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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-4408
RESOURCE AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-0654145
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1845 Walnut Street, Suite 1000
PHILADELPHIA, PA 19103
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (215) 546-5005
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
17,486,384 Shares July 30, 2004
RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2004 (Unaudited) and
September 30, 2003.............................................................. 3
Consolidated Statements of Income (Unaudited)
Three Months and Nine Months Ended June 30, 2004 and 2003....................... 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
Nine Months Ended June 30, 2004................................................. 5
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended June 30, 2004 and 2003........................................ 6
Notes to Consolidated Financial Statements - June 30, 2004 (Unaudited)............... 7 - 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 27 - 45
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................... 46 - 47
Item 4. Controls and Procedures.............................................................. 48
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................................. 49
Item 6. Exhibits and Reports on Form 8-K..................................................... 49 - 50
SIGNATURES.................................................................................................. 51
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESOURCE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, September 30,
2004 2003
----------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 65,514 $ 41,129
Investment in lease receivables................................................. 41,930 6,817
Accounts receivable and prepaid expenses........................................ 20,136 23,599
FIN 46 entities' and other assets held for sale................................. 104,834 222,677
-------- --------
Total current assets.......................................................... 232,414 294,222
Investments in real estate loans and real estate................................... 73,783 68,936
FIN 46 entities' assets............................................................ 61,602 78,247
Investment in RAIT Investment Trust................................................ 7,287 20,511
Property and equipment, net........................................................ 157,516 143,410
Other assets....................................................................... 27,763 19,509
Intangible assets, net............................................................. 7,662 8,476
Goodwill........................................................................... 37,471 37,471
-------- --------
$605,498 $670,782
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................... $ 14,633 $ 59,471
Secured revolving credit facilities - leasing................................... 34,938 7,168
Accounts payable................................................................ 20,664 19,065
FIN 46 entities' and other liabilities associated with assets held for sale..... 66,893 141,473
Accrued liabilities............................................................. 17,607 14,626
Liabilities associated with drilling contracts.................................. 18,011 22,158
-------- --------
Total current liabilities..................................................... 172,746 263,961
Long-term debt..................................................................... 40,505 73,696
Deferred revenue and other liabilities............................................. 4,197 3,633
FIN 46 entities' liabilities....................................................... 29,950 45,184
Deferred income taxes.............................................................. 17,188 12,878
Minority interests................................................................. 84,903 43,976
Commitments and contingencies...................................................... - -
Stockholders' equity:
Preferred stock $1.00 par value: 1,000,000 authorized shares.................... - -
Common stock, $.01 par value: 49,000,000 authorized shares...................... 256 255
Additional paid-in capital...................................................... 247,456 227,211
Less treasury stock, at cost.................................................... (77,660) (78,860)
Less ESOP loan receivable....................................................... (1,114) (1,137)
Accumulated other comprehensive income.......................................... 2,089 5,611
Retained earnings............................................................... 84,982 74,374
-------- --------
Total stockholders' equity.................................................... 256,009 227,454
-------- --------
$605,498 $670,782
======== ========
See accompanying notes to consolidated financial statements
3
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- -------- -------
(in thousands, except per share data)
REVENUES:
Energy................................................... $32,854 $21,792 $110,527 $76,088
Real estate.............................................. 5,615 4,495 15,405 11,143
Leasing.................................................. 1,631 1,172 5,339 3,041
Equity in earnings of financial services investees....... 968 764 3,848 872
Interest, dividends, gains and other..................... 2,054 2,499 6,932 6,625
------- ------- -------- -------
43,122 30,722 142,051 97,769
COSTS AND EXPENSES:
Energy................................................... 20,768 13,012 73,129 49,828
Real estate.............................................. 3,589 931 11,623 2,714
Leasing.................................................. 2,250 1,468 6,676 3,870
Financial services....................................... 689 - 1,102 -
General and administrative............................... 2,287 2,094 5,853 4,587
Reorganization - Atlas America, Inc. public offering..... 1,549 - 1,549 -
Provision for legal settlement........................... - - - 1,185
Depreciation, depletion and amortization................. 3,811 3,247 11,021 9,333
Interest................................................. 1,020 3,203 4,926 9,612
Provision for possible losses............................ 182 375 582 1,548
Minority interest in Atlas Pipeline Partners, L.P........ 1,593 1,445 4,188 2,974
------- ------- -------- -------
37,738 25,775 120,649 85,651
------- ------- -------- -------
Income from continuing operations before income taxes
and minority interest................................... 5,384 4,947 21,402 12,118
Provision for income taxes.................................. 1,831 1,461 7,277 3,756
------- ------- -------- -------
Income from continuing operations before minority
interest................................................. 3,553 3,486 14,125 8,362
Minority Interest in Atlas America, Inc.,
net of taxes of $268..................................... (497) - (497) -
------- ------- -------- -------
Income from continuing operations........................... 3,056 3,486 13,628 8,362
Loss on discontinued operations, net of taxes of
$113 and $689............................................ (210) - (1,277) -
------- ------- -------- -------
NET INCOME.................................................. $ 2,846 $ 3,486 $ 12,351 $ 8,362
======= ======= ======== =======
NET INCOME (LOSS) PER COMMON SHARE - BASIC:
From continuing operations............................... $ .17 $ .20 $ .78 $ .49
From discontinued operations............................. (.01) - (.07) -
------- ------- -------- -------
Net income per common share - basic......................... $ .16 $ .20 $ .71 $ .49
======= ======= ======== =======
Weighted average common shares outstanding.................. 17,452 17,069 17,393 17,186
======= ======= ======== =======
NET INCOME (LOSS) PER COMMON SHARE - DILUTED:
From continuing operations............................... $ .16 $ .20 $ .75 $ .48
From discontinued operations............................. (.01) - (.07) -
------- ------- -------- -------
Net income per common share - diluted....................... $ .15 $ .20 $ .68 $ .48
======= ======= ======== =======
Weighted average common shares.............................. 18,599 17,365 18,189 17,471
======= ======= ======== =======
See accompanying notes to consolidated financial statements
4
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 2004
(Unaudited)
(in thousands, except share data)
Accumulated
Common stock Additional Treasury Stock ESOP Other
------------------- Paid-In --------------------- Loan Comprehensive Retained
Shares Amount Capital Shares Amount Receivable Income Earnings
----------------------------------------------------------------------------------------------
Balance, October 1, 2003............ 25,463,645 $ 255 $227,211 (8,113,500) $(78,860) $(1,137) $ 5,611 $ 74,374
Common shares issued................ 75,354 1 875 - - - - -
Treasury shares issued.............. - - (984) 57,044 1,200 - - -
Gain on sale of Atlas America, Inc.
shares............................. - - 20,354 - - - - -
Other comprehensive income.......... - - - - - - (3,522) -
Cash dividends ($.099 per share).... - - - - - - - (1,743)
Repayment of ESOP Loan.............. - - - - - 23 - -
Net income.......................... - - - - - - - 12,351
----------------------------------------------------------------------------------------------
Balance, June 30, 2004.............. 25,538,999 $ 256 $247,456 (8,056,456) $(77,660) $(1,114) $ 2,089 $ 84,982
========== ====== ======== ========== ======== ======= ============= ========
[RESTUBBED TABLE]
Totals
Stockholders'
Equity
---------------
Balance, October 1, 2003............ $ 227,454
Common shares issued................ 876
Treasury shares issued.............. 216
Gain on sale of Atlas America, Inc.
