<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 June 30, 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:
22,074,219 Shares August 9, 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> <C>
Item 1. Financial Statements
Consolidated Balance Sheet - June 30, 1999 (Unaudited)
and September 30, 1998......................................................... 3
Consolidated Statement of Income (Unaudited)
Three Months and Nine Months Ended June 30, 1999 and 1998...................... 4
Consolidated Statement of Comprehensive Income (Unaudited)
Nine Months Ended June 30, 1999 and 1998....................................... 5
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
Nine Months Ended June 30, 1999................................................ 6
Consolidated Statement of Cash Flows (Unaudited)
Nine Months Ended June 30, 1999 and 1998....................................... 7
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1999.................................................................. 8-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 16-28
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 28
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>
June 30, September 30,
1999 1998
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 45,370 $ 78,080
Accounts and notes receivable and other prepaid expenses 17,215 12,570
Investments in Real Estate Loans (less allowance for
possible losses of $1,760 and $1,191) 255,539 202,050
Investments in Real Estate Ventures 15,689 -
Investments in Leases and Notes Receivable (less allowance for
possible losses of $9,700 and $1,602) 357,080 24,977
Investment in Resource Asset Investment Trust 12,121 11,912
Property and Equipment
Oil and gas properties and equipment 49,068 44,516
(successful efforts)
Gas gathering and transmission facilities 7,740 6,751
Other 12,474 9,133
----------- -----------
69,282 60,400
Less - accumulated depreciation, depletion
and amortization (20,212) (16,915)
------------ ------------
Net Property and Equipment 49,070 43,485
Other Assets
(less accumulated amortization of $5,459 and $3,112) 69,242 53,373
----------- -----------
$ 821,326 $ 426,447
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Warehouse debt $ 6,900 $ 5,166
Non recourse debt 384,969 31,975
Senior debt 101,400 104,400
Other debt 31,075 3,905
Other Liabilities:
Accounts payable 13,077 12,864
Accrued liabilities 24,602 23,653
Estimated income taxes 1,021 6,242
Deferred income taxes 3,579 1,764
----------- -----------
Total Liabilities 566,623 189,969
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
Accumulated other comprehensive income 134 (43)
Additional paid-in capital 208,733 208,588
Less treasury stock, at cost (17,068) (17,890)
Less loan receivable for Employee Stock
Option Plan ("ESOP") (1,528) (1,591)
Retained earnings 64,201 47,184
----------- -----------
Total Stockholders' Equity 254,703 236,478
----------- -----------
$ 821,326 $ 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 Nine Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
Real Estate Finance.............................. $ 17,105 $ 18,541 $ 38,171 $ 43,808
Equipment Leasing................................ 12,299 3,361 27,945 9,985
Energy........................................... 11,177 1,521 40,305 4,871
Interest and Other............................... 796 1,707 2,528 2,851
-------- --------- --------- ---------
41,377 25,130 108,949 61,515
COSTS AND EXPENSES
Real Estate Finance.............................. 1,938 3,120 6,200 7,628
Equipment Leasing................................ 4,876 1,113 10,214 3,903
Energy........................................... 8,430 1,041 27,766 2,794
General and Administrative....................... 1,083 1,059 4,032 3,275
Depreciation, Depletion and Amortization......... 2,145 732 5,999 1,948
Interest......................................... 10,696 5,685 21,819 13,726
Provision for Possible Losses.................... 1,139 263 3,066 1,204
-------- --------- --------- ---------
30,307 13,013 79,096 34,478
-------- --------- --------- ---------
Income before Income Taxes and Extraordinary Item
and Cumulative Effect of a Change in Accounting
Principle........................................ 11,070 12,117 29,853 27,037
Provision for Income Taxes........................... 3,752 3,750 10,090 8,400
-------- --------- --------- ---------
Income before Extraordinary Item and Cumulative
Effect of a change in Accounting Principle 7,318 8,367 19,763 18,637
Extraordinary Item, net of taxes of $150............ - - 291 -
Cumulative Effect of Change in Accounting Principle
Net of taxes of $560............................. - - (840) -
-------- --------- ---------- ---------
NET INCOME........................................... $ 7,318 $ 8,367 $ 19,214 $ 18,637
======== ========= ========= =========
Net Income Per Common Share - Basic Before
Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle................... $ .33 $ .46 $ .90 $ 1.20
Extraordinary Item................................... - - .01 -
Cumulative Effect of a Change in Accounting
Principle........................................ - - (.04) -
-------- --------- ---------- --------
Net Income Per Common Share - Basic.................. $ .33 $ .46 $ .87 $ 1.20
======== ========= ========= ========
Weighted Average Common Shares Outstanding........... 22,055 18,189 21,984 15,544
======== ========= ========= ========
Net Income Per Common Share - Diluted before
Extraordinary item and Cumulative Effect of a
Change in Accounting Principle................... $ .32 $ .45 $ .87 $ 1.16
Extraordinary Item................................... - - .01 -
Cumulative Effect of a Change in Accounting
Principle........................................ - - (.03) -
------- --------- ---------- --------
Net Income Per Common Share - Diluted................ $ .32 $ .45 $ .85 $ 1.16
======== ========= ========= ========
Weighted Average Common Shares....................... 22,824 18,794 22,676 16,087
======== ========= ========= ========
