<PAGE>
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 December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-4408
RESOURCE AMERICA, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 72-0654145
---------- ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1521 Locust Street
Suite 400
Philadelphia, PA 19102
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (215) 546-5005
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of outstanding shares of each of the issuer's classes of
common stock, as of the latest practicable date:
21,936,902 Shares February 9, 1999
<PAGE>
RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1998 (Unaudited)
and September 30, 1998....................................... 3
Consolidated Statements of Income (Unaudited)
Three Months Ended December 31, 1998 and 1997................ 4
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended December 31, 1998 and 1997................ 5
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited) Three Months Ended December 31, 1998............. 6
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended December 31, 1998 and 1997................ 7
Notes to Consolidated Financial Statements -
December 31, 1998 (Unaudited)................................ 8-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 13-21
PART II. OTHER INFORMATION
Item 6. Exhibits
2
<PAGE>
PART I. FINANCIAL INFORMATION
RESOURCE AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 51,154 $ 78,080
Accounts and notes receivable 15,005 9,461
Prepaid expenses and other current assets 5,157 3,109
---------- ----------
Total Current Assets 71,316 90,650
Investments in Real Estate Loans (less allowance for
possible losses of $1,331 and $1,191) 205,358 202,050
Investments in Leases and Notes Receivable (less allowance for
possible losses of $1,737 and $1,602) 33,836 24,977
Investment in Resource Asset Investment Trust 9,195 11,912
Property and Equipment
Oil and gas properties and equipment 47,863 44,516
(successful efforts)
Gas gathering and transmission facilities 7,131 6,751
Other 9,999 9,133
---------- ----------
64,993 60,400
Less - accumulated depreciation, depletion
and amortization (17,895) (16,915)
---------- ----------
Net Property and Equipment 47,098 43,485
Other Assets
(less accumulated amortization of $4,021 and $3,112) 53,115 53,373
---------- ----------
$ 419,918 $ 426,447
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Borrowings under credit facilities $ 1,125 $ 5,166
Accounts payable - trade 8,852 12,864
Accrued liabilities 22,508 18,648
Accrued interest 5,534 2,226
Estimated income taxes 3,878 6,242
Current portion of long-term debt 7,460 7,264
---------- ----------
Total Current Liabilities 49,357 52,410
Long-Term Debt 129,588 133,016
Deferred Income Taxes - 1,764
Other Long-Term Liabilities 687 2,779
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 230 230
Net unrealized loss on investment (1,820) (43)
Additional paid-in capital 208,733 208,588
Less treasury stock, at cost (17,713) (17,890)
Less loan receivable for Employee Stock
Option Plan ("ESOP") (1,591) (1,591)
Retained earnings 52,447 47,184
--------- ----------
Total Stockholders' Equity 240,286 236,478
--------- ----------
$ 419,918 $ 426,447
========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements
3
<PAGE>
RESOURCE AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
REVENUES
Real Estate Finance................................. $ 10,856 $ 9,392
Equipment Leasing.................................... 4,406 3,172
Energy............................................... 21,003 1,815
Interest and Other................................. 973 701
---------- ---------
37,238 15,080
COSTS AND EXPENSES
Real Estate Finance................................. 1,991 1,523
Equipment Leasing................................... 2,033 1,325
Energy.............................................. 16,919 883
General and Administrative.......................... 1,292 927
Depreciation, Depletion and Amortization............ 1,748 508
Interest............................................ 4,025 3,870
Provision for Possible Losses....................... 577 318
---------- ---------
28,585 9,354
---------- ---------
Income Before Income Taxes and Extraordinary Item 8,653 5,726
Provision for Income Taxes.............................. 2,942 1,775
---------- ---------
Income Before Extraordinary Item........................ 5,711 3,951
Extraordinary Item - gain on early
extinguishment of debt, net of taxes of $150........ 291 -
---------- ---------
NET INCOME.............................................. $ 6,002 $ 3,951
========== =========
Net Income Per Common Share - Basic Before
Extraordinary Item...................................... $ .26 $ .28
Extraordinary Item...................................... .01 -
---------- ---------
Net Income Per Common Share - Basic..................... $ .27 $ .28
========== =========
Weighted Average Common Shares Outstanding.............. 21,871 14,199
========== =========
Net Income Per Common Share - Diluted Before
Extraordinary item.................................... $ .26 $ .27
Extraordinary Item...................................... .01 -
---------- ---------
Net Income Per Common Share - Diluted................... $ .27 $ .27
========== =========
Weighted Average Common Shares.......................... 22,393 14,718
========== =========
</TABLE>
See accompanying notes to Consolidated Financial Statements
4
<PAGE>
RESOURCE AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Net Income................................................ $ 6,002 $ 3,951
Other Comprehensive Income:
Unrealized loss on investments......................... $(2,717) -
Tax effect............................................. 940 -
--------- ----------
(1,777) -
--------- ----------
Comprehensive Income...................................... $ 4,225 $ 3,951
========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements
5
<PAGE>
RESOURCE AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended December 31, 1998
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Net
Common Stock Unrealized Additional
------------ Loss on Paid-In
Shares Amount Investment Capital
