserves may vary
substantially from our estimates or estimates contained in the
reserve reports. Any significant variance in these assumptions
could materially affect the estimated quantity of our reserves.
Our properties also may be susceptible to hydrocarbon drainage
from production by other operators on adjacent properties. In
addition, our proved reserves may be subject to downward or upward
revision based upon production history, results of future
exploration and development, prevailing natural gas and oil
prices, mechanical difficulties, governmental regulation and other
factors, many of which are beyond our control.
o The rate of production from natural gas and oil properties
declines as reserves are depleted. Our proved reserves will
decline as reserves are produced unless we acquire additional
properties containing proved reserves, successfully develop new or
existing properties or identify additional formations with primary
or secondary reserve opportunities on our properties. If we are
not successful in expanding our reserve base, our future natural
gas and oil production, the primary source of our energy revenues,
will be adversely affected. Our ability to find and acquire
additional reserves depends on our generating sufficient cash flow
from operations and other sources of capital, principally our
sponsored drilling partnerships. We cannot assure you that we will
have sufficient cash flow or cash from other sources to expand our
reserve base.
o The growth of our energy operations has resulted from both our
acquisition of energy companies such as Atlas America and Viking
Resources and our ability to obtain capital funds through our
sponsored drilling partnerships. If we are unable to identify
acquisition candidates on acceptable terms, or if our ability to
obtain capital funds through our partnerships is impaired, we may
be unable to increase or maintain our inventory of properties and
reserve base, or be forced to curtail drilling, production or
other activities. This would materially adversely affect our
energy operations and their growth prospects.
Real Estate Finance
o Many of our portfolio loans are secured by properties that, while
income producing, are unable to generate sufficient revenues to
pay the full amount of debt service required under the original
loan terms or are subject to other problems. Although we generally
control cash flow from the properties underlying the loans and,
where appropriate, have made financial accommodations to take into
account the operating conditions of the underlying properties,
there may be a higher risk of default with these loans as compared
to conventional loans.
o Declines in real property values generally and/or in those
specific markets where the properties underlying our portfolio
loans are located due to changes in economic factors or otherwise
could affect the value of and default rates under those loans.
o Many of our portfolio loans were acquired as or became (as a
result of borrower refinancing) junior lien obligations.
Subordinate lien financing carries a greater credit risk,
including a substantially greater risk of non-payment of interest
or principal, than senior lien financing. In the event a loan is
foreclosed, we will be entitled to share only in the net
foreclosure proceeds after payment of all senior lienors. It is
therefore possible that we will not recover the full amount of a
foreclosed loan or of our unrecovered investment in the loan.
o At September 30, 2000, our allowance for possible losses was $2.0
million or (1%) of the book value of our loan portfolio. You
should not assume that this allowance will prove to be sufficient
or that future provisions for loan losses will not be materially
greater, either of which could materially reduce our earnings or
adversely affect our financial condition.
26
ITEM 2. PROPERTIES
We maintain our executive office and our real estate finance operations
in Philadelphia, Pennsylvania under a month-to-month lease for 7,173 square feet
of office space. We also maintain a 2,100 square foot office in New York, New
York under a lease agreement which expires December 2001.
As a result of the Atlas America and Viking Resources acquisitions, we
own a 24,000 square foot office building in Pittsburgh, Pennsylvania, a 17,000
square foot field office and warehouse facility in Jackson Center, Pennsylvania
and a field office in Deerfield, Ohio. We also rent two field offices in Ohio
and New York on a