</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 Nine Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C>
Net Income ....................................................... $ 7,318 $ 8,367 $ 19,214 $ 18,637
Other Comprehensive Income:
Unrealized gain on investments, net of taxes of $782 and $69...... $ 1,515 $ - $ 138 $ -
Foreign currency translation adjustments, net of taxes of $20.... 39 - 39 -
-------- -------- --------- ---------
1,554 - 177 -
-------- -------- --------- ---------
Comprehensive Income................................................. $ 8,872 $ 8,367 $ 19,391 $ 18,637
======== ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
RESOURCE AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine Months Ended June 30, 1999
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Other Additional
Common Stock Comprehensive Paid-In Treasury Stock
Shares Amounts Income Capital Shares Amount
---------- -------- ------------- ---------- --------- ----------
<S> <C> <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................. (424) 39,111 822
Issuance of common stock............... 172,487 1 569
Net Income.............................
Other Comprehensive Income:
Unrealized gain on investment,
net of tax...................... 138
Foreign currency translation
adjustments..................... 39
Repayment of ESOP Loan.................
Dividends ($.10 per share).............
---------- ------- ------- -------- --------- ----------
Balance, June 30, 1999................. 23,141,595 $ 231 $ 134 $208,733 1,070,040 $ (17,068)
========== ======= ======= ======== ========= ==========
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
ESOP Totals
Loan Retained Stockholders'
Receivable Earnings Equity
---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, October 1, 1998............... $ (1,591) $ 47,184 $ 236,478
Treasury shares issued................. 398
Issuance of common stock............... 570
Net Income............................. 19,214 19,214
Other Comprehensive Income:
Unrealized gain on investment,
net of tax...................... 138
Foreign currency translation
adjustments..................... 39
Repayment of ESOP Loan................. 63 63
Dividends ($.10 per share)............. (2,197) (2,197)
--------- ----------- ----------
Balance, June 30, 1999................. $ (1,528) $ 64,201 $ 254,703
========= =========== ==========
</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>
Nine Months Ended June 30,
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income ......................................................... $ 19,214 $ 18,637
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization..................................... 5,999 1,948
Property impairments.............................................. (32) 262
Amortization of discount on senior notes and
deferred finance costs.......................................... 1,037 1,450
Provision for possible losses..................................... 3,066 1,204
Deferred income taxes............................................. 193 308
Accretion of discount............................................. (28,215) (5,872)
Collection of interest............................................ 11,944 4,263
Extraordinary gain on debt extinguishment......................... (291) -
Cumulative effect of change in accounting principle............... 840 -
Gain on asset dispositions........................................ (9,145) (28,123)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable and other assets....... 79 (2,246)
Increase in accounts payable and other liabilities................ 2,161 3,860
----------- -----------
Net cash provided by (used in) operating activities.................... 6,850 (4,309)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid in business acquisitions................................. (18,262) (997)
Proceeds from sale of subsidiary....................................... 2,962 -
Cost of equipment acquired for lease................................... (205,710) (59,536)
Capital expenditures................................................... (10,608) (3,271)
Principal payments on notes receivable................................. 4,655 6,301
Proceeds from sale of assets........................................... 153,831 245,072
Increase in other assets............................................... (1,082) (12,409)
Investments in real estate loans....................................... (109,040) (277,801)
Increase (decrease) in other liabilities............................... (10,035) 878
Payments received in excess of revenue recognized on leases............ 63,847 2,520
----------- -----------
Net cash used in investing activities.................................. (129,442) (99,243)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings................................................... 198,495 60,000
Principal payments on long-term borrowings............................. (108,901) (61,235)
Net change in warehouse borrowings..................................... 1,734 3,149
Dividends paid......................................................... (2,197) (1,623)
Purchase of treasury stock............................................. -- (440)
Repayment of ESOP loan................................................. 31 -
Increase in other assets............................................... (248) (775)
Proceeds from issuance of stock........................................ 968 119,567
----------- -----------
Net cash provided by financing activities.............................. 89,882 118,643
----------- -----------
Increase (decrease) in cash and cash equivalents....................... (32,710) 15,091
Cash and cash equivalents at beginning of period....................... 78,080 62,279
----------- -----------
Cash and cash equivalents at end of period............................. $ 45,370 $ 84,370
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - June 30, 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 nine months ended June 30, 1998 to conform to the
quarter and nine months ended June 30, 1999.