shares............................. 20,354
Other comprehensive income.......... (3,522)
Cash dividends ($.099 per share).... (1,743)
Repayment of ESOP Loan.............. 23
Net income.......................... 12,351
---------------
Balance, June 30, 2004.............. $ 256,009
=============
See accompanying notes to consolidated financial statements
5
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
-------------------------
2004 2003
--------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 12,351 $ 8,362
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization....................................... 11,021 9,333
Amortization of discount on senior debt and deferred finance costs............. 834 966
Provision for possible losses.................................................. 582 1,548
Equity in earnings of financial services entities.............................. (3,848) (872)
Equity in earnings of other equity investees................................... (527) -
Minority interest in Atlas Pipeline Partners, L.P.............................. 4,188 2,974
Minority interest in Atlas America, Inc........................................ 497 -
Loss on discontinued operations................................................ 1,277 -
Net loss (gain) on asset dispositions and buyback of senior notes.............. 1,140 (719)
Gain on sale of RAIT Investment Trust shares................................... (7,095) (3,603)
Property impairments and abandonments.......................................... 721 18
Deferred income taxes.......................................................... (3,364) 122
Accretion of discount.......................................................... (1,552) (1,492)
Collection of interest......................................................... - 1,055
Non-cash compensation ......................................................... 215 216
Net change in FIN 46 entities' net assets and other net assets held for sale..... 2,124 -
Net change in investment lease receivables....................................... (35,447) (11,512)
Changes in operating assets and liabilities...................................... 15,054 12,504
--------- --------
Net cash (used in) provided by operating activities.............................. (1,829) 18,900
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................. (23,489) (18,679)
Investments in real estate loans and real estate................................. (5,726) (5,031)
Principal payments on notes receivable and proceeds from sales of assets......... 7,939 8,641
Proceeds from sale of RAIT Investment Trust shares............................... 15,233 10,896
Increase in other assets......................................................... (3,419) (927)
--------- --------
Net cash used in investing activities............................................ (9,462) (5,100)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings....................................................................... 172,978 84,271
Principal payments on borrowings................................................. (225,907) (84,641)
Dividends paid .................................................................. (1,743) (1,727)
Distributions paid to minority interests of Atlas Pipeline Partners, L.P......... (5,088) (2,660)
Proceeds from Atlas Pipeline Partners, L.P. secondary offering, net.............. 25,188 25,255
Proceeds from Atlas America, Inc. initial public offering, net................... 36,999 -
Purchase of treasury stock....................................................... - (3,995)
Repayment of ESOP loan........................................................... 23 24
Increase in other assets......................................................... (1,613) (1,014)
Proceeds from issuance of stock.................................................. 478 25
--------- --------
Net cash provided by financing activities........................................ 1,315 15,538
--------- --------
Net cash provided by (used in) discontinued operations........................... 34,361 (5,624)
--------- --------
Increase in cash and cash equivalents............................................ 24,385 23,714
Cash and cash equivalents at beginning of period................................. 41,129 25,736
--------- --------
Cash and cash equivalents at end of period....................................... $ 65,514 $ 49,450
========= ========
See accompanying notes to consolidated financial statements
6
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
NOTE 1 - MANAGEMENT'S OPINION REGARDING INTERIM FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly-owned except for Atlas
Pipeline Partners, L.P. ("Atlas Pipeline") and Atlas America, Inc. ("Atlas
America"). In addition, commencing with the adoption of Financial Accounting
Standards Board ("FASB") Interpretation 46, "Consolidation of Variable Interest
Entities" ("FIN 46") on July 1, 2003, the Company has consolidated certain
variable interest entities ("VIEs") in which the Company has determined that it
is the primary beneficiary.
The consolidated financial statements and the information and tables
contained in the notes to the consolidated financial statements as of June 30,
2004 and for the three and nine months ended June 30, 2004 and 2003 are
unaudited. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted in this
Form 10-Q pursuant to the rules and regulations of the Securities and Exchange
Commission. However, in the opinion of management, these interim financial
statements include all the necessary adjustments to fairly present the results
of the interim periods presented. The unaudited interim consolidated financial
statements should be read in conjunction with the audited financial statements
included in the Company's Annual Report on Form 10-K/A for the fiscal year ended
September 30, 2003. The results of operations for the three months and nine
months ended June 30, 2004 may not necessarily be indicative of the results of
operations for the full fiscal year ending September 30, 2004.
Certain reclassifications have been made to the consolidated financial
statements as of September 30, 2003 and for the three months and nine months
ended June 30, 2003 to conform to the presentation as of and for the three
months and nine months ended June 30, 2004.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPREHENSIVE INCOME
The following table presents comprehensive income for the periods
indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- -------
(in thousands)
Net income.................................................. $ 2,846 $ 3,486 $12,351 $ 8,362
Other comprehensive income (loss):
Unrealized gain (loss) on investment in RAIT
Investment Trust, net of taxes of $(675), $1,313,
$598, and $2,037....................................... (1,448) 2,797 1,161 4,278
Less: reclassification adjustment for gains realized
in net income, net of taxes of $544, $453,
$2,412 and $1,117.................................... (1,057) (1,130) (4,683) (2,486)
------- ------- ------- -------
(2,505) 1,667 (3,522) 1,792
Unrealized loss on natural gas futures and
options contracts, net of taxes of $50 and $145........ - (212) - (740)
Less: reclassification adjustment for losses realized in
net income, net of taxes of $193 and $358.............. - 391 - 726
------- ------- ------- -------
- 179 - (14)
------- ------- ------- -------
(2,505) 1,846 (3,522) 1,778
------- ------- ------- -------
Comprehensive income........................................ $ 341 $ 5,332 $ 8,829 $10,140
======= ======= ======= =======
7
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
COMPREHENSIVE INCOME - (CONTINUED)
Accumulated other comprehensive income is related to the following at:
June 30, September 30,
2004 2003
-------- --------
(in thousands)
Marketable securities - unrealized gains, net of taxes...................... $ 2,089 $ 5,611
======== ========
PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
June 30, September 30,
2004 2003
-------- --------
(in thousands)
Mineral interests in properties:
Proved properties............................................................ $ 844 $ 844
Unproved properties.......................................................... 984 563
Wells and related equipment...................................................... 206,174 184,226
Support equipment................................................................ 2,452 2,189
Other............................................................................ 10,484 9,136
-------- --------
220,938 196,958
Accumulated depreciation, depletion, amortization and valuation allowances:
Oil and gas properties and related equipment................................. (59,262) (50,170)
Other (4,160) (3,378)
-------- --------
(63,422) (53,548)
-------- --------
$157,516 $143,410
======== ========
INVESTMENT IN RAIT INVESTMENT TRUST
The Company accounts for its investment in RAIT Investment Trust
("RAIT") in accordance with Statement of Financial Accounting Standard ("SFAS")
No. 115 "Accounting for Certain Investments in Debt and Equity Securities." This
investment is classified as available-for-sale and as such is carried at fair
market value based on market quotes. Unrealized gains and losses, net of taxes,
are reported as a separate component of stockholders' equity. The cost of
securities sold is based on the specific identification method.
The following table discloses the pre-tax unrealized gains relating to
the Company's investment in RAIT at the dates indicated:
June 30, September 30,
2004 2003
-------- --------
(in thousands)
Cost........................................................................... $ 4,122 $ 12,260
Unrealized gains............................................................... 3,165 8,251
-------- --------
Estimated fair value........................................................... $ 7,287 $ 20,511
======== ========
8
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses the following methods and assumptions in estimating
the fair value of each class of financial instruments for which it is
practicable to estimate fair value.
For cash and cash equivalents, receivables, payables and debt the
carrying amounts approximate fair value because of the short maturity of these
instruments.
