<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 March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-4408
RESOURCE AMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware 72-0654145
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1521 Locust Street
Suite 400
Philadelphia, PA 19102
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (215) 546-5005
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of outstanding shares of each of the issuer's classes of
common stock, as of the latest practicable date:
22,060,372 Shares May 14, 1999
<PAGE>
RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheet - March 31, 1999 (Unaudited)
and September 30, 1998......................................................... 3
Consolidated Statement of Income (Unaudited)
Three Months and Six Months Ended March 31, 1999 and 1998...................... 4
Consolidated Statement of Comprehensive Income (Unaudited)
Six Months Ended March 31, 1999 and 1998....................................... 5
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
Six Months Ended March 31, 1999................................................ 6
Consolidated Statement of Cash Flows (Unaudited)
Six Months Ended March 31, 1999 and 1998....................................... 7
Notes to Consolidated Financial Statements (Unaudited)
March 31, 1999................................................................. 8-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 16-26
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........................ 26
PART II. OTHER INFORMATION
Item 6. Exhibits
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
RESOURCE AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 44,305 $ 78,080
Accounts and notes receivable and other prepaid expenses 21,597 12,570
Investments in Real Estate Loans (less allowance for
possible losses of $1,570 and $1,191) 278,792 202,050
Investments in Leases and Notes Receivable (less allowance for
possible losses of $9,743 and $1,602) 313,031 24,977
Investment in Resource Asset Investment Trust 9,822 11,912
Property and Equipment
Oil and gas properties and equipment 48,172 44,516
(successful efforts)
Gas gathering and transmission facilities 7,358 6,751
Other 11,450 9,133
----------- -----------
66,980 60,400
Less - accumulated depreciation, depletion
and amortization (18,942) (16,915)
------------ ------------
Net Property and Equipment 48,038 43,485
Other Assets
(less accumulated amortization of $4,842 and $3,112) 71,920 53,373
----------- -----------
$ 787,505 $ 426,447
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Borrowings under warehouse facilities $ 8,195 $ 5,166
Other debt 492,379 140,280
Accounts payable 10,376 12,864
Accrued liabilities 28,142 23,653
Estimated income taxes 1,136 6,242
Deferred income taxes - 1,764
---------- -----------
Total Liabilities 540,228 189,969
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $1.00 par value: 1,000,000 authorized shares - -
Common stock, $.01 par value: 49,000,000 authorized shares 231 230
Net unrealized loss on investment (1,420) (43)
Additional paid-in capital 208,846 208,588
Less treasury stock, at cost (17,303) (17,890)
Less loan receivable for Employee Stock
Option Plan ("ESOP") (1,536) (1,591)
Retained earnings 58,459 47,184
----------- -----------
Total Stockholders' Equity 247,277 236,478
----------- -----------
$ 787,505 $ 426,447
=========== ===========
</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 Six Months
Ended March 31, Ended March 31,
--------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Real Estate Finance.............................. $ 10,210 $ 15,875 $ 21,066 $ 25,267
Equipment Leasing................................ 11,240 3,452 15,646 6,624
Energy........................................... 14,002 1,535 29,128 3,350
Interest and Other............................... 759 443 1,732 1,144
-------- --------- --------- ---------
36,211 21,305 67,572 36,385
COSTS AND EXPENSES
Real Estate Finance.............................. 2,271 2,985 4,262 4,508
Equipment Leasing................................ 3,305 1,465 5,338 2,790
Energy........................................... 7,990 870 19,336 1,753
General and Administrative....................... 1,961 1,289 2,949 2,216
Depreciation, Depletion and Amortization......... 2,106 708 3,854 1,216
Interest......................................... 7,098 4,171 11,123 8,041
Provision for Possible Losses.................... 1,350 623 1,927 941
-------- --------- --------- ---------
26,081 12,111 48,789 21,465
-------- --------- --------- ---------
Income Before Income Taxes and Extraordinary Item.... 10,130 9,194 18,783 14,920
Provision for Income Taxes........................... 3,396 2,875 6,338 4,650
-------- --------- --------- ---------
Income Before Extraordinary Item..................... 6,734 6,319 12,445 10,270
Extraordinary Item - gain on early
extinguishment of debt, net of taxes of $150..... - - 291 -
-------- --------- --------- ---------
NET INCOME........................................... $ 6,734 $ 6,319 $ 12,736 $ 10,270
======== ========= ========= =========
Net Income Per Common Share - Basic Before
Extraordinary Item............................... $ .31 $ .44 $ .57 $ .72
Extraordinary Item................................... - - .01 -
-------- --------- --------- ---------
Net Income Per Common Share - Basic.................. $ .31 $ .44 $ .58 $ .72
======== ========= ========= =========
Weighted Average Common Shares Outstanding........... 22,020 14,247 21,944 14,223
======== ========= ========= =========
Net Income Per Common Share - Diluted Before
Extraordinary item............................... $ .30 $ .43 $ .55 $ .70
Extraordinary Item................................... - - .01 -
-------- --------- --------- ---------
Net Income Per Common Share - Diluted................ $ .30 $ .43 $ .56 $ .70
======== ========= ========= =========
Weighted Average Common Shares....................... 22,656 14,748 22,597 14,733
======== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
RESOURCE AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
Six Months Ended March 31,
--------------------------
1999 1998
---- ----
Net Income .................................... $ 12,736 $ 10,270
Other Comprehensive Income:
Unrealized loss on investments................. $ (2,090) $ -
Tax effect..................................... 713 -
----------- -----------
(1,377) -
----------- -----------
Comprehensive Income.............................. $ 11,359 $ 10,270
=========== ===========
See accompanying notes to consolidated financial statements
5
<PAGE>
RESOURCE AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six Months Ended March 31, 1999
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Net
Common Stock Unrealized Additional Treasury Stock
------------------------ Loss on Paid-In ------------------------------
Shares Amounts Investment Capital Shares Amount
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1998 22,969,108 $230 $(43) $208,588 (1,109,151) $(17,890)
Treasury shares issued (311) 27,928 587
Issuance of common stock 172,487 1 569
Net Income
Other Comprehensive Income:
Unrealized loss on investment,
net of tax (1,377)
Repayment of ESOP Loan
Dividends ($.06 per share)
---------- ---- --------- -------- --------- --------
Balance, March 31, 1999 23,141,595 $231 $ (1,420) $208,846 (1,081,223) $(17,303)
========== ==== ========= ======== ========= ========
ESOP Totals
Loan Retained Stockholders'
Receivable Earnings Equity
---------------------------------------------
Balance, October 1, 1998 $(1,591) $47,184 $236,478
Treasury shares issued 276
Issuance of common stock 570
Net Income 12,736 12,736
Other Comprehensive Income:
Unrealized loss on investment,
net of tax (1,377)
Repayment of ESOP Loan 55 55
Dividends ($.06 per share) (1,461) (1,461)
-------- ------- --------
Balance, March 31, 1999 $ (1,536) $58,459 $247,277
======== ======= ========
</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>