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, September 30, 1998 22,969,108 $230 $(43) $208,588
Treasury shares issued (99)
Issuance of common stock 68,534 - 244
Net Income
Other Comprehensive Income:
Unrealized loss on Investment,
net of tax (1,777)
Dividends ($.03 per share)
---------- ---- ------- --------
Balance, December 31, 1998 23,037,642 $230 $(1,820) $208,733
========== ==== ======= ========
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Treasury Stock ESOP Total
-------------- Loan Retained Stockholders'
Shares Amount Receivable Earnings Equity
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1998 (1,109,151) $(17,890) $(1,591) $47,184 $236,478
Treasury shares issued 8,411 177 78
Issuance of common stock 244
Net Income 6,002 6,002
Other Comprehensive Income:
Unrealized loss on Investment,
net of tax (1,777)
Dividends ($.03 per share) (739) (739)
---------- -------- ------- ------- --------
Balance, December 31, 1998 (1,100,740) $(17,713) $(1,591) $52,447 $240,286
========== ======== ======= ======= ========
</TABLE>
See accompanying notes to Consolidated Financial Statements
6
<PAGE>
RESOURCE AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 6,002 $ 3,951
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 1,748 508
Amortization of discount on senior note and
deferred finance costs............................. 269 208
Provision for possible losses.......................... 577 318
Deferred income taxes................................. (975) 826
Accretion of discount.................................. (6,662) (4,388)
Collection of interest................................. 3,716 2,938
Extraordinary gain on debt extinguishment.............. (291) -
Gain on asset dispositions............................. (4,950) (4,740)
Change in operating assets and liabilities:
Increase in accounts receivable and other current
assets .............................................. (7,605) (3,458)
Decrease in accrued income taxes....................... (2,364) -
Increase in accounts payable and other current
liabilities ......................................... 10,970 1,410
-------- --------
Net cash provided by (used in) operating activities....... 435 (2,427)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid in business acquisitions.................... - (997)
Cost of equipment acquired for lease...................... (39,703) (15,972)
Capital expenditures...................................... (4,602) (1,811)
Principal payments on notes receivable.................... 4,390 34,895
Proceeds from sale of assets.............................. 46,248 20,839
Increase in other assets................................. (787) (974)
Investments in real estate loans......................... (17,253) (79,232)
Increase (decrease) in other liabilities.................. (9,906) 1,168
Payments received in excess of revenue recognized
on leases.............................................. 1,443 437
-------- --------
Net cash used in investing activities..................... (20,170) (41,647)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings...................................... 25,300 -
Principal payments on long-term borrowings................ (27,803) (704)
Short-term borrowings..................................... 22,019 6,670
Principal payment on short-term borrowings................ (26,230) (2,245)
Dividends paid............................................ (739) (470)
Purchase of treasury stock................................ - (440)
Increase in other assets.................................. (60) (15)
Proceeds from issuance of stock........................... 322 85
-------- --------
Net cash (used in) provided by financing activities....... (7,191) 2,881
--------- --------
Decrease in cash and cash equivalents..................... (26,926) (41,193)
Cash and cash equivalents at beginning of period.......... 78,080 69,279
-------- --------
Cash and cash equivalents at end of period................ $ 51,154 $ 28,086
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- DECEMBER 31, 1998 (Unaudited)
NOTE 1 - Management's Opinion Regarding Interim Financial Statements
In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair statement of the results of operations
for the interim period included herein have been made.
Certain reclassifications have been made to the consolidated financial
statements for the quarter ended December 31, 1997 to conform with the quarter
ended December 31, 1998.
Unless otherwise indicated, all information set forth herein gives
effect to the three-for-one stock split (effected in the form of a 200% stock
dividend) in June 1998.
The accounting policies followed by the Company are set forth in Note 1
to the Company's consolidated financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1998.
NOTE 2 - Summary of Significant Accounting Policies
Revenue Recognition
The Company contracts to drill oil and gas wells on a fixed fee basis.
These contracts are accounted for under the completed-contract method. Costs in
excess of amounts billed are classified as accounts receivable. Billings in
excess of costs are classified as accounts payable. Upon completion of
individual contracts, billings and accumulated costs are credited and charged to
current operations.
Futures Contracts
The Company enters into natural gas futures 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 contracts
and non-regulated over-the-counter futures contracts with qualified
counterparties. The futures contracts employed by the Company are commitments to
purchase or sell natural gas at a future date and generally cover one month
periods for up to 18 months in the future. Realized gains (losses) are recorded
in the income accounts in the month(s) that the futures contracts are intended
to hedge. Unrealized gains (losses) are deferred until realized. Deferred losses
were $43,000 at December 31, 1998.
Comprehensive Income
Effective October 1, 1998 the Company adopted SFAS No. 130 "Reporting
Comprehensive Income" which requires disclosure of comprehensive income and its
components. Comprehensive income is defined as changes in stockholders' equity
from nonowner sources and, for the Company, includes net income and changes in
the fair value of marketable securities.