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, changes in the
fair value of marketable securities and foreign currency translation
adjustments.
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>
<TABLE>
<CAPTION>
Other assets consist of the following:
June 30, September 30,
1999 1998
---------- -------------
(in thousands)
<S> <C> <C>
Goodwill ......................................................... $ 48,097 $ 29,335
Contracts acquired
(including syndication network)............................... 14,213 14,943
Deferred financing costs.......................................... 4,051 4,312
Other ......................................................... 2,881 4,783
---------- --------
Total......................................................... $ 69,242 $ 53,373
========== =========
</TABLE>
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 quarter and nine months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
-------- ------- --------- --------
(in thousands)
<S> <C> <C> <C> <C>
Income before extraordinary item and
cumulative effect of a change in accounting
principle........................................ $ 7,318 $ 8,367 $ 19,763 $ 18,637
Extraordinary gain on early extinguishment
of debt, net of taxes of $150.................... - - 291 -
Cumulative effective of a change in accounting
principle, net of taxes of $560.................. - - (840)
-------- ------- --------- --------
Net Income $ 7,318 $ 8,367 $ 19,214 $ 18,637
======== ======== ======== ========
Basic weighted average shares of common
stock outstanding................................ 22,055 18,189 21,984 15,544
Dilutive effective of stock option and
award plans ..................................... 769 605 692 543
-------- -------- -------- --------
Dilutive weighted average shares of
common stock..................................... 22,824 18,794 22,676 16,087
======== ======== ======== ========
</TABLE>
Cumulative Effect of a Change in Accounting Principle
In fiscal 1998, the AICPA issued Statement of Position 98-5, Reporting
on Costs of Start-Up Activities ("SOP 98-5"). SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. The
Company elected early adoption of the provisions of SOP 98-5 effective October
1, 1998 and, accordingly, start up costs of $1.4 million (net of income taxes of
$560,000) which had been capitalized at September 30, 1998, were charged to
operations on October 1, 1998 and are reflected in the consolidated statements
of income for the nine months ended June 30, 1999 as a cumulative effect of a
change in accounting principle.
9
<PAGE>
Foreign Currency Translation Adjustments
The financial position and results of operations of the Company's
foreign subsidiary is measured using local currency as the functional currency.
Revenues and expenses of such subsidiary have been translated into U.S. dollars
at average exchange rates prevailing during the period. Assets and liabilities
have been translated at the rates of exchange at the balance sheet date.
Translation gains and losses are deferred as a separate component of
shareholders' equity, unless there is a sale or complete liquidation of the
underlying foreign investments. Aggregate foreign currency transaction gains and
losses are included in determining net income.
NOTE 3 - Cash Flow Statements
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Cash paid during the period for:
Interest.......................................................... $ 16,697 $ 9,221
Income taxes...................................................... 14,295 10,870
Non-cash activities include the following:
Notes received in exchange for:
Sales of leases................................................... - 9,116
Sales of residential mortgage loans............................... - 6,588
Stock issued in acquisitions...................................... - 2,500
Acquisition of business:
Fair value of assets acquired..................................... 315,466 3,545
Liabilities assumed............................................... (147,534) 48
Debt issued....................................................... (142,997) -
Stock issued...................................................... - (2,500)
Amounts due seller................................................ (6,673) -
----------- -----------
Net cash paid..................................................... $ 18,262 $ 997
========== ===========
Disposal of business:
Net liabilities assumed by buyer.................................. $ 4,938 $ -
========== ===========
</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>
Nine Months Ended Nine Months Ended
June 30, 1999 June 30, 1998
------------- -------------
(in thousands, except share amounts)
(unaudited)
<S> <C>
Revenues ........................................ $ 122,059 $ 90,609
Net income....................................... 21,702 24,507
Net income per common share-diluted.............. .96 1.52
Shares used in computation....................... 22,676 16,087
</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
combining operations; and (iv) 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.
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 period from September 29, 1998 to
March 31, 1999 by approximately $1.2 million, which is included in operations in
the nine months ended June 30, 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:
<TABLE>
<CAPTION>
Nine Months Ended
June 30, 1998
(in thousands, except share amounts)
(unaudited)
<S> <C>
Revenues........................................ $ 94,057
Net income...................................... 20,881
Net income per common share-diluted............. 1.14
Shares used in computation...................... 18,270
</TABLE>
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
combining 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 $10.7 million and $2.3 million during the
three months ended June 30, 1999 and 1998, respectively, and $16.3 million and
$5.9 million during the nine months ended June 30, 1999 and 1998, respectively.