For investments in real estate loans, because each loan is a unique
transaction involving a discrete property, it is impractical to determine their
fair values. However, the Company believes the carrying amounts of the loans are
reasonable estimates of their fair value considering the nature of the loans and
the estimated yield relative to the risks involved.
For secured revolving credit facilities - leasing, the carrying amount
approximates fair value because of the short maturity of these instruments.
The following table provides information on other financial instruments
at:
June 30, 2004 September 30, 2003
-------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ------- -------- --------
(in thousands)
Energy debt........................................ $ 35,751 $35,751 $ 31,194 $ 31,194
Real estate debt................................... 17,296 17,296 19,469 19,469
Senior debt........................................ - - 54,027 55,648
Other debt......................................... 2,091 2,091 28,477 28,477
-------- ------- -------- --------
$ 55,138 $55,138 $133,167 $134,788
======== ======= ======== ========
EARNINGS PER SHARE
Basic earnings (loss) per share are determined by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Earnings (loss) per share - diluted is computed by dividing
net income (loss) by the sum of the weighted average number of shares of common
stock outstanding and dilutive potential shares issuable during the period.
Dilutive potential shares of common stock consist of the excess of shares
issuable under the terms of various stock option plans over the number of such
shares that could have been reacquired (at the weighted average price of shares
during the period) with the proceeds received from the exercise of the options.
9
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
EARNINGS PER SHARE - (CONTINUED)
The following table presents a reconciliation of the components used in
the computation of net income (loss) per common share-basic and net income
(loss) per common share-diluted for the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
(in thousands)
Income from continuing operations............................. $ 3,056 $ 3,486 $13,628 $ 8,362
Loss from discontinued operations, net of taxes of $113
and $689................................................... (210) - (1,277) -
------- ------- ------- -------
Net income................................................. $ 2,846 $ 3,486 $12,351 $ 8,362
======= ======= ======= =======
Weighted average common shares outstanding-basic.............. 17,452 17,069 17,393 17,186
Dilutive effect of stock option and award plans............... 1,147 296 796 285
------- ------- ------- -------
Weighted average common shares-diluted........................ 18,599 17,365 18,189 17,471
======= ======= ======= =======
ASSET RETIREMENT OBLIGATIONS
The Company accounts for the estimated plugging and abandonment costs
of its oil and gas properties in accordance with SFAS No. 143, "Accounting for
Asset Retirement Obligations."
A reconciliation of the Company's liability for well plugging and
abandonment costs for the periods indicated follows:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
(in thousands)
Asset retirement obligations, beginning of period............. $ 3,371 $ 3,481 $ 3,131 $ -
Liabilities incurred.......................................... 50 - 151 -
Adoption of SFAS 143.......................................... - - - 3,380
Liabilities settled........................................... (3) - (46) -
Revision in estimates......................................... 47 - 130 -
Accretion expense............................................. 50 82 149 183
------- ------- ------- -------
Asset retirement obligations, end of period................... $ 3,515 $ 3,563 $ 3,515 $ 3,563
======= ======= ======= =======
Accretion expense is included in depreciation, depletion and
amortization in the Company's consolidated statements of income and the asset
retirement obligation liabilities are included in deferred revenue and other
liabilities in the Company's consolidated balance sheets.
10
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
The Company considers temporary investments with a maturity at the date
of acquisition of 90 days or less to be cash equivalents.
Supplemental disclosure of cash flow information:
Nine Months Ended
June 30,
---------------------
2004 2003
------ -------
(in thousands)
Cash paid (received) during the period for:
Interest..................................................................... $5,349 $ 6,821
Income taxes................................................................. $ - $(1,067)
Non-cash activities include the following:
Receipt of a note in connection with the sale of a real estate loan.......... $ - $ 1,350
Leases transferred to LEAF's sponsored investment partnership................ $ - $ 5,366
Receipt of note upon resolution of a real estate loan and a FIN 46 asset..... $8,772 $ -
Real estate received in exchange for notes upon foreclosure on loans......... $ - $ 8,231
Assumption of debt upon foreclosure of loans................................. $ - $ 4,067
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation plans under
the recognition and measurement principles of Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees," and related
interpretations. For substantially all grants of stock options, no stock-based
employee compensation cost is reflected in net income since each option granted
had an exercise price equal to the market value of the underlying common stock
on the date of grant. The following table provides the pro forma effects of
recognizing compensation expense in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation, as amended by the required disclosures of SFAS No.
148, "Accounting for Stock Based Compensation - Transition and Disclosure."
Three Months Ended Nine Months Ended
June 30, June 30,
----------------- ------------------
2004 2003 2004 2003
------ ------ ------- -------
(in thousands, except per share data)
Net income as reported........................................ $2,846 $3,486 $12,351 $ 8,362
Stock-based employee compensation expense reported
in net income, net of taxes................................ - - - -
Total stock-based employee compensation under fair
value method for all grants, net of taxes.................. (636) (984) (1,921) (1,735)
------ ------ ------- -------
Pro forma net income.......................................... $2,210 $2,502 $10,430 $ 6,627
====== ====== ======= =======
Net income per common share:
Basic - as reported........................................ $ .16 $ .20 $ .71 $ .49
Basic - proforma........................................... $ .13 $ .15 $ .60 $ .39
Diluted - as reported...................................... $ .15 $ .20 $ .68 $ .48
Diluted - pro forma........................................ $ .12 $ .14 $ .57 $ .38
11
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company from time to time enters into natural gas futures and
option contracts to hedge its exposure to changes in natural gas prices. At any
point in time, such contracts may include regulated New York Mercantile Exchange
("NYMEX") futures and options contracts and non-regulated over-the-counter
futures contracts with qualified counterparties. NYMEX contracts are generally
settled with offsetting positions, but may be settled by the delivery of natural
gas.
At June 30, 2004, the Company had no open natural gas futures contracts
related to natural gas sales. Gains or losses on futures contracts are
determined as the difference between the contract price and a reference price,
generally prices on NYMEX. The Company did not settle any contracts during the
nine months ended June 30, 2004. The Company recognized losses of $584,000 and
$1.1 million on settled contracts for the three months and nine months ended
June 30, 2003. The Company recognized no gains or losses during the nine months
ended June 30, 2004 and 2003 for hedge ineffectiveness or as a result of the
discontinuance of cash flow hedges.
Although hedging provides the Company some protection against falling
prices, these activities could also reduce the potential benefits of price
increases, depending upon the instrument.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In December 2003, the FASB revised SFAS No. 132, "Employers'
Disclosures about Pensions and other Postretirement Benefits", establishing
additional annual disclosures about plan assets, investment strategy,
measurement date, plan obligations and cash flows. In addition, the revised
standard established interim disclosure requirements related to the net periodic
benefit cost recognized and contributions paid or expected to be paid during the
current fiscal year. The new annual disclosures were effective for financial
statements with fiscal years ending after December 15, 2003 and the
interim-period disclosures were effective for interim periods beginning after
December 15, 2003. The adoption of the revised SFAS 132 had no impact on the
Company's results of operations or financial position.
12
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 3 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, FASB issued FIN 46. In December 2003, FASB issued a
revised interpretation of FIN 46 ("FIN 46-R"), which supersedes FIN 46 and
clarifies and expands current accounting guidance for VIEs. We refer to this
interpretation throughout these notes as FIN 46 or FIN 46-R. FIN 46 clarifies
when a company should consolidate in its financial statements the assets,
liabilities and activities of a VIE. FIN 46 provides general guidance as to the
definition of a VIE and requires it to be consolidated if a party with an
ownership, contractual or other financial interest absorbs the majority of the
VIE's expected losses, or is entitled to receive a majority of the residual
returns, or both. A variable interest holder that is such a primary beneficiary
of the VIE is required to consolidate the VIE's assets, liabilities and
non-controlling interests at fair value at the date the interest holder first
becomes the primary beneficiary of the VIE. FIN 46 and FIN 46-R were effective
immediately for all VIEs created after January 31, 2003 and for VIEs created
prior to February 1, 2003, no later than the end of the first reporting period
after March 15, 2004. The Company early-adopted FIN 46 on July 1, 2003.