8
<PAGE>
Earnings Per Share
The following table presents a reconciliation of the numerators and denominators
used in the comparison of net income per common share-basic and net income per
common share-diluted for the quarters ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Income before extraordinary item.......................... $ 5,711 $ 3,951
Extraordinary gain on early extinguishment
of debt (net of taxes of $150)......................... 291 -
----------- ----------
Net income $ 6,002 $ 3,951
=========== ==========
Basic weighted average shares of common
stock outstanding...................................... 21,871 14,199
Dilutive effective of stock option and
award plans............................................ 522 519
----------- ----------
Dilutive weighted average shares of common stock.......... 22,393 14,718
=========== ==========
</TABLE>
Note 3 - Cash Flow Statements
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Cash paid during the period for:
Interest......................................... $ 448 $ 173
Income taxes..................................... 6,246 4,180
Non-cash activities include the following:
Notes received in exchange for:
Sales of leases - 3,891
Sales of residential mortgage loans - 8,093
Sale of a senior lien interest................. - 1,000
Stock issued in acquisitions..................... - 2,500
Details of acquisitions:
Fair value of assets acquired.................. - 3,545
Debt issued.................................... - (48)
Stock issued................................... - (2,500)
----------- ----------
Net cash paid.................................... $ - $ 997
=========== =========
</TABLE>
9
<PAGE>
NOTE 4 - Acquisition
On September 29, 1998, the Company acquired The Atlas Group, Inc. ("Atlas") in
exchange for 2,063,496 shares of the Company's Common Stock and the assumption
of Atlas debt. Atlas is primarily involved in the energy finance business
through the syndication of oil and gas properties in the Appalachian basin. The
acquisition has been accounted for as a purchase and accordingly the purchase
price has been allocated to assets and liabilities based on their fair market
values at the date of acquisition.
The following table reflects unaudited pro forma combined results of operations
of the Company and Atlas presented as if the acquisition had taken place at the
beginning of the prior fiscal year, pro forma information for the current year
is not presented as the operations of Atlas are included in the Company's
Consolidated Financial Statements:
Three Months Ended
December 31, 1997
-----------------
(in thousands, except
share amounts)
Revenues........................................ $ 33,189
Net income ..................................... 4,783
Net income per common share-diluted ............ .28
Shares used in computation...................... 16,901
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments to: (i) depletion, depreciation and
amortization expense attributable to allocation of the purchase price; (ii)
general and administrative expenses for certain cost reductions realized from
the combining of operations; and (iii) interest expense for additional
borrowings. They do not purport to be indicative of the results of operation
which actually would have resulted had the combination been consummated at the
beginning of the period or of future results of operations of the consolidated
entities.
NOTE 5 - Investments in Real Estate Loans
The Company has primarily focused its real estate activities on the
purchase of income producing commercial mortgages at a discount from both the
face value of such mortgages and the appraised value of the properties
underlying the mortgages. The Company records as income the accretion of a
portion of the difference between its cost basis in a commercial mortgage and
the sum of projected cash flows therefrom. Cash received by the Company for
payment on each mortgage is allocated between principal and interest. This
accretion of discount amounted to $2.9 million and $1.5 million during the three
months ended December 31, 1998 and 1997, respectively. As the Company sells
senior lien interests or receives funds from refinancings of such mortgages, a
portion of the cash received is employed to reduce the cumulative accretion of
discount included in the carrying value of the Company's investments in real
estate loans.
10
<PAGE>
At December 31, 1998, the Company held commercial real estate loans
having aggregate face values of $696.7 million, which were being carried at
aggregate cost of $197.1 million, including cumulative accretion. The following
is a summary of the changes in the carrying value of the Company's investments
in real estate loans for the three months ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Commercial mortgage loan balance,
beginning of period.................................. $188,651 $88,816
New loans.............................................. 5,479 63,648
Additions to existing loans............................ 3,502 1,998
Provision for possible losses.......................... (100) (52)
Accretion of discount (net of collection of interest) 2,946 1,450
Collection of principal................................ - (35,250)
Cost of loans sold..................................... (3,334) (3,568)
------------- -------------
Commercial mortgage loan balance,
end of period 197,144 117,042
Investments in residential mortgage loans
(less an allowance for possible losses of
$326 and $16)....................................... 8,214 11,842
------------- ------------
Total real estate loans $ 205,358 $ 128,884
============= ============
</TABLE>
A summary of activity in the Company's allowance for possible losses related to
real estate loans for the three months ended December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Balance, beginning of period....................... $ 1,191 $ 400
Provision for possible losses:
Commercial................................. 100 52
Residential................................ 40 16
Writeoffs.......................................... - -
------------- ------------
Balance, end of period............................. $ 1,331 $ 468
============= ============
</TABLE>
In December 1998, the Company sold a senior lien interest to RAIT at a
purchase price of $4.0 million and recognized a gain of $2.0 million.
11
<PAGE>
NOTE 6-Investments in Leases and Notes Receivable
Components of the investment in leases and notes receivable as of
December 31, 1998 and 1997, including residual values are as follows:
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Total minimum lease payments receivable.............. $ 17,366 $ 5,383
Initial direct costs, net of amortization............ 260 95
Unguaranteed residual................................ 10,311 425
Unearned lease income................................ (6,365) (1,205)
------------- ------------
Investment in leases................................. 21,572 4,698
Notes receivable..................................... 14,001 9,008
Allowance for possible losses........................ (1,737) (492)
------------- ------------
Investment in leases and notes receivable............ $ 33,836 $ 13,214
============= ============
</TABLE>
A summary of activity in the Company's allowance for possible losses related to
direct financing leases and notes receivable for the three months ended December
31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Balance, beginning of period......................... $ 1,602 $ 248
Provision for possible losses........................ 424 250
Write offs........................................... (289) (6)
------------- -----------
Balance, end of period $ 1,737 $ 492
============= ===========
</TABLE>
Note 7-Subsequent Event
On February 4, 1999 the Company acquired all the common stock of JLA
Credit Corporation ("JLA"). The transaction was valued at $357 million which was
comprised of cash, $143 million in non-recourse financing and the assumption of
JLA debt. JLA is a small ticket leasing company focusing on programs with
vendors and manufacturers primarily in the high technology, machine tool,
printing and Japanese business segments.