As the Company sells senior lien interests or receives funds from refinancing
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 June 30, 1999, the Company held commercial mortgage loans having
aggregate face values of $739.7 million, which were being carried at aggregate
cost of $250.5 million, including cumulative accretion. As more fully described
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" (Commercial Loan Acquisition and Resolution), during the quarter
ended June 30, 1999, the Company received a 50% partnership interest in a
building which secured a mortgage loan and foreclosed on one commercial mortgage
loan. These have been classified as investments in real estate ventures.
12
<PAGE>
The following is a summary of the changes in the carrying value of the
Company's investments in loans for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, 1999 June 30, 1999
------------- -------------
(in thousands)
<S> <C> <C>
Commercial mortgage loan balance,
beginning of period............................................... $ 272,958 $ 188,651
New loans............................................................ 2,493 82,352
Additions to existing loans.......................................... 1,947 7,259
Provision for possible losses........................................ (100) (400)
Accretion of discount (net of collection of interest)................ 10,666 16,271
Collection of principal.............................................. (16,887) (19,722)
Cost of loans sold................................................... (4,875) (8,209)
Loans reclassified to Investments in Real Estate Ventures............ (15,689) -
------------ ------------
Commercial mortgage loan balance, end of period...................... 250,513 266,202
Investment in residential mortgage loans
(less an allowance for possible losses of $455)................... 5,026 5,026
------------ ------------
Total real estate loans........................................... $ 255,539 $ 271,228
============ ============
</TABLE>
A summary of activity in the Company's allowance for possible losses
related to real estate loans for the three and nine months ended June 30, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
--------- ------- -------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period..................... $ 1,570 $ 716 $ 1,191 $ 400
Provision for possible losses
Commercial.................................. 100 91 400 225
Residential................................. 90 7 169 189
Write-offs....................................... - - - -
--------- ------- -------- -------
Balance, end of period........................... $ 1,760 $ 814 $ 1,760 $ 814
========= ======= ======== =======
</TABLE>
13
<PAGE>
NOTE 6 - Investments in Leases and Notes Receivable
Components of the investment in leases and notes receivable as of June
30, 1999 and September 30, 1998, including residual values, are as follows:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
Total minimum lease payments receivable........................... $ 395,227 $ 10,011
Initial direct costs, net of amortization......................... 3,727 153
Unguaranteed residual............................................. 24,878 6,338
Unearned lease income............................................. (72,018) (4,061)
--------- ---------
Investment in leases.............................................. 351,814 12,441
Notes receivable.................................................. 14,966 14,138
Allowance for possible losses..................................... (9,700) (1,602)
--------- ---------
Investment in leases and notes receivable......................... $ 357,080 $ 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 nine
months ended June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
--------- -------- -------- ------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period......................... $ 9,743 $ 827 $ 1,602 $ 248
Provision for possible losses........................ 974 165 2,497 790
Balance of acquired subsidiary....................... - - 7,200 -
(Write-offs) recoveries.............................. (1,017) (149) (1,599) (195)
--------- -------- -------- ------
Balance, end of period............................... $ 9,700 $ 843 $ 9,700 $ 843
========= ======== ======== ======
</TABLE>
14
<PAGE>
NOTE 7 - Debt
Total debt consists of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Warehouse debt
Equipment leasing.............................................................. $ 6,900 $ 2,500
Residential mortgage lending................................................... - 2,666
----------- -----------
Total warehouse debt................................................ 6,900 5,166
----------- -----------
Non recourse debt
Two commercial paper borrowings secured by leases, interest from 5.19% to
5.53%, due in December 1999 and February 2000, but 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............................................................... 44,445 -
Three term loan facilities, secured by leases, interest from 6.21%
to 6.60%. The timing and amount of the repayment of notes
are dependent upon the ultimate collection of the
securitized lease payments................................................... 249,611 -
Two loans payable to a financial institution secured by a mortgage
loan. The senior loan is in the amount of $49,656 bears interest,
payable monthly at 30 day LIBOR (5.0% at June 30, 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; due in March 2002, but may be
extended for one year. The junior loan is in the amount of
$9,759, bears interest at 17.5%, of which 15% is payable
monthly with the balance accruing, due in March 2001......................... 59,415 -
Revolving and term loans to banks, secured by oil and gas
properties, interest ranging from 6.72% to 8.25% due
September 1999, 2002......................................................... 31,498 31,975
----------- -----------
Total non recourse debt............................................. 384,969 31,975
----------- -----------
12% senior unsecured notes, interest due semi-annually,
principal due August 2004.................................................... 101,400 104,400
Other............................................................................. 31,075 3,905
----------- -----------
$ 517,444 $ 145,446
=========== ===========
</TABLE>
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 OF THIS FORM 10-Q. 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 OF THIS FORM 10-Q OR TO
REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
Overview of Third Quarter of Fiscal 1999
On February 4, 1999 the Company acquired JLA Credit Corporation, a
company primarily involved in small ticket equipment leasing. In September 1998,
the Company acquired The Atlas Group, Inc., 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 $41.4 million in the third quarter of
fiscal 1999, an increase of $16.3 million (65%) from $25.1 million in the third
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 $9.7
million, to $11.2 million from $1.5 million, as a result of the acquisition of
Atlas. Leasing revenues increased $8.9 million, to $12.3 million from $3.4
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 $17.1 million in the third quarter of
fiscal 1999, a decrease of $1.4 million (8%) from $18.5 million in the third
quarter of fiscal 1998. While there were changes within the components of
commercial mortgage loan revenue, as discussed below, the overall decrease in
real estate finance revenues was primarily as a result of a decrease in
residential mortgage lending. Real estate finance (commercial and residential
mortgage loans) and equipment leasing revenues were 71% and 87% of total
revenues in the third quarter of fiscal 1999 and 1998, respectively.