Certain entities relating to the Company's real estate finance business
have been consolidated in accordance with FIN 46-R. Because of timing of receipt
of financial information, the Company accounts for these FIN 46 entities on a
one quarter lag. The assets, liabilities, revenues and expenses of the
consolidated VIEs are included in the Company's financial statements where
previously the Company's interests in the VIEs had been recorded as investments
in real estate loans.
The assets and liabilities of the VIEs that are now included in the
consolidated financial statements are not the Company's. The liabilities of the
VIEs will be satisfied from the cash flows of the VIEs' consolidated assets, not
from the assets of the Company, which has no legal obligation to satisfy those
liabilities. The following tables provide supplemental information about assets,
liabilities, revenues and expenses associated with entities consolidated in
accordance with FIN 46-R and not classified as held for sale at the dates
indicated:
June 30, September 30,
2004 2003
------- -------
(in thousands)
ASSETS:
Cash........................................................................ $ 664 $ 1,689
Account receivables......................................................... 401 451
Real estate assets, net..................................................... 60,369 76,035
Other....................................................................... 168 72
------- -------
Total FIN 46 entities' assets............................................. $61,602 $78,247
======= =======
LIABILITIES:
Mortgage loans on real estate............................................... $24,376 $37,620
Other....................................................................... 5,574 7,564
------- -------
Total FIN 46 entities' liabilities........................................ $29,950 $45,184
======= =======
13
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 3 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES - (CONTINUED)
Three Months Nine Months
Ended Ended
June 30, June 30,
2004 2004
-------- --------
(in thousands)
OPERATING INFORMATION - INCLUDED IN REAL ESTATE:
Revenues.................................................................... $ 3,021 $ 8,447
Costs and expenses:
Operating expenses........................................................ 1,684 5,139
Depreciation and amortization............................................. 420 1,074
Interest.................................................................. 276 903
-------- --------
Total costs and expenses................................................ 2,380 7,116
-------- --------
Operating income.......................................................... $ 641 $ 1,331
======== ========
The following tables provide supplemental information about assets,
liabilities, revenues and expenses associated with entities that are held for
sale, substantially all of which are consolidated in accordance with FIN 46.
During the nine months ended June 30, 2004, the Company liquidated its position
in five entities which were classified as held for sale.
June 30, September 30,
2004 2003
-------- --------
(in thousands)
ASSETS:
Cash........................................................................ $ 3,787 $ 3,960
Accounts receivables........................................................ 786 2,988
Real estate assets, net..................................................... 97,325 213,026
Other....................................................................... 2,936 2,703
-------- --------
Total assets.............................................................. $104,834 $222,677
======== ========
LIABILITIES:
Mortgage loans on real estate............................................... $ 58,408 $130,687
Other....................................................................... 8,485 10,786
-------- --------
Total liabilities......................................................... $ 66,893 $141,473
======== ========
Three Months Nine Months
Ended Ended
June 30, June 30,
2004 2004
-------- --------
(in thousands)
INCOME (LOSS) FROM FIN 46 DISCONTINUED OPERATIONS (SEE NOTE 10):
Revenues.................................................................... $ 3,233 $ 8,539
Expenses.................................................................... 3,531 8,442
-------- --------
Operating (loss) income..................................................... (298) 97
Loss on disposals........................................................... (25) (2,665)
Income tax benefit.......................................................... 113 899
-------- --------
Loss from FIN 46 discontinued operations.................................. $ (210) $ (1,669)
======== ========
14
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 4 - OTHER ASSETS, INTANGIBLE ASSETS AND GOODWILL
OTHER ASSETS
The following table provides information about other assets at the
dates indicated:
June 30, September 30,
2004 2003
------- --------
(in thousands)
Deferred financing costs, net of accumulated amortization of
$6,338 and $5,504......................................................... $ 2,704 $ 2,105
Equity method investments in Trapeza entities................................. 7,968 4,802
Investments at lower of cost or market........................................ 6,727 6,185
Other......................................................................... 10,364 6,417
------- --------
Total other assets........................................................ $27,763 $ 19,509
======= ========
Deferred financing costs are amortized over the terms of the related
loans (two to seven years).
Investments in Trapeza entities are accounted for using the equity
method of accounting because the Company, as a 50% owner of the general partner
of these entities, has the ability to exercise significant influence over their
operating and financial decisions. The Company accounts for its share of equity
earnings using a one-quarter lag, as permissible by the accounting principles
generally accepted in the United States of America. The Company's combined
general and limited partner interests in these entities range from 13% to 18%.
Investments at the lower of cost or market include non-marketable
investments in entities in which the Company has less than a 20% ownership
interest, and in which it does not have the ability to exercise significant
influence. These investments include approximately 10% of the outstanding shares
of The Bancorp, Inc. ("TBI"), a related party, which owns approximately 33% of
the The Bancorp Bank, a publicly traded company.
INTANGIBLE ASSETS
Partnership management and operating contracts and the Company's
equipment leasing operating system, or leasing platform, were acquired through
acquisitions recorded at fair value on their acquisition dates. The Company
amortizes contracts acquired on a declining balance method over their respective
estimated lives, ranging from five to thirteen years. The leasing platform is
amortized on the straight-line method over seven years. Amortization expense for
the nine months ended June 30, 2004 and 2003 was $814,000 and $987,000,
respectively. The aggregate estimated annual amortization expense is
approximately $1.1 million for each of the succeeding five years.
The following table provides information about intangible assets at the
dates indicated:
June 30, September 30,
2004 2003
------- --------
(in thousands)
Partnership management and operating contracts................................. $14,343 $ 14,343
Leasing platform............................................................... 918 918
------- --------
15,261 15,261
Accumulated amortization....................................................... (7,599) (6,785)
------- --------
Intangible assets, net......................................................... $ 7,662 $ 8,476
======= ========
15
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 4 - OTHER ASSETS, INTANGIBLE ASSETS AND GOODWILL - (CONTINUED)
GOODWILL
The Company accounts for its goodwill in accordance with SFAS No. 142
"Goodwill and Other Intangible Assets." The Company evaluates its goodwill at
least annually as of the last day of the fiscal year and will reflect the
impairment of goodwill, if any, in operating income in the statement of income
in the period in which the impairment is indicated. All goodwill recorded on the
Company's balance sheets is related to the Company's energy segments. At June
30, 2004 and September 30, 2003, the Company had goodwill of $37.5 million, net
of accumulated amortization of $4.5 million.
NOTE 5 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In June 2004, Atlas Pipeline entered into a definitive agreement to
acquire Spectrum Field Services, Inc. ("Spectrum"), whose principal assets
include 1,900 miles of natural gas pipelines and a natural gas processing
facility in Velma, Oklahoma (see Note 15). In connection with the acquisition of
Spectrum, Atlas Pipeline entered into commitment agreements with the Company and
Atlas America for the purchase of up to $25.0 million of preferred units in an
operating subsidiary of Atlas Pipeline upon the closing of the acquisition. In
consideration for their commitments, upon the closing of the Spectrum
acquisition on July 16, 2004 and the purchase by each of $10.0 million in
preferred units, Atlas Pipeline paid the Company and Atlas America a commitment
fee of $750,000 and $500,000, respectively. On July 20, 2004, Atlas Pipeline
repurchased the preferred units from the Company and Atlas America for $20.4
million.