The JLA acquisition will be recorded utilizing the purchase method of
accounting and accordingly the results of operations of JLA will be included in
the Company's consolidated financial statements commencing February 1999.
12
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
WHEN USED IN THIS FORM 10-Q, THE WORDS "BELIEVES," "ANTICIPATES,"
"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS WHICH SPEAK ONLY AS OF
THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE
RESULTS OF ANY REVISIONS TO FORWARD LOOKING STATEMENTS WHICH MAY BE MADE TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
Overview of First Quarter of Fiscal 1999
In September 1998, the Company acquired Atlas, a company primarily
involved in energy finance through the syndication of oil and gas properties.
Results of operations include the operations of Atlas from the date of purchase,
and accordingly energy operations are not comparable to the similar period of
the prior year, however, see Note 4.
The Company's gross revenues were $37.2 million in the first quarter of
fiscal 1999, an increase of $22.1 million (147%) from $15.1 million in the first
quarter of fiscal 1998. The increase in total revenues during the first quarter
of fiscal 1999 was primarily due to an increase of $19.2 million in the revenues
from the Company's energy business to $21.0 million from $1.8 million in the
first quarter of fiscal 1998. This is due to the acquisition of Atlas on
September 29, 1998. Energy revenues were 56% and 12% of total revenues in the
first quarter of fiscal 1999 and 1998, respectively. In addition, equipment
leasing revenues were $4.4 million in the first quarter of fiscal 1999 an
increase of $1.2 million (39%) from $3.2 million in the first quarter of fiscal
1998. Real estate finance (commercial and residential mortgage loans) revenues
were $10.9 million in the first quarter of fiscal 1999, an increase of $1.5
million (16%) from $9.4 million in the first quarter of fiscal 1998. Real estate
finance (commercial and residential mortgage loans) and equipment leasing
revenues were 41% and 83% of total revenues in the first quarter of fiscal 1999
and 1998, respectively
As of December 31, 1998, total assets were $419.9 million. Real estate
finance assets were 51% and 58% and equipment leasing assets were 10% and 6% of
total assets at December 31, 1998 and September 30, 1998, respectively. Energy
assets were 23% and 21% of total assets at December 31, 1998 and September 30,
1998, respectively.
13
<PAGE>
Results of Operations: Real Estate Finance
The following table sets forth certain information relating to the
revenues recognized and cost and expenses incurred in the Company's real estate
finance operations during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Revenues:
Commercial mortgage loan
acquisition and resolution:
Interest......................................... $ 3,716 $ 2,938
Accreted discount................................ 2,946 1,450
Fees............................................. 969 1,775
Gains on sales of senior lien
interests and loans............................ 2,370 1,528
----------- -----------
10,001 7,691
----------- -----------
Residential mortgage lending:
Gains on sales of residential
mortgage loans................................. 337 1,421
Interest......................................... 261 64
Origination and other income..................... 257 216
----------- -----------
855 1,701
----------- -----------
$ 10,856 $ 9,392
=========== ===========
Costs and Expenses:
Commercial mortgage loan acquisition
and resolution................................. $ 478 $ 380
Residential mortgage lending..................... 1,513 1,143
----------- -----------
$ 1,991 $ 1,523
=========== ===========
</TABLE>
Commercial Mortgage Loan Acquisition and Resolution.
Revenues from commercial mortgage loan acquisition and resolution
operations increased to $10.0 million in the quarter ended December 31, 1998; an
increase of $2.3 million (30%) from $7.7 million in the quarter ended December
31, 1997. The increase was attributable to the following:
(i) An increase of $2.3 million (52%) in interest income including
an increase of $1.5 million of accretion of discount) resulting
from an increase of $89.7 million in the average book value of
loans outstanding during the period to $192.9 million as
compared to $103.2 million for the same period in the prior
fiscal year.
14
<PAGE>
(ii) An increase of $842,000 (55%) in gains from sales of senior
lien interests. The Company sold senior lien interests in two
loans in the quarter ended December 31, 1998 resulting in
proceeds of $5.7 million as compared to six loans resulting in
proceeds of $5.3 million in the quarter ended December 31,
1997. In the quarter ended December 31, 1998, proceeds of $4.0
million from the sale to RAIT of a senior lien interest in one
loan, resulted in a gain of $2.0 million.
(iii) A decrease of $806,000 in fee income (45%) resulting from a
one-time fee of $850,000 earned in the first quarter of fiscal
1999 for services rendered to an existing borrower in
connection with the operation, leasing and supervision of the
collateral securing the Company's loan, as compared to the
first quarter of fiscal 1998 when the Company received fees for
services rendered in connection with financial advisory and
consultation services related to the organization of RAIT
($830,000) and financial advisory services to a borrower whose
loan the Company later acquired ($900,000).