Six Months Ended March 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................... $ 12,736 $ 10,270
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization................... 3,854 1,216
Property impairments............................ (14) 63
Amortization of discount on senior notes and
deferred finance costs........................ 556 444
Provision for possible losses................... 1,927 941
Deferred income taxes........................... (1,250) 362
Accretion of discount........................... (12,975) (3,597)
Collection of interest.......................... 7,370 2,769
Extraordinary gain on debt extinguishment....... (291) -
Gain on asset dispositions...................... (8,832) (15,987)
Change in operating assets and liabilities
Increase in accounts receivable and other assets (4,383) (3,678)
Decrease in accounts payable
and other liabilities......................... (1,264) (3,075)
------------ ------------
Net cash used in operating activities................ (2,566) (10,272)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid in business acquisitions............... (18,262) (997)
Proceeds from sale of subsidiary..................... 3,556 -
Cost of equipment acquired for lease................. (115,143) (32,966)
Capital expenditures................................. (8,471) (2,654)
Principal payments on notes receivable............... 4,932 5,539
Proceeds from sale of assets......................... 115,318 119,103
Increase in other assets............................. (1,562) (8,058)
Investments in real estate loans..................... (98,882) (178,560)
Increase (decrease) in other liabilities............. (9,950) 1,400
Payments received in excess of revenue recognized
on leases....................................... 30,079 1,205
----------- -----------
Net cash used in investing activities................ (98,385) (95,988)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings................................. 132,806 82,211
Principal payments on long-term borrowings........... (62,583) (20,404)
Net change in warehouse borrowings................... (2,665) (19,203)
Dividends paid....................................... (1,461) (949)
Purchase of treasury stock........................... - (440)
Repayment of ESOP loan............................... 23 -
(Increase) decease in other assets................... 210 (1,046)
Proceeds from issuance of stock...................... 846 234
----------- -----------
Net cash provided by financing activities............ 67,176 59,606
----------- -----------
Decrease in cash and cash equivalents................ (33,775) (46,654)
Cash and cash equivalents at beginning of period..... 78,080 69,279
----------- -----------
Cash and cash equivalents at end of period........... $ 44,305 $ 22,625
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - March 31, 1999 (Unaudited)
NOTE 1 - Management's Opinion Regarding Interim Financial Statements
In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair statement of the results of operations
for the interim periods included herein have been made.
Certain reclassifications have been made to the consolidated financial
statements for the quarter and six months ended March 31, 1998 to conform to the
quarter and six months ended March 31, 1999.
Unless otherwise indicated, all information set forth herein gives
effect to the three-for-one stock split (effected in the form of a 200% stock
dividend) in June 1998.
The accounting policies followed by the Company, except as set forth in
Note 2, are set forth in Note 1 to the Company's consolidated financial
statements included in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998.
NOTE 2 - Summary of Significant Accounting Policies
Revenue Recognition
The Company contracts to drill oil and gas wells on a fixed fee basis.
These contracts are accounted for under the completed-contract method. Costs in
excess of amounts billed are classified as accounts receivable. Billings in
excess of costs are classified as accounts payable. Upon completion of
individual contracts, billings and accumulated costs are credited and charged to
current operations.
Comprehensive Income
Effective October 1, 1998 the Company adopted SFAS No. 130 "Reporting
Comprehensive Income" which requires disclosure of comprehensive income and its
components. Comprehensive income is defined as changes in stockholders' equity
from nonowner sources and, for the Company, includes net income and changes in
the fair value of marketable securities.
Other Assets
Included in other assets are intangible assets that consist primarily
of contracts acquired through acquisitions recorded at fair value on their
acquisition dates, the excess of the acquisition cost over the fair value of the
net assets of a business acquired (goodwill) and deferred financing costs. The
contracts acquired are being amortized on a declining balance method, except for
syndication network which is being amortized on a straight-line basis, over
their respective estimated lives, ranging from five to 30 years, goodwill is
being amortized on a straight-line basis over periods ranging from 15 to 30
years, deferred financing costs are being amortized over the terms of the
related loans (two to seven years) and others costs are being amortized over
varying periods of up to five years.
8
<PAGE>
Other assets consist of the following:
March 31, September 30,
1999 1998
---- ----
(in thousands)
Goodwill .................................... $ 48,421 $ 29,335
Contracts acquired
(including syndication network).......... 14,466 14,943
Deferred financing costs..................... 3,997 4,312
Other .................................... 5,036 4,783
--------- --------
Total.................................... $ 71,920 $ 53,373
========= ========
Earnings Per Share
The following table presents a reconciliation of the components used in
the comparison of net income per common share-basic and net income per common
share-diluted for the three months and six months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Income before extraordinary item..................... $ 6,734 $ 6,319 $ 12,445 $ 10,270
Extraordinary gain on early extinguishment
of debt (net of taxes of $150) .................. - - 291 -
----------- ----------- ----------- -----------
Net Income $ 6,734 $ 6,319 $ 12,736 $ 10,270
=========== =========== =========== ===========
Basic weighted average shares of common
stock outstanding................................ 22,020 14,247 21,944 14,223
Dilutive effective of stock option and
award plans ..................................... 636 501 653 510
----------- ----------- ----------- -----------
Dilutive weighted average shares of
common stock 22,656 14,748 22,597 14,733
=========== =========== =========== ===========
</TABLE>
9
<PAGE>
NOTE 3 - Cash Flow Statements
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Cash paid during the period for:
Interest.................................... $ 9,614 $ 8,010
Income taxes................................ 12,702 7,870
Non-cash activities include the following:
Notes received in exchange for:
Sales of leases............................. - 8,843
Sales of residential mortgage loans......... - 8,267
Receipt of note in satisfaction
of real estate sale......................... - 1,000
Stock issued in acquisitions................ - 2,500
Acquisition of business:
Fair value of assets acquired............... 315,466 3,545
Liabilities assumed......................... (147,534) -
Debt issued................................. (142,997) (48)
Stock issued................................ - (2,500)
Amounts due seller.......................... (6,673) -
------------ -----------
Net cash paid............................... $ 18,262 $ 997
=========== ===========
Disposal of business:
Net liabilities assumed by buyer............ $ 4,436 $ -
=========== ===========
</TABLE>
NOTE 4 - Acquisitions
On February 4, 1999, the Company acquired all of the common stock of
JLA Credit Corporation ("JLA") in exchange for cash and assumption of JLA debt.