As of June 30, 1999, total assets were $821.3 million. Real estate
finance assets were 34% and 50% and equipment leasing assets were 47% and 6% of
total assets at June 30, 1999 and September 30, 1998, respectively. Energy
assets were 11% and 21% of total assets at June 30, 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 costs and expenses incurred in the Company's real estate
finance operations during the periods indicated:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Commercial mortgage loan
acquisition and resolution:
Interest.................................... $ 4,574 $ 3,446 $ 11,944 $ 8,177
Accreted discount........................... 10,666 2,275 16,271 5,872
Fees........................................ 1,299 1,430 5,708 5,085
Gains on sales of senior lien interests..... - 9,461 2,370 15,824
Gains on sale of loans...................... 135 - - 3,100
Loan payments in excess of
carrying value............................ 16 - 165 -
Rental income............................... 143 - 143 -
----------- ----------- ----------- -----------
16,833 16,612 36,601 38,058
----------- ----------- ----------- -----------
Residential mortgage lending:
Gains (loss) on sales of residential
mortgage loans............................ (31) 1,036 431 3,673
Interest and other income................... 303 893 1,139 2,077
----------- ----------- ----------- -----------
272 1,929 1,570 5,750
----------- ----------- ----------- -----------
$ 17,105 $ 18,541 $ 38,171 $ 43,808
=========== =========== =========== ===========
Costs and Expenses:
Commercial mortgage loan acquisition
and resolution............................ $ 915 $ 338 $ 2,567 $ 1,202
Residential mortgage lending................ 1,023 2,782 3,633 6,426
----------- ----------- ----------- -----------
$ 1,938 $ 3,120 $ 6,200 $ 7,628
=========== =========== =========== ===========
</TABLE>
Commercial Mortgage Loan Acquisition and Resolution
Revenues from commercial mortgage loan acquisition and resolution
operations increased to $16.8 million in the third quarter ended June 30, 1999,
an increase of $221,000 (1%) from $16.6 million in the quarter ended June 30,
1998. Revenue from these operations decreased to $36.6 million in the nine
months ended June 30, 1999, a decrease of $1.5 million (4%) from $38.1 million
in the nine months ended June 30, 1998. The decrease in the third quarter of
fiscal 1999 was attributable to the following:
(i) A decrease of $9.5 million in gains from sales of senior lien
interests. 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 principal amount of its
commercial mortgage loans originated on its balance sheet rather than
selling senior lien interests in such loans. Thus, for most of the
Company's sale and financing transactions prior to January 1, 1999, the
Company recorded a gain on sale. Thereafter, most of the Company's
17
<PAGE>
transactions have been accounted for as financing rather than sales for
which gains were recorded. The cash flows available to the Company from
its financing transactions, 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 of this change in policy is a shift from the recognition
of an immediate gain upon the sale of a senior lien interest in a
commercial mortgage loan receivable to the recognition of interest
income over the life of the loan receivable. The Company was repaid
$142,000 on one commercial mortgage loan which was in excess of the
loan's carrying value of $126,000 and recorded a gain of $16,000 in the
quarter ended June 30, 1999 and sold one loan without recourse to
Resource Asset Investment Trust for $4.1 million and recognized a gain
of $35,000 as compared to sales of senior lien interests in seven loans
resulting in proceeds of $79.6 million and a gain of $9.5 million,
including gains of $3.3 million and $4.9 million in connection with two
such loans, in the quarter ended June 30, 1998.