In recent years and especially during fiscal 1998, the Company's
resources have increased considerably, enabling the Company to acquire loans
much larger than those it had previously acquired and to increase the amount of
its average net investment in loans. For loans acquired through the fiscal year
ended September 30, 1997, the average receivable balance for loans acquired was
$6.1 million and the average investment cost was $3.2 million. During the year
ended September 30, 1998, the average receivable balance for loans acquired was
$37.2 million and the average investment cost was $27.8 million. The Company
does not, however, pursue a fixed policy of seeking larger loans and,
accordingly, will acquire larger loans only when attractive opportunities are
presented and the Company has, or can obtain (through loan financing, sale of
senior lien interests in existing loans or other means) sufficient investment
funds. The Company continues to seek and acquire smaller loans.
During the three months ended December 31, 1998, the Company acquired
two loans for a cost of $5.5 million, as compared to the purchase and
origination of five loans for a cost of $63.6 million (including $35.3 million
of costs with respect to one loan which were reduced immediately upon loan
acquisition by first mortgage financing arranged by the Company), during the
three months ended December 31, 1997. The two loans acquired during the quarter
ended December 31, 1998 had outstanding receivable balances of $1.5 million and
$4.0 million. During the quarter ended December 31, 1997, the average of loans
acquired (excluding the $35.3 million financing referred to above) ranged from
$1.5 million to $14.6 million.
Gains on sale of loans and senior lien interests in loans (if any) and
the amount of fees received (if any) vary from transaction to transaction and
there may be significant variations in the Company's gain on sale and fee income
from period to period.
As a consequence of the foregoing, the Company's yield (gross
commercial mortgage loan acquisition and resolution revenues, including gains
resulting from refinancings, sales of loans and sales of senior lien interests
in loans, divided by the book value of average loan balances) decreased to 21%
in the quarter ended December 31, 1998 as compared to 30% in the quarter ended
December 31, 1997.
Costs and expenses of the Company's commercial mortgage loan operations
were $478,000 in the quarter ended December 31, 1998, an increase of $98,000
(26%) from $380,000 in the quarter ended December 31, 1997. The increase was
primarily a result of hiring additional personnel and increased compensation to
existing employees.
As a result of the foregoing, the Company's operating profit from
commercial mortgage loan acquisition and resolution operations increased to $9.5
million in the quarter ended December 31, 1998, as compared to $7.3 million in
the same period in the prior year.
15
<PAGE>
Residential Mortgage Lending. During the quarter ended December 31,
1998, the Company originated 140 residential mortgage loans aggregating $8.3
million as compared to the origination and purchase of 300 loans at a total cost
of $14.5 million during the quarter ended December 31, 1997. The Company may
opportunistically purchase residential mortgage loans although its focus is on
residential mortgage loan originations. During fiscal 1998, the Company had a
program for originating "125 loans" which was terminated at the end of the
fiscal year. At December 31, 1998, the Company held $4.4 million of "125 loans",
all of which were held for sale.
The Company sold residential mortgage loans with a book value of $8.9
million and $11.0 million during the three months ended December 31, 1998 and
1997, respectively, resulting in gains of $337,000 and $1.4 million for the same
periods. In the quarter ended December 31, 1997, the Company sold certain
originated and acquired residential mortgage loans for a note in the principal
amount of $8.3 million of which $6.8 million has been paid through December 31,
1998. The $6.8 million payment was funded by a loan to the purchaser from an
unaffiliated bank and was guaranteed by the Company and secured by the
residential mortgage loans sold to the purchaser. The Company has taken such
guarantee into consideration in establishing its allowance for possible losses.
The Company recognized a gain of $1.2 million on this transaction. Interest
income from loans held was $261,000 in the first quarter of fiscal 1999, an
increase of $197,000 (308)% from $64,000 in the first quarter of fiscal 1998.
Fees from origination activities, during the first quarter of fiscal 1999 were
$257,000 an increase of $41,000 (19%) from $216,000 in the first quarter of
fiscal 1998. The increase in interest and fees is a result of an increase in the
portfolio size as compared to the similar period of the prior year. The Company
commenced residential mortgage loan operations in the quarter ended December 31,
1997.
Costs and expenses associated with residential mortgage lending
operations were $1.5 million in the quarter ended December 31, 1998, and
increase of $370,000 (32%) from $1.1 million in the quarter ended December 31,
1997. In addition, the Company incurred $239,000 and $149,000 of depreciation
and amortization, $29,000 and $95,000 of interest expense and $40,000 and
$16,000 in provision for possible losses, in the three months ended December 31,
1998 and 1997, respectively.
As a result of the foregoing, the Company's residential mortgage
lending business incurred a loss from operations of $926,000 for the quarter
ended December 31, 1998, as compared to income from operations of $298,000 in
the same period of the prior year.