JLA is a company primarily involved in the small ticket equipment leasing
business. The acquisition has been accounted for as a purchase and accordingly
the purchase price has been allocated to assets and liabilities based on their
fair market values at the date of acquisition. The sale of leases to JLA's
special purpose subsidiaries for securitization purposes, are accounted for as
securitized financings, and, accordingly, the leases are retained on JLA's
balance sheet as long-term investments. In connection with the acquisition of
JLA, the Company obtained an asset backed commercial paper borrowing facility
(ABS) to repay JLA bank debt and an additional ABS facility to fund leases
originated by JLA. As a result of the magnitude of the JLA acquisition and the
related borrowing facilities, the composition of the Company's consolidated
balance sheet has changed significantly. The company believes that, consistent
with the presentation of other specialty finance companies, it is more
appropriate to present its consolidated balance sheet on a non-classified basis,
which does not segregate assets and liabilities into current and non-current
categories.
10
<PAGE>
The following table reflects unaudited pro forma combined results of
operations of the Company and JLA presented as if the acquisition had taken
place on October 1, 1997:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
March 31, 1999 March 31, 1998
---------------- ----------------
(in thousands, except share amounts)
(unaudited)
<S> <C> <C>
Revenues ....................................... $ 80,682 $ 54,341
Net income...................................... 14,384 14,223
Net income per common share-diluted............. .64 .97
Shares used in computation...................... 22,597 14,733
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments to: (i) depreciation and
amortization expense attributable to allocation of the purchase price;(ii)
equipment leasing revenue as a result of the purchase price allocation; (iii)
general and administrative expenses for certain cost reductions realized from
the combining of operations; and (iv) interest expense for additional
borrowings. They do not purport to be indicative of the results of operation
which actually would have resulted had the combination been consummated at the
beginning of the period or of future results of operations of the consolidated
entities.
On September 29, 1998, the Company acquired The Atlas Group, Inc.
("Atlas") in exchange for 2,063,496 shares of the Company's Common Stock and the
assumption of Atlas debt. Atlas is primarily involved in the energy finance
business through the syndication of oil and gas properties in the Appalachian
basin. The acquisition has been accounted for as a purchase and accordingly the
purchase price has been allocated to assets and liabilities based on their fair
market values at the date of acquisition. Prior to March 31, 1999, a business
unit acquired, as part of the Atlas acquisition, entered into natural gas
futures contracts to hedge its exposure to changes in natural gas prices. The
futures contracts employed by the Company were commitments to purchase or sell
natural gas at a future date and generally covered one-month periods for up to
18 months in the future. The Company, in accordance with its intent, at the date
of acquisition, disposed of this business unit on March 31, 1999. The value of
the contracts acquired increased during the "holding period" by approximately
$1.2 million, which amount is included in operations in the six months ended
March 31, 1999.
11
<PAGE>
The following table reflects unaudited pro forma combined results of
operations of the Company and Atlas presented as if the acquisition had taken
place on October 1, 1997. Pro forma information for the current year is not
presented for Atlas as the operations of Atlas are included in the Company's
Consolidated Financial Statements:
Six Months Ended
March 31, 1998
--------------
(in thousands, except share amounts)
(unaudited)
Revenues................................... $ 57,590
Net income................................. 11,715
Net income per common share-diluted........ .69
Shares used in computation................. 16,916
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments to: (i) depletion, depreciation
and amortization expense attributable to allocation of the purchase price;(ii)
general and administrative expenses for certain cost reductions realized from
the combining of operations; and (iii) interest expense for additional
borrowings. They do not purport to be indicative of the results of operations
which actually would have resulted had the combination been consummated at the
beginning of the period or of future results of operations of the consolidated
entities.
NOTE 5 - Investments in Real Estate Loans
The Company has primarily focused its real estate activities on the
purchase of income producing commercial mortgage loans at a discount from both
the face value of such mortgage loans and the appraised value of the properties
underlying the mortgage loans. The Company records as income the accretion of a
portion of the difference between its cost basis in a commercial mortgage loan
and the sum of projected cash flows therefrom. Cash received by the Company for
payment on each mortgage is allocated between principal and interest. This
accretion of discount amounted to $2.7 million and $1.9 million during the three
months ended March 31, 1999 and 1998, respectively, and $5.6 million and $3.6
million during the six months ended March 31, 1999 and 1998, respectively. As
the Company sells senior lien interests or receives funds from refinancings of
such mortgages, a portion of the cash received is employed to reduce the
cumulative accretion of discount included in the carrying value of the Company's
investments in real estate loans.