In March 2004, the Company acquired $3.7 million of leases at book
value from leasing investment partnerships in which it is the general partner.
These partnerships are in the liquidation process.
In December 2003, RAIT provided the Company a standby commitment to
provide $10.0 million in bridge financing in connection with the retirement of
the Company's senior debt. RAIT received a $100,000 facilitation fee from the
Company in connection with providing this standby commitment. On January 15,
2004, the Company borrowed the $10.0 million from RAIT, and on January 21, 2004,
the Company repaid RAIT in full.
In October 2003, the Company recapitalized a loan it acquired in 1998
under a plan of reorganization in bankruptcy for a cost of $95.6 million. At the
time of such acquisition, an order of the bankruptcy court required that legal
title to the property underlying the loan be transferred. To comply with that
order, to maintain control of the property and to protect the Company's
interest, an entity whose general partner is a subsidiary of the Company and
whose limited partners are Messrs. Scott Schaeffer, Daniel Cohen and Edward
Cohen (with a 94% aggregate beneficial interest) assumed title to the property.
As part of the recapitalization, Messrs. Edward Cohen and Scott Schaeffer
transferred all of their interests to an unrelated third party and Mr. Daniel
Cohen transferred 16.3% of his 31.3% interest to such third party. They received
no consideration from the unrelated third party, but in consideration for them
agreeing to the recapitalization of the loan, the Company agreed to reimburse
them the amount that they had paid to the Company in 1998 for the interests
transferred. Such payment was $200,000 in the aggregate.
In October 2003, a FIN 46 entity's asset underlying one of the
Company's loans was sold to an entity of which Daniel Cohen is a shareholder;
such entity was the highest bidder for the property and the Company received
$6.6 million in cash and recognized a gain of $77,000. Prior to such sale, the
FIN 46 entity's asset had been owned by a partnership in which Messrs. Edward
Cohen, Daniel Cohen and Adam Kauffman and Ms. Betsy Cohen were limited partners.
16
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 6 - INVESTMENTS IN LEASE RECEIVABLES
Components of the investment in direct financing leases at the dates
indicated are as follows:
June 30, September 30,
2004 2003
------- -------
(in thousands)
Total future minimum lease payments receivable................................. $49,421 $ 7,982
Initial direct costs, net of amortization...................................... 152 122
Unguaranteed residual.......................................................... 73 51
Unearned lease income.......................................................... (7,689) (1,326)
Unearned residual income....................................................... (27) (12)
------- -------
Investments in lease receivables............................................ $41,930 $ 6,817
======= =======
Although the lease terms extend over many years as indicated in the
table below, the Company routinely sells the leases to Lease Equity Appreciation
Fund I or Merrill Lynch Equipment Finance, LLC shortly after their origination
in accordance with agreements with each party. The contractual future minimum
lease payments receivable for each of the five succeeding annual periods ending
June 30 and thereafter, are as follows (in thousands):
2005................... $17,776
2006................... 13,031
2007................... 8,703
2008................... 5,161
2009................... 3,072
Thereafter............. 1,678
-------
$49,421
=======
NOTE 7 - INVESTMENTS IN REAL ESTATE LOANS AND REAL ESTATE
In real estate, the Company focuses on the sponsorship and management
of real estate investment programs and the management and resolution of its
investments in income-producing real estate loans. In the management of real
estate investment programs, the Company receives fees for the acquisition, debt
placement and management related to properties acquired by these programs. In
the management and resolution of real estate loans, the Company records as
income the accretion of a portion of the difference between its cost basis in a
loan and the sum of projected cash flows therefrom. Cash received by the Company
for payment on each loan is allocated between principal and interest. This
accretion of discount amounted to $574,000 and $1.6 million during the three
months and nine months ended June 30, 2004 and $83,000 and $1.5 million for the
three months and nine months ended June 30, 2003, respectively. As the Company
receives funds from refinancing of its loans by the borrower, a portion of the
cash received is employed to reduce the cumulative accretion of discount
included in the carrying value of the Company's investments in real estate
loans.
17
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 7 - INVESTMENTS IN REAL ESTATE LOANS AND REAL ESTATE - (CONTINUED)
At June 30, 2004 and 2003, the Company held real estate loans having an
aggregate face value of $186.9 million and $588.1 million, respectively. The
reduction at June 30, 2004 primarily reflects the reclassification of loans
having $393.6 million of aggregate face value ($132.7 million of carrying value)
upon the adoption of FIN 46 on July 1, 2003 as discussed in Note 1 and Note 3.
The following is a summary of the changes in the carrying value of the
Company's investments in real estate loans and real estate for the periods
indicated.
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -------------------
2004 2003 2004 2003
------- -------- ------- --------
(in thousands)
Loan balance, beginning of period........................... $48,535 $187,728 $40,416 $187,542
New loan.................................................... - - 8,772 1,350
Additions to existing loans................................. 955 2,214 3,017 4,635
Accretion of discount (net of collection of interest)....... 574 83 1,552 1,492
Write-downs................................................. - (1,159) - (1,552)
Collection of principal..................................... - (4,941) - (9,542)
Cost of loans resolved...................................... - - (3,693) -
Foreclosures transferred to real estate..................... - (6,842) - (6,842)
------- -------- ------- --------
Loan balance, end of period................................. $50,064 $177,083 $50,064 $177,083
Real estate ventures........................................ $13,415 $ 14,387 $13,415 $ 14,387
Real estate owned, net of accumulated depreciation of
$830, $558, $830 and $558................................ 12,127 12,507 12,127 12,507
Allowance for possible losses............................... (1,823) (1,242) (1,823) (1,242)
------- -------- ------- --------
Balance, loans and real estate, end of period............... $73,783 $202,735 $73,783 $202,735
======= ======== ======= ========
18
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 7 - INVESTMENTS IN REAL ESTATE LOANS AND REAL ESTATE - (CONTINUED)
In determining the Company's allowance for possible losses related to
its real estate loans, the Company considers general and local economic
conditions, neighborhood values, competitive overbuilding, casualty losses and
other factors which may affect the value of loans and real estate. The value of
loans and real estate may also be affected by factors such as the cost of
compliance with regulations and liability under applicable environment laws,
changes in interest rates and the availability of financing. Income from a
property will be reduced if a significant number of tenants are unable to pay
rent or if available space cannot be rented on favorable terms. In addition, the
Company continuously monitors collections and payments from its borrowers and
maintains an allowance for estimated losses based upon its historical experience
and its knowledge of specific borrower collection issues identified. The Company
reduces its investments in real estate loans and real estate by an allowance for
amounts that may become unrealizable in the future. Such allowance can be either
specific to a particular loan or property or general to all loans and real
estate.