(ii) An increase of $9.5 million (166%) in interest income (including an
increase of $8.4 million of accretion of discount) of which $6.6
million resulted from the repayment in June of 1999 of a mortgage loan
secured by a property located in Philadelphia, Pennsylvania. The
payment, which was made pursuant to the terms of an existing loan
restructuring agreement, was comprised of $29.6 million in cash, plus a
50% interest in the building securing the mortgage loan. The property
interest includes significant cash flow preferences in the underlying
cash flows from the property. Because the amount received in repayment
of the loan and anticipated to be received from the property interest
exceeds the amount of discounted cash flows previously estimated in
determining the Company's accretion of discount on the loan, the
Company was required to revise its estimates in determining the
accreted discount on this loan. This accretion was $7.3 million for the
quarter ended June 30, 1999, of which $919,000 was recurring accretion
and $6.4 million was accretion recognized to reflect the fair value of
the property interest received in exchange for the repaid mortgage
loan. This compares to $881,000 in the quarter ended June 30,
1998 when the previous estimates had been utilized. As of June 30,
1999, this mortgage loan will no longer be carried as a mortgage loan
but rather as an investment in real estate ventures and, accordingly,
no further accretion of discount will be recognized with respect to it.
In addition, an increase of $92.6 million in the average book value of
loans outstanding during the current period to $269.6 million as
compared to $177.0 million for the same period in the prior fiscal
year, increased accretion of discount income.
(iii) A decrease of $131,000 in fee income (9%) resulting from a one-time fee
of $1.3 million earned in the third quarter of fiscal 1999, as compared
to the third quarter of fiscal 1998 when the Company received a
one-time fee of $1.4 million.
(iv) An increase in rental income of $143,000 in the third quarter of fiscal
1999, as a result of the foreclosure on a mortgage loan during the
quarter ended June 30, 1999. `
18
<PAGE>
In recent years, and especially during fiscal 1998, the Company's
resources have increased considerably, enabling the Company to acquire loans
much larger than previously acquired and increasing 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 third
quarter and nine months ended June 30, 1999, the Company acquired one and four
loans for a total cost of $2.5 million and $82.4 million, as compared to the
purchase and origination of four and ten loans for a cost of $70.9 million and
$213.1 million, during the third quarter and nine months ended June 30, 1998.
The one loan acquired during the quarter ended June 30, 1999, had an outstanding
receivable balance of $2.5 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
25% in the quarter ended June 30, 1999 as compared to 38% in the quarter ended
June 30, 1998.
Costs and expenses of the Company's commercial mortgage loan operations
were $915,000 in the quarter ended June 30, 1999, an increase of $577,000 (171%)
from $338,000 in the quarter ended June 30, 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
$15.9 million and $34.0 million in the third quarter and nine months ended June
30, 1999, as compared to $16.3 million and 36.9 million in the third quarter and
nine months ended June 30, 1998, respectively.
Residential Mortgage Lending
The Company originated and purchased 66 and 274 residential mortgage
loans aggregating $5.7 and $19.4 million during the quarter and nine months
ended June 30, 1999, as compared to the origination and purchase of 610 and
1,363 residential mortgage loans at a total cost of $25.4 million and $59.5
million during the quarter and nine months ended June 30, 1998. The Company sold
residential mortgage loans with a book value of $6.1 million and $22.7 million
resulting in a loss of $31,000 and a gain of $431,000 during the quarter and
nine months ended June 30, 1999. The Company sold residential loans aggregating
$23.4 million and $56.5 million resulting in gains of $1.0 million and $3.7
million during the quarter and nine months ended June 30, 1998. The Company
opportunistically purchases residential mortgage loans although its focus is on
residential mortgage loan originations. Interest income and fees from
origination activities were $303,000 and $1.1 million during the quarter and
nine months ended June 30, 1999 as compared to $893,000 and $2.1 million during
the quarter and nine months ended June 30, 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.
19
<PAGE>
Costs and expenses incurred by residential mortgage operations
aggregated $1.0 million and $3.6 million for the quarter and nine months ended
June 30, 1999 as compared to $2.8 million and $6.4 million for the quarter and
nine months ended June 30, 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 $154,000 and
$488,000 of depreciation, $1,000 and $30,000 of interest expense and $90,000 and
$169,000 in the provision for possible losses in the quarter and nine months
ended June 30, 1999 as compared to $216,000 and $574,000 of depreciation,
$67,000 and $231,000 of interest expense, and $7,000 and $189,000 in the
provision for possible losses for the quarter and nine months ended June 30,
1998. In summary, the Company's residential mortgage operations incurred losses
from operations of $1.0 million and $2.7 million for the quarter and nine months
ended June 30, 1999 as compared to $1.4 and $1.8 for the quarter and nine months
ended June 30, 1998.