16
<PAGE>
Results of Operations: Equipment Leasing
The following table sets forth certain information relating to the
revenues recognized and costs and expenses incurred in the Company's equipment
leasing operations during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Revenues:
Small ticket leasing -
Gains on sales of leases...................... $ 2,244 $ 1,788
Interest and fees............................. 1,402 601
Partnership management............................ 673 531
Lease finance placement and
advisory services.............................. 87 252
-------- ---------
$ 4,406 $ 3,172
======== =========
Costs and Expenses:
Small ticket leasing...................... $ 1,419 $ 797
Partnership management................ 443 338
Lease finance placement and
advisory services....................... 171 190
-------- ---------
$ 2,033 $ 1,325
======== =========
</TABLE>
The Company experienced continued growth in its leasing business during
the first quarter of fiscal 1999, originating 3,221 leases having a cost of
$39.7 million, as compared to 1,551 leases having a cost of $16.0 million during
the first quarter of fiscal year 1998. In the first quarter of fiscal 1999, the
Company sold leases with a book value of approximately $29.1 million to an
Intermediate Purchaser in return for cash of $31.3 million, resulting in gains
on sale of $2.2 million, as compared to the first quarter of fiscal 1998, in
which the Company sold leases with a book value of $14.4 million to a
special-purpose financing entity in return for cash of $12.3 million and a note
with a face value of $3.9 million resulting in gains on sale of $1.8 million.
Payment on the note is subject to the level of lease delinquencies and
realization of residuals on the sold leases. Revenues from equipment leasing
were $4.4 million in the first quarter of fiscal 1999, an increase of $1.2
million (39%) from $3.2 million in the first quarter of fiscal 1998. The
increase in revenues for the first quarter of fiscal 1999 was attributable to
(i) an increase in interest and fee income of $801,000 (133%) resulting from the
increased volume of lease originations and (ii) an increase in the gains on
sales of leases of $456,000 (26%) resulting from the increased number of leases
originated and sold.
During the quarter ended June 30, 1998, the Company began to retain for
its own account the residual values of leases sold. Prior to this quarter the
Company had sold its residual interests, primarily for promissory notes
(aggregating $14.3 million at December 31, 1998) from Intermediate Purchasers.
The Company anticipates that it will continue to retain residual interests for
its own account; however, there is no established Company policy as to the
retention or sale of residuals and, accordingly, the Company may determine to
sell residuals in the future. The effect of retaining residuals is to reduce
revenues recognized from the sale of leases at the time of sale while increasing
revenues anticipated to be derived in the future from the realization of
residuals. At December 31, 1998, estimated unrealized residuals approximated
$10.3 million.
17
<PAGE>
Equipment leasing costs and expenses were $2.0 million in the first
quarter of fiscal 1999, an increase of $708,000 (53%) from $1.3 million in the
first quarter of fiscal 1998. The increase was primarily a result of higher
operating costs associated with the increase in lease originations.
Results of Operations: Energy and Energy Finance
The following table sets forth certain information relating to revenues
recognized and costs and expenses incurred in the Company's energy and energy
finance operations during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Production................................. $ 2,520 $ 1,232
Gas Marketing............................. 5,877 -
Well Construction......................... 10,401 -
Well Services............................. 2,205 583
---------- -----------
$ 21,003 $ 1,815
========== ===========
Costs and Expenses:
Exploration and Production................ $ 1,322 $ 574
Gas Marketing............................. 5,573 -
Well Construction......................... 9,313 -
Well Services............................. 711 309
---------- -----------
$ 16,919 $ 883
========== ===========
</TABLE>
A comparison of the Company's revenues, daily production volumes, and average
sales prices follows:
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues (in thousands)(1)
Gas .................................................... $ 2,289 $ 1,017
Oil .................................................... $ 172 $ 201
Production volumes
Gas (thousands of cubic feet ("mcf")/day)............... 10,522 4,198
Oil (barrels ("bbls")/day).............................. 154 124
Average sales price
Gas (per mcf)........................................... $ 2.36 $ 2.63
Oil (per bbl)........................................... $ 12.15 $ 17.52
</TABLE>
(1) Excludes sales of residual gas and sales to landowners.
18
<PAGE>
Natural gas revenues were $2.3 million in the quarter ended December
31, 1998, an increase of $1.3 million (125%) from $1.0 million in the first
quarter of fiscal 1998 due to a 151% increase in production volumes, partially
offset by a 10% decrease in the price received per mcf. Without the addition of
Atlas, natural gas revenues would have decreased $106,000 (10%) due to a 6%
decrease in price received per mcf and a 5% decrease in production volumes as
compared to the same period of fiscal 1998. Oil revenues were $172,000 in the
first quarter of fiscal 1999 a decrease of $29,000 (14%) from $201,000 in the
first quarter of fiscal 1998, due to a 31% decrease in the average sales price
of oil during the first quarter of fiscal 1999. The decrease was partially
offset by a 24% increase in production volumes as compared to fiscal 1998.
Without the addition of Atlas, oil revenues would have decreased 28,000 (14%)
due to a 31% decrease in the average sales price of oil, partially offset by a
24% increase in production volumes as compared to fiscal 1998.
Well construction revenues and expenses represents the billings and
costs associated with the completion of 53 wells by Atlas.
Well services revenues and related costs both increased significantly
as a result of an increase in the number of wells operated from approximately
1,100 to approximately 2,500 after the acquisition of Atlas.
A comparison of the Company's production costs as a percentage of oil
and gas sales, and the production cost per equivalent unit for oil and gas, for
the three months ended December 31, 1998 and 1997 are as follows:
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
Production Costs
As a percent of sales............................ 46% 42%
Gas (mcf)........................................ $1.10 $1.14
Oil (bbl)........................................ $6.58 $6.79
The increase in production costs as a percent of sales is a result of a
decrease in the price received for both gas and oil in the quarter ended
December 31, 1998 as compared to the prior fiscal year. Production costs were
$1.2 million in the quarter ended December 31, 1998 an increase of $637,000
(123%) from $519,000 in the quarter ended December 31, 1997 as a result of costs
associated with the wells acquired through Atlas.