The following is a summary of activity in the Company's allowance for
possible losses related to real estate for the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
----------------- -------------------
2004 2003 2004 2003
------ ------- ------ --------
(in thousands)
Balance, beginning of period................................. $1,673 $ 4,260 $1,417 $ 3,480
Provision for possible losses................................ 150 375 550 1,548
Write-downs.................................................. - (1,159) (144) (1,552)
Transfers to real estate upon foreclosure.................... - (2,234) - (2,234)
------ ------- ------ --------
Balance, end of period....................................... $1,823 $ 1,242 $1,823 $ 1,242
====== ======= ====== ========
NOTE 8 - REAL ESTATE LEASING ACTIVITIES
The following table provides information about the Company's
investments in real estate owned at the dates indicated:
June 30, September 30,
2004 2003
------- -------
(in thousands)
Land.......................................................................... $ 280 $ 630
Leasehold interest............................................................ 4,800 4,800
Office building............................................................... - 3,596
Apartment building............................................................ 3,778 3,380
Hotel......................................................................... 4,099 4,040
------- -------
12,957 16,446
Less accumulated depreciation................................................. (830) (640)
------- -------
Total.................................................................... $12,127 $15,806
======= =======
19
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 9 - DEBT
Total debt consists of the following:
June 30, September 30,
2004 2003
-------- --------
(in thousands)
Senior debt................................................................... $ - $ 54,027
Energy debt................................................................... 35,751 31,000
Real estate debt:
Non-recourse revolving credit facility and term notes..................... - 19,663
Other..................................................................... 17,296 19,612
-------- --------
Total real estate debt.................................................. 17,296 39,275
Other debt.................................................................... 2,091 8,865
-------- --------
55,138 133,167
Less current maturities....................................................... (14,633) (59,471)
-------- --------
$ 40,505 $ 73,696
======== ========
During the nine months ended June 30, 2004, the Company retired $54.0
million of its senior debt, resulting in a loss of approximately $2.0 million
which is included in interest, dividends, gains and other in the Company's
consolidated statements of income.
Annual debt principal payments over the next five years ending June 30
are as follows: 2005 - $14.6 million, 2006 - $306,000, 2007 - $40.2 million,
2008 - $0 and thereafter - $12,000.
NOTE 10 - DISCONTINUED OPERATIONS
The assets and liabilities of six of the entities that are consolidated
under the provisions of FIN 46 have been classified as held for sale in
accordance with the Company's intent to sell its interest in the real estate
loans underlying those assets and liabilities of which four were disposed since
adoption on July 1, 2003. In addition, the Company foreclosed on two properties
in which it held loans, these properties were classified as held for sale; one
has since been disposed.
Summarized operating results of the Company's real estate operations
held for sale are as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
----- --------- ------- -----
(in thousands)
Income (loss) from FIN 46 discontinued operations before
income taxes............................................ $(298) $ - $ 97 $ -
Loss on disposal............................................ (25) - (2,665) -
Income tax benefit.......................................... 113 - 899 -
----- --------- ------- -----
Loss from FIN 46 discontinued operations.................... $(210) $ - $(1,669) $ -
===== ========= ======= =====
20
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 10 - DISCONTINUED OPERATIONS - (CONTINUED)
In September 1999, the Company adopted a plan to discontinue its
residential mortgage lending business, Fidelity Mortgage Funding, Inc. ("FMF").
The business was disposed of in November 2000. Accordingly, FMF has been
reported as a discontinued operation.
The estimated loss on the disposal of FMF was originally $275,000 (net
of taxes of $148,000) including anticipated operating losses after the date of
disposal. Upon final resolution of certain lease obligations associated with
FMF, the Company has recognized a gain on disposal in the nine months ended June
30, 2004. Summarized results of FMF are as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- -----------------
2004 2003 2004 2003
---------- ------- ------- -------
(in thousands)
Gain on disposal............................................ $ - $ - $ 602 $ -
Income tax provision........................................ - - (210) -
---------- ------- ------- -------
Gain on discontinued operations............................. $ - $ - $ 392 $ -
========== ======= ======= =======
Summarized results of discontinued real estate and FMF operations are:
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- -----------------
2004 2003 2004 2003
---------- ------- ------- -------
(in thousands)
(Loss) income from discontinued operations, net of
taxes of ($105) and $32................................. $ (193) $ - $ 65 $ -
Loss on disposal, net of taxes of $8 and $721............... (17) - (1,342) -
---------- ------- ------- -------
Loss from discontinued operations........................... $ (210) $ - $(1,277) $ -
========== ======= ======= =======
21
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 11 - OPERATING SEGMENT AND MAJOR CUSTOMER INFORMATION
The Company's operations include five reportable operating segments. In
addition to the five reportable operating segments, certain other activities are
reported in the "Other energy" and "All other" categories. These operating
segments reflect the way the Company manages its operations and makes business
decisions. The Company does not allocate income taxes to its operating segments.
Operating segment data for the periods indicated are as follows:
THREE MONTHS ENDED JUNE 30, 2004 (in thousands):
Production
Well and Other Real Financial All
Drilling Exploration Energy (a) Estate Leasing Services Other Eliminations Total
------- --------- --------- -------- ------- ------ ------- ------------ --------
Revenues from
external customers.... $16,370 $ 12,977 $ 3,564 $ 5,643 $ 1,644 $ 968 $ 2,024 $ (68) $ 43,122
Interest income......... - - 69 4 20 - 141 (68) 166
Interest expense........ - - 462 378 231 - 17 (68) 1,020
Depreciation,
depletion and
amortization........ - 2,468 990 123 229 1 - - 3,811
Segment profit (loss)... 1,753 8,024 (3,109) 1,428 (1,100) 278 (1,890) - 5,384
Other significant
items:
Segment assets...... $7,951 $ 156,895 $ 59,907 $242,337 $46,580 $8,482 $83,346 $ - $605,498
THREE MONTHS ENDED JUNE 30, 2003 (in thousands):
Production
Well and Other Real Financial All
Drilling Exploration Energy (a) Estate Leasing Services Other Eliminations Total
------- --------- --------- -------- ------- ------ ------- ------------ --------
Revenues from
external customers.... $ 8,217 $ 10,066 $ 3,584 $ 4,530 $ 1,191 $ 772 $ 2,400 $ (38) $ 30,722
Interest income......... - - 31 30 13 8 260 (38) 304
Interest expense........ - - 450 424 155 - 2,212 (38) 3,203
Depreciation,
depletion and
amortization........ - 2,107 980 68 60 - 32 - 3,247
Segment profit (loss)... 732 5,306 (2,166) 2,700 (491) 465 (1,599) - 4,947
Other significant
items:
Segment assets...... $7,244 $ 136,309 $ 56,638 $204,153 $17,694 $4,926 $84,464 $ - $511,428
22
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 11 - OPERATING SEGMENT AND MAJOR CUSTOMER INFORMATION - (CONTINUED)
NINE MONTHS ENDED JUNE 30, 2004 (in thousands):
Production
Well and Other Real Financial All
Drilling Exploration Energy (a) Estate Leasing Services Other Eliminations Total
------- --------- --------- -------- ------- ------ ------- ------------ --------
Revenues from
external customers.... $64,577 $ 34,972 $ 11,337 $ 15,513 $ 5,385 $3,811 $ 6,631 $ (175) $142,051
Interest income......... - - 128 68 54 - 359 (175) 434
Interest expense........ - - 1,422 1,235 838 - 1,606 (175) 4,926
Depreciation,
depletion and
amortization........ - 7,190 3,047 376 407 1 - - 11,021
Segment profit (loss)... 7,258 20,055 (5,404) 1,754 (2,569) 2,708 (2,400) - 21,402
Other significant
items:
Segment assets...... $ 7,951 $ 156,895 $ 59,907 $242,337 $46,580 $8,482 $83,346 $ - $605,498
NINE MONTHS ENDED JUNE 30, 2003 (in thousands):
Production
Well and Other Real Financial All
Drilling Exploration Energy (a) Estate Leasing Services Other Eliminations Total
------- --------- --------- -------- ------- ------ ------- ------------ --------
Revenues from
external customers.... $38,166 $ 27,551 $ 10,759 $ 11,213 $ 3,092 $ 880 $ 6,265 $ (157) $ 97,769
Interest income......... - - 169 65 52 8 549 (157) 686
Interest expense........ - - 1,509 1,228 349 - 6,683 (157) 9,612
Depreciation,
depletion and
amortization........ - 6,073 2,869 135 157 - 99 - 9,333
Segment profit (loss)... 3,889 13,132 (3,798) 5,490 (1,284) 473 (5,784) - 12,118
Other significant
items:
Segment assets...... $ 7,244 $ 136,309 $ 56,638 $204,153 $17,694 $4,926 $84,464 $ - $511,428
- -----------------------------
(a) Revenues and expenses from segments below the quantitative thresholds are
attributable to two operating segments of the Company: well services and
natural gas transportation. These segments have never met any of the
quantitative thresholds for determining reportable segments.