At March 31, 1999, the Company held commercial mortgage loans having
aggregate face values of $812.4 million, which were being carried at aggregate
cost of $273.0 million, including cumulative accretion. The following is a
summary of the changes in the carrying value of the Company's investments in
loans for the periods indicated:
12
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, 1999 March 31, 1999
-------------- --------------
(in thousands)
<S> <C> <C>
Commercial mortgage loan balance,
beginning of period.......................... $ 197,144 $ 188,651
New loans....................................... 74,380 79,859
Additions to existing loans..................... 1,810 5,312
Provision for possible losses................... (200) (300)
Accretion of discount (net of collection of interest) 2,659 5,605
Collection of principal......................... (2,835) (2,835)
Cost of loans sold.............................. - (3,334)
------------ -------------
Commercial mortgage loan balance,
end of period................................ 272,958 272,958
Investment in residential mortgage loans
(less an allowance for possible losses of
$365)........................................ 5,834 5,834
------------ ------------
Total real estate loans........................... $ 278,792 $ 278,792
============ ============
</TABLE>
A summary of activity in the Company's allowance for possible losses
related to real estate loans for the three and six months ended March 31, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
-------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period..................... $ 1,331 $ 468 $ 1,191 $ 400
Provision for possible losses
Commercial.................................. 200 82 300 134
Residential................................. 39 166 79 182
Write-offs....................................... - - - -
----------- ----------- ----------- -----------
Balance, end of period........................... $ 1,570 $ 716 $ 1,570 $ 716
=========== =========== =========== ===========
</TABLE>
13
<PAGE>
NOTE 6 - Investments in Leases and Notes Receivable
Components of the investment in leases and notes receivable as of March
31, 1999 and September 30, 1998, including residual values are as follows:
<TABLE>
<CAPTION>
March 31 As of September 30,
-------- -------------------
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Total minimum lease payments receivable.............. $ 351,432 $ 10,011
Initial direct costs, net of amortization............ 824 153
Unguaranteed residual................................ 19,149 6,338
Unearned lease income................................ (63,167) (4,061)
------------- ------------
Investment in leases................................. 308,238 12,441
Notes receivable..................................... 14,536 14,138
Allowance for possible losses........................ (9,743) (1,602)
------------- ------------
Investment in leases and notes receivable............ $ 313,031 $ 24,977
============ ===========
</TABLE>
A summary of activity in the Company's allowance for possible losses
related to investment in leases and notes receivable for the three and six
months ended March 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
-------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period......................... $ 2,019 $ 492 $ 1,602 $ 248
Provision for possible losses........................ 1,099 375 1,523 625
Balance of acquired subsidiary....................... 7,200 - 7,200 -
(Write-offs) recoveries.............................. (575) (40) (582) (46)
----------- ------------ ------------ ------------
Balance, end of period............................... $ 9,743 $ 827 $ 9,743 $ 827
=========== =========== =========== ===========
</TABLE>
14
<PAGE>
NOTE 7 - Other Debt
Other debt consists of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Two commercial paper borrowings secured by leases, interest from 6.97%
to 8.00%, due in December 1999 and February 2000, but are renewable at
the mutual option of the Company and the lender for a one year period,
however, the timing and amount of the repayment of these borrowings are
dependent upon the ultimate collection of the securitized lease
payments................................................................... $ 143,066 $ -
Two term loan facilities assumed in connection with the JLA acquisition,
secured by leases, interest from 5.91% to 7.0%. The timing and
amount of the repayment of notes are dependent upon the ultimate collection
of the securitized lease payments.......................................... 116,953 -
12% senior unsecured notes, interest due semi-annually, principal
due August 2004............................................................ 101,600 104,400
Two loans payable to a financial institution secured by a mortgage loan, the
senior loan in the amount of $50,000 bears interest, payable monthly at 30
day LIBOR (5% at March 31, 1999) plus 3% for 90 days; the agreement
provides for a reduction in the LIBOR spread to 2.75% upon completion of
certain defined conditions by June 30, 1999; due in March 2002, and may be
extended for one year; the junior loan in the amount of $15,000 bears
interest at 17.5%, of which 15% is payable monthly with the balance
accruing, due in March 2001................................................ 65,000 -
Revolving and term loans to banks, secured by oil and gas properties,
interest ranging from 7.125% to 8.0% due June 1999, April 2003 and
September 2003............................................................. 31,894 31,975
Other .................................................................. 33,866 3,905
------------- -----------
Total other debt............................................................. $ 492,379 $ 140,280
============= ===========
</TABLE>
As of March 31, 1999 the debt maturing over the next five years is as
follows: 2000 - $119,005; 2001 - $161,183; 2002 - $71,397; 2003 - $24,503;
and 2004 - $10,514.
15
<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 Second Quarter of Fiscal 1999
On February 4, 1999 the Company acquired JLA, a company primarily
involved in small ticket equipment leasing. In September 1998, the Company
acquired Atlas, a company primarily involved in energy finance through the
syndication of oil and gas properties. Results of operations include the
operations of JLA and Atlas from their respective dates of purchase, and
accordingly leasing and energy operations are not comparable to the similar
periods of the prior year (see Note 4 of the Notes to Consolidated Financial
Statements).
The Company's gross revenues were $36.2 million in the second quarter
of fiscal 1999, an increase of $14.9 million (70%) from $21.3 million in the
second quarter of fiscal 1998. The increase in total revenues was due to
increases in energy revenues and revenues from leasing operations, partially
offset by a decrease in real estate finance revenues. Energy revenues increased
$12.5 million, to $14.0 million from $1.5 million, as a result of the
acquisition of Atlas. Leasing revenues increased $7.8 million, to $11.2 million
from $3.5 million, as a result of the acquisition of JLA and the continued
growth of the small ticket equipment leasing business. Real estate finance
(commercial and residential mortgage loans) revenues were $10.2 million in the
second quarter of fiscal 1999, a decrease of $5.7 million (36%) from $15.9
million in the second quarter of fiscal 1998. Real estate finance (commercial
and residential mortgage loans) and equipment leasing revenues were 59% and 91%
of total revenues in the second quarter of fiscal 1999 and 1998, respectively
As of March 31, 1999, total assets were $787.5 million. Real estate
finance assets were 37% and 50% and equipment leasing assets were 44% and 6% of
total assets at March 31, 1999 and September 30, 1998, respectively. Energy
assets were 11% and 21% of total assets at March 31, 1999 and September 30,
1998, respectively.
16
<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 Six Months
Ended March 31, Ended March 31,
-------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Commercial mortgage loan
acquisition and resolution:
Interest.................................... $ 3,654 $ 2,009 $ 7,370 $ 4,731
Accreted discount........................... 2,659 1,931 5,605 3,597
Fees........................................ 3,440 1,880 4,409 3,655
Gains on sales of senior lien
interests and loans....................... - 7,935 2,370 9,463
Loan payments in excess of
carrying value............................ 14 - 14 -
----------- ----------- ----------- -----------
9,767 13,755 19,768 21,446
----------- ----------- ----------- -----------
Residential mortgage lending:
Gains on sales of residential
mortgage loans............................ 125 1,216 462 2,637
Interest and other income................... 318 904 836 1,184
----------- ----------- ----------- -----------
443 2,120 1,298 3,821
----------- ----------- ----------- -----------
$ 10,210 $ 15,875 $ 21,066 $ 25,267
=========== =========== =========== ===========
Costs and Expenses:
Commercial mortgage loan acquisition
and resolution............................ $ 1,174 $ 484 $ 1,652 $ 864
Residential mortgage lending................ 1,097 2,501 2,610 3,644
----------- ----------- ----------- -----------
$ 2,271 $ 2,985 $ 4,262 $ 4,508
=========== =========== =========== ===========
</TABLE>
Commercial Mortgage Loan Acquisition and Resolution
Revenues from commercial mortgage loan acquisition and resolution
operations decreased to $9.8 million and $19.8 million in the second quarter and
six months ended March 31, 1999; a decrease of $4.0 million (29%) for the
quarter and $1.7 million (8%) for the six months ended March 31, 1999, from
$13.8 million and $21.4 million in the second quarter and six months ended March
31, 1998. The decrease in the second quarter of fiscal 1999 was attributable to
the following:
(i) A decrease of $7.9 million in gains from sales of senior lien
interests and loans because, prior to January 1, 1999, most of
the company's transactions involving the sale or financing of
senior lien interests of its commercial mortgage loans were
structured to meet the criteria for sale under generally
accepted accounting principles. Effective January 1, 1999, the
Company made a strategic decision to structure future
transactions so as to retain the entire commercial mortgage
loans originated on its balance sheet rather than selling senior
lien interests in such loans. Prior to January 1,
17
<PAGE>
1999, most of the transactions involving the sale or
refinancing of senior lien interests of its commercial mortgage
loans were structured to meet the criteria for sale under
generally accepted accounting principles. Thus, for most of its
transactions, as described above, that were completed prior to
such date, the Company recorded a gain on sale. The cash flows
available to the Company, which are generally based on the
appraised value and the cash flows of the property underlying
the Company's commercial mortgage loans, are unaffected by
these modifications. The primary effect from this move to
emphasize refinancing is a shift from the recognition of an
immediate gain upon the sale of a senior lien interest in
commercial mortgage loans receivable to the recognition of
interest income over the life of the loans receivable. The
Company was repaid $83,000 on a commercial mortgage loan which
was in excess of the loan's carrying value of $69,000 and
recorded a gain of $14,000 in the quarter ended March 31, 1999
as compared to sales of senior lien interests in seven loans
sold to unaffiliated third parties resulting in proceeds of
$11.5 million and a gain of $4.8 million in the quarter ended
March 31, 1998. In addition, in the quarter ended March 31,
1998, proceeds of $20.2 million from the sale to RAIT of ten
mortgage loans and senior lien interests in two other loans,
resulted in a gain of $3.1 million.