Amortization of oil and gas properties as a percentage of oil and gas
production revenues was 24% in the quarter ended December 31, 1998 compared to
15% in the quarter ended December 31, 1997. The variance from period to period
was directly attributable to changes in the Company's oil and gas reserve
quantities, product prices and fluctuations in the depletable cost basis of oil
and gas properties.
Results of Operations: Other Revenues, Costs and Expenses
Interest and other income was $973,000 in the quarter ended December
31, 1998, an increase of $272,000 (39%) as compared to the quarter ended
December 31, 1997, due to the recognition of dividend income of $426,000 from
RAIT in the first quarter of fiscal 1999. RAIT paid no dividend in the first
quarter of fiscal 1998, since it had not yet commenced business operations. This
increase was partially offset by a decrease in interest earned as a result of a
decrease in the amount of uncommitted funds invested.
19
<PAGE>
General and administrative expenses were $1.3 million in the quarter
ended December 31, 1998, an increase of 365,000 (39%) as compared to $927,000
for the quarter ended December 31, 1997, primarily as a result of the hiring of
additional corporate staff and increases in the compensation of senior officers.
Provision for possible losses were $577,000 in the quarter ended
December 31, 1998 an increase of $259,000 (81%) as compared to a provision of
$318,000 in the quarter ended December 31, 1997. The increase primarily relates
to equipment leasing ($424,000) and real estate finance ($140,000). The
increased provisions reflect the increases in both lease originations and
investments in real estate loans. In establishing the Company's allowance for
possible losses in connection with its real estate finance and equipment leasing
operations, the Company considers among other things, the historic performance
of the Company's loan or lease portfolios, industry standards and experience
regarding losses in similar loans or leases and payment history on specific
loans and leases, as well as general economic conditions in the United States,
in the borrower's or lessee's geographic area and in its specific industry.
The effective tax rate increased to 34% in the quarter ended December
31, 1998 from 31% in the quarter ended December 31, 1997. The fiscal 1999
increase resulted from: (i) an increase in the statutory rate due to an increase
in the Company's pre-tax earnings; (ii) an increase in amortization of goodwill,
which is not deductible for tax purposes; (iii) a decrease in tax exempt
interest in relationship to pre-tax income; and (iv) an increase in state income
taxes.
Liquidity and Capital Resources
During the past three fiscal years, the Company has derived its capital
resources from three main sources: public and private offerings of debt and
equity securities, lines of credit and purchase facilities extended by banks and
other institutional lenders with respect to equipment leasing, residential
mortgage and energy operations, and sales of senior lien interests in or
borrower refinancings of commercial mortgage loans held in the Company's
portfolio. The Company has employed its available capital resources primarily in
the expansion of its real estate finance and equipment leasing businesses, and
expects that it will continue to do so for the foreseeable future. However,
through its acquisition of Atlas, the Company has significantly expanded its oil
and gas operations and, as a result, may direct capital resources to oil and gas
operations as other opportunities arise or as the Company's oil and gas business
develops.
The Company believes that its future growth and earnings will be
materially dependent upon its ability to continue to generate capital resources
from prior sources or to identify new sources. During the last half of calendar
1998, capital markets in the United States were unstable, resulting in a loss of
liquidity in credit markets and significant drops in the prices of certain
securities in the equity markets. The effects of this instability were
particularly pronounced for finance companies such as the Company. Although the
liquidity of the credit markets has improved in recent months, the Company has
not seen a similar improvement in the equity markets for finance companies. The
substantial decrease in the price of the Company's Common Stock in August 1998
remains in effect, further impeding the Company's access to the equity capital
markets. Accordingly, the Company anticipates that generating additional capital
resources on terms similar to those available to it during the last three fiscal
years may be restricted and the Company's ability to generate continued growth
in its real estate finance and equipment leasing operations may be restricted.
Any such restriction could adversely affect the Company's earnings potential.
20
<PAGE>
Sources and (uses) of cash for the three months ended December 31, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Provided by (used in) operations ...................... $ 435 $ (2,427)
Used in investing activities ...................... (20,170) (41,647)
(Used in) provided by financing activities............... (7,191) 2,881
----------- ----------
$ (26,926) $ (41,193)
=========== ==========
</TABLE>
The Company had $51.2 million in cash and cash equivalents on hand at
December 31, 1998, as compared to $78.1 million at September 30, 1998. The
Company's ratio of current assets to current liabilities was 1.44 to 1.0 at
December 31, 1998 and 1.73 to 1.0 at September 30, 1998. Working capital at
December 31, 1998 was $22.0 million as compared to $38.2 million at September
30, 1998. The Company's ratio of earnings to fixed charges was 2.26 to 1.0 in
the quarter ended December 31, 1998 as compared to 2.48 to 1.0 in the quarter
ended December 31, 1997.
Cash provided by operating activities in the first quarter of fiscal
1999 increased $2.9 million as compared to the first quarter of fiscal 1998,
primarily as a result of changes in net operating assets and liabilities.