Operating profit (loss) per segment represents total revenues less
costs and expenses attributable thereto. Costs and expenses allocated to
segments include interest, provision for possible losses and depreciation,
depletion and amortization, but exclude general corporate overhead expenses.
23
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
NOTE 11 - OPERATING SEGMENT AND MAJOR CUSTOMER INFORMATION - (CONTINUED)
The Company markets its gas and oil production on a competitive basis.
Gas is sold under various types of contracts ranging from life-of-the-well to
short-term contracts. The Company is party to a ten-year agreement which expires
in March 2009 to sell the majority of its existing and future production to an
affiliate of FirstEnergy Corporation, a publicly-traded company (NYSE:FE).
Pricing under the contract is tied to index-based formulas which the Company
negotiates annually and payments to the Company under the agreement are
guaranteed by FEC.
The Company anticipates that it will negotiate mutually agreeable
pricing terms for subsequent 12-month periods pursuant to the aforementioned
agreement. Management believes that the loss of any one customer and FEC in
particular, would not have a material adverse effect as it believes that, under
current market conditions, the Company's production could readily be absorbed by
other purchasers.
NOTE 12 - PUBLIC OFFERINGS
In May 2004, Atlas America completed an initial public offering of
2,645,000 shares of its common stock at a price of $15.50 per common share
including underwriters' over allotment resulting in a $20.4 million credit
reflected as an increase to stockholders' equity based on the excess of proceeds
received over the book value of the interest sold to the public. The net
proceeds of the offering of $37.0 million, after deducting underwriting
discounts and costs, were distributed to the Company in the form of a repayment
of inter-company debt and a non-taxable dividend. Following the offering, the
Company continues to own approximately 80.2% of Atlas America's common stock. In
connection with the offering, Edward Cohen became Chairman, Chief Executive
Officer and President of Atlas America and retired as Chief Executive Officer of
the Company. As a result of his retirement and the commencement of payment of
benefits under his supplemental employment retirement agreement ("SERP"), the
Company recorded a charge of $1.4 million (see Note 13).
In April 2004, Atlas Pipeline completed a public offering of 750,000
common units. The net proceeds after underwriting discounts, commissions and
costs were approximately $25.2 million. Following this offering, the
publicly-owned common units represented 67.9% of the limited partnership
interest in Atlas Pipeline. The Company, as general partner, simultaneously
contributed $512,700 in cash to Atlas Pipeline as required by Atlas Pipeline's
partnership agreement. As a result of SEMCO Energy, Inc.'s ("SEMCO") purported
termination of Atlas Pipeline's acquisition of Alaska Pipeline Company on July
1, 2004, Atlas Pipeline used the offering proceeds, which had originally been
raised in contemplation of acquiring Alaska Pipeline, for the acquisition of
Spectrum in July 2004 (see Note 15).
24
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 13 - BENEFIT PLANS
Atlas Pipeline has a Long-Term Incentive Plan for officers and
non-employee managing board members of its general partner and its affiliates,
consultants and joint venture partners who perform services for Atlas Pipeline.
During the nine months ended June 30, 2004, 61,098 phantom units were granted.
Grants for 846 units were forfeited during the three months ended June 30, 2004,
leaving 60,252 phantom units outstanding as of June 30, 2004. Atlas Pipeline
recognized $69,800 and $72,300 in compensation expense related to these grants
and their associated distributions in the three months and nine months ended
June 30, 2004. The fair market value associated with these grants was $2.2
million which will be charged to operations over the vesting period of the
units.
Atlas America has a Stock Incentive Plan for employees, consultants and
directors of Atlas America and its affiliates, with a maximum of 1,333,333
shares reserved for issuance. In May 2004, 4,835 deferred units representing a
right to receive a share of common stock over a 3-year vesting period (at an
average price of $15.50 per unit) were issued to non-employee directors of Atlas
America under this plan. Units will vest sooner upon a change of control of
Atlas America or death or disability of a grantee, provided the grantee has
completed at least six months of service. Upon termination of service by a
grantee, all unvested units are forfeited. The fair value of the grants awarded
($75,000 in total) will be charged to operations over the vesting period of the
units.
In May 2004, Atlas America entered into an employment agreement with
its Chief Executive Officer and President, Edward E. Cohen, pursuant to which
Atlas America has agreed to provide him with a supplemental employment
retirement plan ("SERP") and with certain financial benefits upon termination of
his employment. Under the SERP, he will be paid an annual benefit equal to the
product of (a) 6.5% multiplied by (b) his base salary at the time of his
retirement, death or other termination of employment with Atlas America,
multiplied by, (c) the number of years of employment commencing upon the
effective date of the SERP agreement, limited to an annual maximum benefit of
65% of his final base salary and an annual minimum benefit of 26% of his final
base salary. During the three months ended June 30, 2004, operations were
charged $20,000 with respect to this commitment.
NOTE 14 - LEAF ACQUISITION
On June 30, 2004 LEAF Financial Corporation ("LEAF"), our wholly owned
subsidiary expanded its lease origination capability and assets under management
with the acquisition of certain assets of Premier Lease Services, L.C. of West
Des Moines, IA. The acquisition includes both a portfolio of small ticket leases
with a value of $35.0 million bought on behalf of its investment partners and
numerous vendor finance relationships as well as the right to utilize certain of
their origination personnel.
25
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 15 - SUBSEQUENT EVENTS
CREDIT FACILITY
On July 16, 2004, Atlas Pipeline entered into a new $135.0 million
credit facility which replaces its existing $20.0 million facility. The loan
arrangement, for which Wachovia Bank, National Association will serve as
administrative agent, includes eleven additional lenders. The facility is
comprised of a five-year $100.0 million term loan and a four-year $35.0 million
revolving line of credit which can be increased by an additional $40.0 million
under certain circumstances.
ACQUISITION
On July 16, 2004, Atlas Pipeline acquired Spectrum for approximately
$145.3 million, including the payment of anticipated taxes due as a result of
the transaction.
Atlas Pipeline financed the Spectrum acquisition, including
approximately $2.1 million of transaction costs, as follows:
o borrowing $100.0 million under the term loan portion and $2.2 million
under the revolving credit portion of its $135.0 million senior
secured term loan and revolving credit facility administered by
Wachovia Bank, National Association;
o using the $20.0 million of proceeds received from the sale to the
Company and Atlas America of preferred units in Atlas Pipeline
Operating Partnership; and
o using $25.2 million of net proceeds from its April 2004 common unit
offering.
PUBLIC OFFERING OF UNITS
On July 20, 2004, Atlas Pipeline closed an offering of 2,100,000 of its
common units through underwriters led by Lehman Brothers and including A.G.
Edwards & Sons, Inc., Friedman Billings Ramsey, KeyBanc Capital Markets and
Sanders Morris Harris, which was priced at $34.76 per common unit. After
underwriting discounts and commissions, Atlas Pipeline received net proceeds of
$69.5 million.