(ii) An increase of $2.4 million (60%) in interest income (including
an increase of $728,000 of accretion of discount) resulting
from an increase of $75.8 million in the average book value of
loans outstanding during the period to $231.6 million as
compared to $155.8 million for the same period in the prior
fiscal year.
(iii) An increase of $1.6 million in fee income (83%) resulting from
a one-time fee of $3.4 million earned in the second quarter of
fiscal 1999, as compared to the second quarter of fiscal 1998
when the Company received a one-time fee of $1.9 million.
In recent years and especially during fiscal 1998, the Company's
resources have increased considerably, enabling the Company to acquire loans
much larger than those it had previously acquired and to increase the amount of
its average net investment in loans. For loans acquired through the fiscal year
ended September 30, 1997, the average receivable balance for loans acquired was
$6.1 million and the average investment cost was $3.2 million. During the year
ended September 30, 1998, the average receivable balance for loans acquired was
$37.2 million and the average investment cost was $27.8 million. During the
second quarter and six months ended March 31, 1999, the Company acquired one and
three loans for a total cost of $74.4 million and $79.9 million, as compared to
the purchase and origination of one and five loans for a cost of $78.6 million
and $142.2 million, during the second quarter and six months ended March 31,
1998. The one loan acquired during the quarter ended March 31, 1999 had an
outstanding receivable balance of $126.0 million. The one loan acquired during
the quarter ended March 31, 1998, had an outstanding receivable balance of
$128.0 million. The Company does not, however, pursue a fixed policy of seeking
larger loans and, accordingly, will acquire larger loans only when attractive
opportunities are presented and the Company has, or can obtain (through loan
financing, sale of senior lien interests in existing loans or other means)
sufficient investment funds. The Company continues to seek and acquire smaller
loans.
Gains on sale of loans, senior lien interests in loans, and loan
payments in excess of carrying value (if any) and the amount of fees received
(if any) vary from transaction to transaction and there may be significant
variations in the Company's gain on sale and fee income from period to period.
As a consequence of the foregoing, the Company's yield (gross
commercial mortgage loan acquisition and resolution revenues, including gains
resulting from refinancings, sales of loans and sales of senior lien interests
in loans, divided by the book value of average loan receivables) decreased to
17% in the quarter ended March 31, 1999 as compared to 38% in the quarter ended
March 31, 1998.
18
<PAGE>
Costs and expenses of the Company's commercial mortgage loan operations
were $1.2 million in the quarter ended March 31, 1999, an increase of $690,000
(143%) from $484,000 in the quarter ended March 31, 1998. The increase was
primarily a result of hiring additional personnel and increased compensation to
existing employees.
As a result of the foregoing, the Company's operating profit from
commercial mortgage loan acquisition and resolution operations decreased to $9.1
million and $18.6 million in the second quarter and six months ended March 31,
1999, as compared to $13.3 million and $20.6 million in the second quarter and
six months ended March 31, 1998, respectively.
Residential Mortgage Lending
The Company originated 68 and 208 residential mortgage loans
aggregating $5.4 and $13.7 million during the quarter and six months ended March
31, 1999, as compared to the origination and purchase of 490 and 790 residential
mortgage loans at a total cost of $20.7 million and $35.2 million during the
quarter and six months ended March 31, 1998. The Company sold residential
mortgage loans with a book value of $7.7 million and $16.6 million resulting in
gains of $125,000 and $462,000 during the quarter and six months ended March 31,
1999. The Company sold loans aggregating $21.8 million and $33.1 million
resulting in gains of $1.2 million and $2.6 million during the quarter and six
months ended March 31, 1998. The Company opportunisitically purchases
residential mortgage loans although its focus is on residential mortgage loan
originations. Interest income and fees from origination activities were $318,000
and $836,000 during the quarter and six months ended March 31, 1999 as compared
to $904,000 and $1.2 million during the quarter and six months ended March 31,
1998. The decrease in interest and fee income is the result of a decrease in
originations due to the termination of high loan to value loan products
previously offered, reflecting changes in the mortgage industry, in particular,
the availability to residential mortgage lending programs of institutional
financing.
Costs and expenses incurred by residential mortgage operations
aggregated $1.1 million and $2.6 million for the quarter and six months ended
March 31, 1999 as compared to $2.5 million and $3.6 million for the quarter and
six months ended March 31, 1998. The decrease in costs and expenses is primarily
the result of the Company shifting its focus away from direct mail advertising
as the source of loan originations to telemarketing and electronic commerce as
well as staff reductions. Additionally, the Company incurred $229,000 and
$468,000 of depreciation, $0 and $29,000 of interest expense and $39,000 and
$79,000 in the provision for possible losses in the quarter and six months ended
March 31, 1999 as compared to $209,000 and $358,000 of depreciation, $69,000 and
$164,000 of interest expense, and $166,000 and $182,000 in the provision for
possible losses for the quarter and six months ended March 31, 1998. In
summary, the Company's residential mortgage operations incurred losses from
operations of $922,000 and $1.9 million for the quarter and six months ended
March 31, 1999 as compared to $825,000 and $527,000 for the quarter and six
months ended March 31, 1998.