During fiscal 1998, the Company had a program for originating "125
loans" which terminated at the end of the fiscal year. At June 30, 1999, the
Company held $2.9 million of "125 loans", all of which are held for sale.
20
<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 Nine Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Small ticket leasing -
Gains on sales of leases.................... $ 224 $ 1,631 $ 5,073 $ 5,514
Interest and fees........................... 11,558 1,011 21,095 2,373
Partnership management........................... 385 422 1,460 1,398
Lease finance placement and
advisory services........................... 132 297 317 700
----------- ----------- ----------- -----------
$ 12,299 $ 3,361 $ 27,945 $ 9,985
=========== =========== =========== ===========
Costs and Expenses:
Small ticket leasing............................. $ 4,196 $ 579 $ 8,350 $ 2,307
Partnership management........................... 561 319 1,486 1,038
Lease finance placement and
advisory services........................... 119 215 378 558
----------- ----------- ----------- -----------
$ 4,876 $ 1,113 $ 10,214 $ 3,903
=========== =========== =========== ===========
</TABLE>
The Company experienced continued growth in its leasing business during
the third fiscal quarter and nine months ended June 30, 1999 as compared to the
third fiscal quarter and nine months ended June 30, 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 third quarter and nine months ended
June 30, 1999, the Company originated 5,339 and 13,017 leases having a cost of
$90.6 million and $205.7 million, as compared to 2,580 and 5,921 leases having a
cost of $26.5 million and $59.5 million during the third quarter and nine months
ended June 30, 1998, respectively.
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 $15.0 million at June 30, 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 June 30, 1999, estimated
unrealized residuals approximated $24.9 million.
Through March 31, 1999, the Company structured a substantial part of
its lease financing transactions, other than warehouse revolving lines of credit
and certain financings relating to JLA (see note 4) to meet the criteria for
treatment as sales under generally accepted accounting principles. Thus, for all
such transactions completed through that date, the Company recorded gains on
sales and terminations. On April 1, 1999, the Company elected to alter the
structure of its future securitizations so that it retains leases that it
securitizes as long-term investments on its balance sheet and records the
related securitization indebtedness on its balance sheet as debt for accounting
purposes. The Company also modified its existing $100.0 million commerical paper
(CP) conduit facility so that it would retain leases as investments and record
related securitization indebtedness as debt on its balance sheet. The primary
effect of the change in securitization structure and the modification of its CP
conduit facility is that the Company will recognize income over the lives of the
lease receivables rather than recognize an immediate gain upon the sale of the
lease receivables. The Company's cash flow, which is influenced by the advance
rates and discount rates provided for by the CP conduit facilities, was
unaffected by these modifications.
21
<PAGE>
The Company currently has two sales facilities, one with IBM Credit
("IBM") and one with IBM Canada, that relate to equipment leases generated
through those companies. As a result of the requirements of IBM and IBM Canada,
these facilities continue to be structured in a way that requires the Company to
treat transactions under the facilities as sales for accounting purposes. All
leases generated through IBM and IBM Canada must be sold to these facilities.
In the third quarter of fiscal 1999, the Company sold leases with a
book value of approximately $21.4 million in return for cash of $21.6 million,
resulting in gains on sale of $224,000. In the third quarter of fiscal 1998, the
Company sold leases face with a book value of $21.1 million in return for cash
of $22.7 million resulting in gains on sale of $1.6 million.
Revenues from equipment leasing increased to $12.3 million and $27.9
million in the third quarter and nine months ended June 30, 1999, from $3.4
million and $10.0 million in the third quarter and nine months ended June 30,
1998, an increase of $8.9 million (266%) and $18.0 million (180%), respectively.
The increase in revenues during the third quarter of fiscal 1999 was
attributable to (i) an increase in interest and fee income of $10.5 million
(1043%) resulting from the acquisition of JLA with its seasoned on-balance sheet
lease portfolio which provided $9.0 million of interest income for the quarter
ended June 30, 1999, as well as increased volume of lease originations and (ii)
a decrease in the gains on sales of leases of $1.4 million (86%) resulting from
the decreased number of leases sold as described above.
Equipment leasing costs and expenses were $4.9 million and $10.2
million in the third quarter and nine months ended June 30, 1999, an increase of
$3.8 million (338%) and $6.3 million (162%) from $1.1 million and $3.9 million
in the third quarter and nine months ended June 30, 1998. The increase was
primarily a result of higher operating costs associated with the increase in
lease originations and the inclusion of the costs ($1.0 million) of JLA for the
quarter ended June 30, 1999.