Atlas Pipeline has granted the underwriters an over-allotment option
for an additional 315,000 common units exercisable within thirty days. The
over-allotment option, if fully exercised, would generate an additional $10.4
million in net proceeds for Atlas Pipeline.
Atlas Pipeline used a portion of the net proceeds of the offering to
repay $40.0 million of the borrowings under its new credit facility and to
repurchase the preferred units from the Company and Atlas America for $20.4
million. The balance of approximately $8.9 million will be used for working
capital.
ALASKA PIPELINE COMPANY ACQUISITION
In September 2003, Atlas Pipeline entered into an agreement with SEMCO
to purchase all of the stock of Alaska Pipeline Company. In order to complete
the acquisition, Atlas Pipeline needed the approval of the Regulatory Commission
of Alaska. The Regulatory Commission initially approved the transaction, but on
June 4, 2004 it vacated its order of approval based upon a motion for
clarification or reconsideration filed by SEMCO. On July 1, 2004, SEMCO sent
Atlas Pipeline a notice purporting to terminate the transaction. Atlas Pipeline
believes SEMCO caused the delay in closing the transaction and breached its
obligations under the acquisition agreement. Atlas Pipeline intends to
vigorously pursue its remedies under the acquisition agreement. In connection
with the acquisition, Atlas Pipeline incurred $2.2 million of costs, which are
included in other assets on the Company's balance sheet.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (UNAUDITED)
WHEN USED IN THIS FORM 10-Q, THE WORDS "BELIEVES" "ANTICIPATES,"
"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES MORE
PARTICULARLY DESCRIBED IN ITEM 1, UNDER THE CAPTION "RISK FACTORS", IN OUR
ANNUAL REPORT ON FORM 10-K/A FOR FISCAL 2003. THESE RISKS AND UNCERTAINTIES
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE HEREOF. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF
ANY REVISIONS TO FORWARD-LOOKING STATEMENTS WHICH WE MAY MAKE TO REFLECT EVENTS
OR CIRCUMSTANCES AFTER THE DATE OF THIS FORM 10-Q OR TO REFLECT THE OCCURRENCE
OF UNANTICIPATED EVENTS.
OVERVIEW OF THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 2004 AND 2003
Our results of operations for the three and nine months ended June 30,
2004 reflected the continued predominance of our energy operations. Our
financial condition and results of operations were also affected during these
periods by the following:
o we took the first steps in the process of spinning off our energy
operations when Atlas America, Inc. completed its initial public
offering of common stock, reducing our ownership interest to 80.2%;
and
o we continued to build our financial services, equipment leasing and
real estate segments which will be the core of our business following
the spin-off.
Our energy revenues were $32.9 million and $110.5 million for the three
and nine months ended June 30, 2004, respectively, as compared to $21.8 million
and $76.1 million for the three and nine months ended June 30, 2003,
respectively. This growth in energy revenues was driven by well drilling
revenues which were $16.4 million and $64.6 million in the three and nine months
ended June 30, 2004, respectively, as compared to $8.2 million and $38.2 million
in the three and nine months ended June 30, 2003, respectively. In addition,
production revenues increased to $13.0 million and $35.0 million in the three
and nine months ended June 30, 2004, respectively, as compared to $10.1 million
and $27.6 million in the three and nine months ended June 30, 2003,
respectively.
We took the first steps toward our goal of spinning off our energy
operations in May 2004 when Atlas America completed its initial public offering.
Because we retained an 80.2% interest (10.7 million shares) in Atlas America,
Atlas America's assets, liabilities and operations continue to be consolidated
in our financial statements and the public's ownership is reflected as a
minority interest. We received $37.0 million from the proceeds of the public
offering in the form of a repayment of intercompany indebtedness and a tax free
dividend and recorded a credit of $20.4 million on the sale as an increase to
stockholders' equity. We expect to complete the spin-off in fiscal 2005 by
distributing our remaining shares in Atlas America to our stockholders.
Completion of the spin-off is subject, however, to the satisfaction of specified
conditions, principally the receipt of a ruling from the Internal Revenue
Service that the distribution will be free from federal income tax to us and our
stockholders.
27
Our financial condition and results of operations during the three and
nine months ended June 30, 2004 was affected and, until we spin off Atlas
America, will continue to be affected by initiatives taken by Atlas Pipeline
Partners, L.P. In April 2004, Atlas Pipeline completed a public offering of
750,000 of its common units, realizing net offering proceeds, after expenses, of
$25.2 million. The principal financial effect of the offering was to increase
the minority interest in our financial statements for the public ownership
interest. After the end of the reporting periods for this report, on July 16,
2004 Atlas Pipeline acquired Spectrum Financial Services, Inc. at a cost of
$145.3 million, including transaction costs and anticipated taxes due as a
result of the transaction. The acquisition was funded partially by debt
financing and partially by the proceeds of the April 2004 offering together with
a further offering completed on July 20, 2004. The Spectrum acquisition will
increase Atlas Pipeline's assets, liabilities, revenues and expenses and,
because we consolidate with Atlas Pipeline, increase ours as well.
During the three and nine-month periods, we also continued our program
of building the businesses that we will retain following the spin-off. This
program resulted in a substantial increase in the assets we manage. Through our
operating subsidiaries, Resource Financial Fund Management, Inc., LEAF Financial
Corp. and Resource Real Estate, Inc. we use industry specific expertise to
generate and administer investment opportunities for our account and for outside
investors in the financial services, equipment leasing and real estate sectors.
As a specialized asset manager, we anticipate receiving structuring fees,
acquisition fees, debt placement fees (real estate) and reimbursements of
expenses for the establishment of new products or programs. For our continuing
role in the management of our programs, we anticipate the receipt of
administrative fees for managing investor's funds, a carried interest in the
profits of the programs and asset management fees for managing the underlying
assets.
In financial services, the amount of assets we managed for issuers of
collateralized debt obligations, or CDOs, increased to $2.1 billion at June 30,
2004 from $1.0 billion at June 30, 2003 through our sponsorship of three
additional CDO issuers in the Trapeza series. We have formed a new subsidiary,
Ischus Capital Management LLC, to develop and sponsor CDO issuers holding
asset-backed securities. We anticipate that this will positively impact the
amount of assets we manage and our net income in succeeding periods.
In equipment leasing, the amount of assets we managed for investors in
the investment partnership we sponsored and on behalf of Merrill Lynch through a
multi-year alliance increased to $138.9 million at June 30, 2004 from $29.1
million at June 30, 2003. The growth was principally due to increased sales of
units in our sponsored public investment partnership and the expansion of our
alliance with Merrill Lynch. On June 30, 2004, we expanded our lease origination
capability and assets under management with the acquisition of certain assets
from Premier Lease Services, L.C., which included a portfolio of small ticket
leases with a value of $35.0 million bought on behalf of our investment partners
along with numerous vendor finance relationships as well as the right to utilize
certain of their experienced origination personnel.
28
In real estate, the amount of assets we managed on behalf of the
investment limited partnerships we sponsored increased to $106.7 million at June
30, 2004 from $67.3 million at June 30, 2003. Our real estate operations were
also impacted by our continuing program of resolving our real estate loan
portfolio through sales and loan restructurings. The loans and real estate
assets in our loan acquisition portfolio decreased from $615.0 million
(principally outstanding loan receivables) at June 30, 2003 to $331.9 million
(principally outstanding loan receivables) at June 30, 2004.
The following tables reflect changes to our revenues and assets for the
periods indicated:
REVENUES AS A PERCENT OF TOTAL REVENUES
Three Months Ended Nine Months Ended
June 30, June 30,
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2004 2003 200