During fiscal 1998, the Company had a program for originating "125
loans" which terminated at the end of the fiscal year. At March 31, 1999, the
Company held $3.3 million of "125 loans", all of which are held for sale.
19
<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 Six Months
Ended March 31, Ended March 31,
------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Small ticket leasing -
Gains on sales of leases.................... $ 2,605 $ 2,095 $ 4,849 $ 3,883
Interest and fees........................... 8,135 761 9,537 1,362
Partnership management........................... 402 445 1,075 976
Lease finance placement and
advisory services........................... 98 151 185 403
----------- ----------- ----------- -----------
$ 11,240 $ 3,452 $ 15,646 $ 6,624
=========== =========== =========== ===========
Costs and Expense:
Small ticket leasing............................. $ 2,735 $ 931 $ 4,154 $ 1,728
Partnership management........................... 482 381 925 719
Lease finance placement and
advisory services........................... 88 153 259 343
----------- ----------- ----------- -----------
$ 3,305 $ 1,465 $ 5,338 $ 2,790
=========== =========== =========== ===========
</TABLE>
The Company experienced continued growth in its leasing business during
the second fiscal quarter and six months ended March 31, 1999 as compared to the
second fiscal quarter and six months ended March 31, 1998. This growth was
further accelerated by the JLA acquisition on February 4, 1999. The results of
operations of JLA are included in the Company's consolidated results of
operations from February 4, 1999. During the second quarter and six month ended
March 31, 1999, the Company originated 4,457 and 7,678 leases having a cost of
$75.4 million and $115.1 million, as compared to 1,798 and 3,341 leases having a
cost of $17.0 million and $33.0 million during the second quarter and six months
ended March 31, 1998,respectively. In the second quarter of fiscal 1999, the
Company sold leases with a book value of approximately $55.8 million in return
for cash of $58.4 million, resulting in gains on sale of $2.6 million.
In the second quarter of fiscal 1998, the Company sold leases with a
book value of $17.7 million in return for cash of $15.4 million and a note with
a face value of $4.4 million resulting in gains on sale of $2.1 million. Payment
on the note is subject to the level of lease delinquencies and realization of
residuals on the leases sold.
20
<PAGE>
During the quarter ended June 30, 1998, the Company began to retain for
its own account the residual interests of leases sold. Prior to this quarter the
Company had sold its residual interests, primarily for promissory notes
(aggregating $13.1 million at March 31, 1999). The Company anticipates that it
will continue to retain residual interests for its own account; however, there
is no established Company policy as to the retention or sale of residuals and,
accordingly, the Company may determine to sell residuals in the future. The
effect of retaining residuals is to reduce revenues recognized from the sale of
leases at the time of sale while increasing revenues anticipated to be derived
in the future from the realization of residuals. At March 31, 1999, estimated
unrealized residuals approximated $19.1 million.
Revenues from equipment leasing increased to $11.2 million and $15.6
million in the second quarter and six months ended March 31, 1999, from $3.5
million and $6.6 million in the second quarter and six months ended March 31,
1998, an increase of $7.8 million (226%) and $9.0 million (136%), respectively.
The increase in revenues during the second quarter of fiscal 1999 was
attributable to (i) an increase in interest and fee income of $7.4 million
(969%) resulting from the acquisition of JLA with its seasoned on-balance sheet
lease portfolio which provided $6.5 million of interest income from the date it
was acquired through March 31, 1999, as well as increased volume of lease
originations and (ii) an increase in the gains on sales of leases of $510,000
(24%) resulting from the increased number of leases originated and sold.
Equipment leasing costs and expenses were $3.3 million and $5.3 million
in the second quarter and six months ended March 31, 1999, an increase of $1.8
million (125%) and $2.5 million (91%) from $1.5 million and $2.8 million in the
second quarter and six months ended March 31, 1998. The increase was primarily a
result of higher operating costs associated with the increase in lease
originations and the inclusion of the costs ($1.6 million) of JLA's from the
date it was acquired through March 31, 1999.
Results of Operations: Energy and Energy Finance
The following table sets forth certain information relating to revenues
recognized and costs and expenses incurred in the Company's energy and energy
finance operations during the periods indicated:
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
--------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Production.................................. $ 2,410 $ 1,048 $ 4,930 $ 2,280
Well Construction........................... 8,240 - 18,641 -
Well Services............................... 2,201 487 4,406 1,070
Gain on sales of assets..................... 1,151 - 1,151 -
----------- ----------- ----------- -----------
$ 14,002 $ 1,535 $ 29,128 $ 3,350
=========== =========== =========== ===========
Costs and Expenses:
Exploration and Production.................. $ 948 $ 571 $ 2,270 $ 1,145
Well Construction........................... 6,562 - 15,875 -
Well Services............................... 480 299 1,191 608
----------- ----------- ----------- -----------
$ 7,990 $ 870 $ 19,336 $ 1,753
=========== =========== =========== ===========
</TABLE>
Revenues and costs and expenses from gas marketing operations, which
were acquired in the Atlas acquisition, have been omitted from the above table,
as the Company, in accordance with its intent at the date of acquisition,
disposed of these operations in March 1999.
21
<PAGE>
A comparison of the Company's revenues, daily production volumes, and
average sales prices follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
-------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues (in thoursands) (1)
Gas ............................................ $ 2,198 $ 891 $ 4,487 $ 1,908
Oil ............................................ $ 200 $ 148 $ 372 $ 349
Production volumes
Gas (thousands of cubic feet ("mcf")/day......... 10,584 3,535 10,553 3,870
Oil (barrels (`bbls")/day)....................... 223 112 188 118
Average sales price
Gas (per mcf).................................... $ 2.31 $ 2.80 $ 2.34 $ 2.71
Oil (per bbl).................................... $ 9.95 $ 14.75 $ 10.86 $ 16.22
</TABLE>
(1) Excludes sales of residual gas and sales to landowners.
Natural gas revenues were $2.2 million and $4.5 million in the second
quarter and six months ended March 31, 1999, an increase of $1.3 million (147%)
and $2.6 million (135%) from $0.9 million and $1.9 million in the second quarter
and six months ended March 31, 1998 due to a 199% increase in production
volumes, partially offset by a 17% decrease in the price received per mcf.