The Company's cash used in investing activities decreased $21.5 million
in the first quarter of fiscal 1999 as compared to the first quarter of fiscal
1998. This increase resulted primarily from a decrease in the amount of cash
used to fund real estate finance activities. In commercial mortgage loan
activities, the Company invested $5.5 million and $63.6 million in the
acquisition or origination of two loans and five loans in the quarters ended
December 31, 1998 and 1997, respectively. In addition, the Company advanced
funds on existing commercial loans of $3.5 million and $2.0 million in the same
respective periods. Cash proceeds received upon refinancings or sales of senior
lien interests and loans amounted to $5.7 million and $39.6 million in the
quarters ended December 31, 1998 and 1997, respectively. These proceeds reflect
the sale of senior lien interests in or refinancing of two and six loans,
respectively.
In small ticket leasing, the Company invested $39.7 million and $16.0
million in the origination of 3,221 and 1,551 leases in the quarters ended
December 31, 1998 and 1997, respectively. Cash proceeds received upon sales of
leases amounted to $31.3 million and $12.3 million in the quarters ended
December 31, 1998 and 1997, respectively.
The Company invested $8.3 million and $14.5 million in 140 and 300
residential mortgage loans during the quarters ended December 31, 1998 and 1997,
respectively. During that period, the Company received cash proceeds from the
sale of some of these loans of $9.2 million and $4.3 million.
The Company's cash flow provided by financing activities decreased
$10.1 million during the quarter ended December 31, 1998 as compared to the
quarter ended December 31, 1997, primarily as a result of increased payments on
long and short term borrowings.
21
<PAGE>
Computer Systems and Year 2000 Issues
Based upon a recent assessment by the Company, the Company has in place
Year 2000 capable systems for its commercial mortgage loan, equipment leasing
and residential mortgage loan operations. The Company believes that the systems
for its energy operations (excluding those of Atlas) have completed
approximately 85% of the necessary remediation processes and that remediation
(including testing) will be completed by April 1999. The Company believes that
its embedded systems (such as natural gas monitoring systems and telephones) are
Year 2000 compliant or, if not, are either not date dependent or would not
materially affect the Company's operations. With respect to Atlas' systems, the
Company's post-acquisition assessment has indicated that the Company will merge
Atlas' systems with the Company's energy systems thereby largely eliminating
remediation requirements. The Company anticipates that, Atlas' systems will be
Year 2000 compliant by September 30, 1999.
As of December 31, 1998, the Company's cost in remediation of its
systems has not been material. The Company anticipates that its remaining
remediation costs (including costs relating to Atlas' systems) will not exceed
$100,000.
The Company has initiated communications with all of its significant
business partners through a Vendor Readiness Survey to determine their Year 2000
compliance. Responses are evaluated as they are received to determine if
additional action is required to ensure compliance of the business partner. As
of December 31, 1998, all of the Company's principal business partners have
advised the Company that they are Year 2000 compliant or have initiated programs
that will render them Year 2000 compliant in a timely fashion.
As a result of its internal assessment and survey of its business
partners, the Company currently does not believe that Year 2000 matters will
have a material impact on its business, financial condition or results of
operations. To the extent that any of its business partners are materially
affected by Year 2000 problems, the Company intends to seek alternative firms
providing the same services that are Year 2000 compliant. In view of the
responses from its current business partners, the Company will identify
alternative firms on an as-needed basis. There can be no assurance, however,
that the Company would be able to make appropriate arrangements should the need
arise and, accordingly, it is uncertain whether or to what extent the Company
may be affected if problems with its business partners arise.
The Company is aware of the potential for claims against it and other
companies for damages for products and services that were not Year 2000
compliant. Since the Company is neither a hardware manufacturer nor a software
developer, the Company believes that it does not have significant exposure to
liability for such claims.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits:
27 Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter for which this report is being filed. The
Registrant filed a current report on Form 8-K dated September
29, 1998 and Form 8-K/A dated December 14, 1998 regarding the
acquisition of The Atlas Group, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RESOURCE AMERICA, INC.
(Registrant)
Date: February 12, 1999 By: /s/ Steven J. Kessler
----------------- ---------------------------------
STEVEN J. KESSLER
Senior Vice President and Chief
Financial Officer
Date: February 12, 1999 By: /s/ Nancy J. McGurk
----------------- ---------------------------------
NANCY J. McGURK
Vice President-Finance and Chief
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 51,154
<SECURITIES> 9,195
<RECEIVABLES> 15,018
<ALLOWANCES> 13
<INVENTORY> 0
<CURRENT-ASSETS> 71,316
<PP&E> 64,993
<DEPRECIATION> 17,895
<TOTAL-ASSETS> 419,918
<CURRENT-LIABILITIES> 49,357
<BONDS> 129,588
0
0
<COMMON> 230
<OTHER-SE> 240,056
<TOTAL-LIABILITY-AND-EQUITY> 240,286
<SALES> 2,520
<TOTAL-REVENUES> 37,238
<CGS> 1,322
<TOTAL-COSTS> 20,943
<OTHER-EXPENSES> 3,040
<LOSS-PROVISION> 577
<INTEREST-EXPENSE> 4,025
<INCOME-PRETAX> 8,653
<INCOME-TAX> 2,942
<INCOME-CONTINUING> 5,711
<DISCONTINUED> 0
<EXTRAORDINARY> 291
<CHANGES> 0
<NET-INCOME> 6,002
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