Without the addition of Atlas, natural gas revenues would have decreased $64,000
(7%), despite a 2% increase in production volumes as compared to the period of
fiscal 1998, due to a 9% decrease in price received per mcf. Oil revenues were
$200,000 and $372,000 in the second quarter and six months ended March 31, 1999
an increase of $51,000 (35%) and $23,000 (7%) from $148,000 and $349,000 in the
second quarter and six months ended March 31, 1998, due to a 100% increase in
production volumes, partially offset by a 33% decrease in the average sales
price of oil during the second quarter of fiscal 1999 as compared to the second
quarter of fiscal 1998. Without the addition of Atlas, oil revenues would have
increased $35,000 (23%) due to an 80% increase in production volumes as compared
to fiscal 1998, partially offset by a 31% decrease in the average sales price of
oil.
Well construction revenues and expenses represents the billings and
costs associated with the completion of 39 and 92 wells by Atlas in the second
quarter and six months ended March 31, 1999, respectively.
Well services revenues and related costs increased significantly as a
result of an increase in the number of wells operated from approximately 900 to
approximately 2,200 after the acquisition of Atlas.
22
<PAGE>
A comparison of the Company's production costs as a percentage of oil
and gas sales, and the production cost per equivalent unit for oil and gas, for
the three and six months ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
------------------------ ------------------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Production Costs
As a percent of sales............................ 35% 43% 41% 43%
Gas (mcf)........................................ $ .84 $ 1.21 $ 0.94 $ 1.18
Oil (bbl)........................................ $ 4.93 $ 7.27 $ 5.64 $ 6.80
</TABLE>
The decrease in production costs as a percent of sales is a result of
lower operating costs on the wells associated with the Atlas acquisition.
Production costs were $843,000 million and $2.0 million in the second quarter
and six months ended March 31, 1999 an increase of $386,000 (84%) and $974,000
(100%) from $457,000 and $976,000 in the second quarter and six months ended
March 31, 1998 as a result of the costs associated with the wells acquired
through Atlas.
Amortization of oil and gas properties as a percentage of oil and gas
production revenues was 25% in both the second quarter and six months ended
March 31, 1999 compared to 20% and 17% in the second quarter and six months
ended March 31, 1998. The variance from period to period is directly
attributable to changes in the Company's oil and gas reserve quantities, product
prices and fluctuations in the depletable cost basis of oil and gas properties.
Results of Operations: Other Revenues, Costs and Expenses
Interest and other income was $759,000 and $1.7 million in the second
quarter and six months ended March 31, 1999, an increase of $316,000 (71%) and
$588,000 (51%) as compared to $443,000 and $1.1 million during the second
quarter and six months ended March 31, 1998. This increase was primarily due to
the recognition of dividend income of $426,000 from RAIT in the second quarter
of fiscal 1999. RAIT paid a $135,000 dividend in the second quarter of fiscal
1998.
General and administrative expenses were $2.0 million and $2.9 million
in the second quarter and six months ended March 31, 1999, an increase of
$672,000 (52%) and $733,000 (33%) as compared to $1.3 million and $2.2 million
for the second quarter and six months ended March 31, 1998, primarily as a
result of the hiring of additional corporate staff and increases in the
compensation and benefits of senior officers along with the Company's continued
growth in its existing business lines and recent acquisitions as described in
Note 4.
Depreciation, depletion and amortization was $2.1 million and $3.9
million in the second quarter and six months ended March 31, 1999, an increase
of $1.4 million (197%) and $2.6 million (217%) as compared to $708,000 and $1.2
million during the second quarter and six months ended March 31, 1998. The
increase was primarily attributable to the oil and gas properties acquired as
part of the Atlas acquisition.
Interest expense was $7.1 million and $11.1 million in the second
quarter and six months ended March 31, 1999, an increase of $2.9 million (70%)
and $3.1 million (38%) as compared to $4.2 million and $8.0 million during the
second quarter and six months ended March 31, 1998. The increase was primarily
attributable to JLA's on-balance sheet borrowings.
Provision for possible losses were $1.4 million and $1.9 million in the
second quarter and six months ended March 31, 1999 an increase of $727,000
(117%) and $986,000 (105%) as compared to a provision of $623,000 and $941,000
in the second quarter and six months ended March 31, 1998. The increase in the
second quarter of fiscal 1999 primarily relates to equipment leasing ($724,000)
and reflects the increases in lease originations. In establishing the Company's
allowance for possible losses in connection with its real estate finance and
equipment leasing operations, the Company considers among other things, the
historic performance of the Company's loan or lease portfolios, industry
standards and experience regarding losses in similar loans or leases and payment
history on specific loans and leases, as well as general economic conditions in
the United States, in the borrower's or lessee's geographic area and in its
specific industry.
23
<PAGE>
The effective tax rate increased to 34% in the quarter ended March 31,
1999 from 31% in the quarter ended March 31, 1998. The fiscal 1999 increase
resulted from: (i) an increase in the statutory rate due to an increase in the
Company's pre-tax earnings; (ii) an increase in amortization of goodwill,
attributable to the Company's acquisition of Atlas, which is not deductible for
tax purposes; (iii) a decrease in tax exempt interest in relation to pre-tax
income; and (iv) an increase in state income taxes. These increases in the
effective tax rate were partially offset by increased tax credits.
Liquidity and Capital Resources
During the past three fiscal years, the Company has derived its capital
resources from three main sources: public and private offerings of debt and
equity securities, lines of credit and purchase facilities extended by banks and
other institutional lenders with respect to equipment leasing, residential
mortgage and energy operations, and sales of senior lien interests in or
borrower refinancings of commercial mortgage loans held in the Company's
portfolio. The Company has employed its available capital resources primarily in
the expansion of its real estate finance and equipment leasing businesses, and
expects that it will continue to do so for the foreseeable future. However,
through its acquisition of Atlas, the Company has significantly expanded its oil
and gas operations and, as a result, may direct capital resources to oil and gas
operations as other opportunities arise or as the Company's oil and gas business
develops.
The Company believes that its future growth and earnings will be
materially dependent upon its ability to continue to generate capital resources
from prior sources or to identify new sources. During the last half of calendar
1998, capital markets in the United States were unstable, resulting in a loss of
liquidity in credit markets and significant drops in the prices of certain
securities in the equity markets. The effects of this instability were
particularly pronounced for finance companies such as the Company. Although the
liquidity of the credit markets has improved in recent months, the price of the
Company's stock has not significantly recovered from the substantial decrease in
price that occurred in August 1998, which has impeded the Company's access to
the equity capital markets. Accordingly, the Company anticipates that generating
additional capital resources on terms similar to those available to it during
the last three fiscal years may be restricted and the Company's ability to
generate continued growth in its real estate finance and equipment leasing
operations may be restricted. Any such restriction could adversely affect the
Company's earnings potential.
The Company's conduit securitization facilities, which are at variable
rates of interest, require the Company to enter into interest rate swap
agreements for the benefit of the purchaser of the leases. Such swap agreements
effectively provide for the payment by the Company of a fixed rate of interest
from the pool of securitized leases to the bank conduit purchasing the leases,
notwithstanding the payment by the conduit of a variable rate of interest on the
commercial paper issued by it. The Company does not hold or issue interest rate
swap agreements or any other derivative financial instruments for trading
purposes. At the time of each securitization, the Company's special purpose
subsidiary assigns its right, title and interest in the interest rate swap
agreement to the purchaser of the leases. At March 31, 1999, the uncollected
balance of the leases sold under the securitization facilities was approximately
$514.7 million. Related interest rate swap agreements outstanding at March 31,
1999 had an aggregate notional value of approximately $393.6 million, required
payments based on fixed rates ranging from 5.19% to 7.0%.
Sources and (uses) of cash for the six month periods ended March 31,
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Used in operations...................................$ (2,566) $ (10,272)
(Used in) investing activities....................... (98,385) (95,988)
(Used in) provided by financing activities........... 67,176 59,606
---------- ----------
$ (33,775) $ (46,654)
=========== ===========
</TABLE>
The Company had $44.3 million in cash and cash equivalents on hand at
March 31, 1999, as compared to $78.1 million at September 30, 1998. The
Company's ratio of earnings to fixed charges was 1.4 to 1.0 in the quarter ended
March 31, 1999 as compared to 3.2 to 1.0 in the quarter ended March 31, 1998.
24
<PAGE>
Cash used in operating activities in the first six months of fiscal
1999 decreased $7.7 million as compared to the first six months of fiscal 1998,
primarily as a result a decrease in gains on asset dispositions in relation to
net income.
The Company's cash used in investing activities increased $2.4 million
in the six months ended March 31, 1999 as compared to the six months ended March
31, 1998. This decrease resulted primarily from a decrease in the amount of cash
used to fund real estate finance activities. In commercial mortgage loan
activities, the Company invested $74.4 million and $79.9 million in the
acquisition or origination of three loans and five loans in the six months ended
March 31, 1999 and 1998, respectively. In addition, the Company advanced funds
on existing commercial loans of $1.8 million and $5.3 million in the same
respective periods. Cash proceeds received upon refinancings or sales of senior
lien interests and loans amounted to $8.6 million and $68.5 million in the six
months ended March 31, 1999 and 1998, respectively. These proceeds reflect the
sale of senior lien interests in or refinancing of three and nineteen loans,
respectively.
In small ticket leasing, the Company invested $115.1 million and $33.0
million in the origination of 7,678 and 3,341 leases during the six months ended
March 31, 1999 and 1998, respectively. Cash proceeds received upon sales of
leases amounted to $89.7 million and $27.8 million during the six months ended
March 31, 1999 and 1998, respectively.
The Company invested $13.7 million and $34.7 million in 208 and 790
residential mortgage loans during the six months ended March 31, 1999 and 1998,
respectively. During that period, the Company received cash proceeds from the
sale of some of these loans of $17.0 million and $22.8 million.
The Company's cash flow provided by financing activities increased $7.6
million during the six months ended March 31, 1999 as compared to the six months
ended March 31, 1998, primarily as a result of increased borrowings.
Computer Systems and Year 2000 Issues
Based upon a recent assessment by the Company, the Company has in place
Year 2000 capable systems for its commercial mortgage loan, equipment leasing
and residential mortgage loan operations. The Company believes that the systems
for its energy operations (excluding those of Atlas) have completed
approximately 85% of the necessary remediation processes and that remediation
(including testing) will be completed in June 1999. The Company believes that
its embedded systems (such as natural gas monitoring systems and telephones) are
Year 2000 compliant or, if not, are either not date dependent or would not
materially affect the Company's operations. With respect to Atlas' systems, as a
result of the Company's post-acquisition assessment, it has determined to merge
Atlas' systems with those of the Company thereby largely eliminating remediation
requirements. The Company anticipates that the merger of the systems will be
completed by September 30, 1999.
As of March 31, 1999, the Company's cost in remediation of its systems
has not been material. The Company anticipates that its remaining remediation
costs (including costs relating to Atlas' systems) will not exceed $100,000.
The Company has initiated communications with all of its significant
business partners through a Vendor Readiness Survey to determine their Year 2000
compliance. Responses are evaluated as they are received to determine if
additional action is required to ensure compliance of the business partner. As
of March 31, 1999, all of the Company's principal business partners have advised
the Company that they are Year 2000 compliant or have initiated programs that
will render them Year 2000 compliant in a timely fashion.
25
<PAGE>
As a result of its internal assessment and survey of its business
partners, the Company currently does not believe that Year 2000 matters will
have a material impact on its business, financial condition or results of
operations. To the extent that any of its business partners are materially
affected by Year 2000 problems, the Company intends to seek alternative firms
providing the same services that are Year 2000 compliant. In view of the
responses from its current business partners, the Company will identify
alternative firms on an as-needed basis. There can be no assurance, however,
that the Company would be able to make appropriate arrangements should the need
arise and, accordingly, it is uncertain whether or to what extent the Company
may be affected if problems with its business partners arise.
The Company is aware of the potential for claims against it and other
companies for damages for products and services that were not Year 2000
compliant. Since the Company is neither a hardware manufacturer nor a software
developer, the Company believes that it does not have significant exposure to
liability for such claims.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2, "Management Discussion and Analysis of Financial Condition
and Results of Operations", and Notes 4, 5, 6, and 7 of Notes to the
Consolidated Financial Statements (unaudited).
PART II. OTHER INFORMATION
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits:
27 Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter for which this report is being filed. The
Registrant filed a current report on Form 8-K dated February
9, 1999 and Form 8-K/A dated April 20, 1999 regarding the
acquisition of JLA Credit Corporation.
26
<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: May 14, 1999 By: /s/ Steven J. Kessler
------------ ------------------------------------
STEVEN J. KESSLER
Senior Vice President and Chief Financial
Officer
Date: May 14, 1999 By: /s/ Nancy J. McGurk
------------ --------------------------
NANCY J. McGURK
Vice President-Finance and Chief Accounting
Officer
27
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