22
<PAGE>
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 Nine Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Production.................................. $ 2,524 $ 1,014 $ 7,454 $ 3,294
Well Construction........................... 6,028 - 24,669 -
Well Services............................... 2,625 507 7,031 1,577
Gain on sales of assets..................... - - 1,151 -
----------- ----------- ----------- -----------
$ 11,177 $ 1,521 $ 40,305 $ 4,871
=========== =========== =========== ===========
Costs and Expenses:
Exploration and Production.................. $ 1,141 $ 767 $ 3,411 $ 1,912
Well Construction........................... 5,353 - 21,228 -
Well Services............................... 1,936 274 3,127 882
----------- ----------- ----------- -----------
$ 8,430 $ 1,041 $ 27,766 $ 2,794
=========== =========== =========== ===========
</TABLE>
A comparison of the Company's revenues, daily production volumes, and average
sales prices follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues (in thousands) (1)
Gas ............................................ $ 2,275 $ 822 $ 6,762 $ 2,730
Oil ............................................ $ 246 $ 156 $ 618 $ 505
Production volumes
Gas (thousands of cubic feet ("mcf")/day......... 10,824 3,684 10,643 3,808
Oil (barrels (`bbls")/day)....................... 188 130 188 122
Average sales price
Gas (per mcf).................................... $ 2.31 $ 2.45 $ 2.33 $ 2.63
Oil (per bbl).................................... $ 14.39 $ 13.15 $ 12.04 $ 15.13
</TABLE>
(1) Excludes sales of residual gas and sales to landowners.
Natural gas revenues were $2.3 million and $6.8 million in the third
quarter and nine months ended June 30, 1999, an increase of $1.5 million (177%)
and $4.0 million (148%) from $822,000 and $2.7 million in the third quarter and
nine months ended June 30, 1998 due to a 194% increase in production volumes,
partially offset by a 6% decrease in the price received per mcf. Without the
addition of Atlas, natural gas revenues would have increased $34,000 (4%), as a
result of a 6% increase in production volumes as compared to the same period of
fiscal 1998, partially offset by a 2% decrease in price received per mcf. Oil
revenues were $246,000 and $618,000 in the third quarter and nine months ended
June 30, 1999 an increase of $90,000 (58%) and $113,000 (22%) from $156,000 and
$505,000 in the third quarter and nine months ended June 30, 1998, due to a 45%
increase in production volumes, and a 9% increase in the average sales price of
oil during the third quarter of fiscal 1999 as compared to the third quarter of
fiscal 1998. Without the addition of Atlas, oil revenues would have increased
$60,000 (39%) due to a 22% increase in production volumes as compared to fiscal
1998 and a 13% increase in the average sales price of oil.
23
<PAGE>
Well construction revenues and expenses represents the billings and
costs associated with the completion of 22 and 114 wells by Atlas in the third
quarter and nine months ended June 30, 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 2,300 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 and nine months ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
Production Costs
<S> <C> <C> <C> <C>
As a percent of sales............................ 41% 51% 41% 45%
Gas (mcf)........................................ $ .95 $ 1.24 $ .94 $ 1.20
Oil (bbl)........................................ $ 5.70 $ 7.46 $ 5.66 $ 7.17
</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 $761,000 and $3.0 million in the third quarter and nine
months ended June 30, 1999, an increase of $241,000 (46%) and $1.5 million (50%)
from $520,000 and $1.5 million in the third quarter and nine months ended June
30, 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 24% in both the third quarter and nine months ended June
30, 1999 compared to 20% and 18% in the third quarter and nine months ended June
30, 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 $796,000 and $2.5 million in the third
quarter and nine months ended June 30, 1999, a decrease of $911,000 (53%) and
$323,000 (11%) as compared to $1.7 million and $2.8 million during the third
quarter and nine months ended June 30, 1998. The decrease in the quarter ended
June 30, 1999 arose as a result of the substantial decrease in the Company's
uncommitted cash balances and the temporary investment of such balances.
24
<PAGE>
General and administrative expenses were $1.1 million and $4.0 million
in the third quarter and nine months ended June 30, 1999, an increase of $24,000
(2%) and $757,000 (23%) as compared to $1.1 million and $3.3 million for the
third quarter and nine months ended June 30, 1998, primarily as a result of the
hiring of additional corporate staff, increases in 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 $6.0
million in the third quarter and nine months ended June 30, 1999, an increase of
$1.4 million (193%) and $4.1 million (208%) as compared to $732,000 and $1.9
million during the third quarter and nine months ended June 30, 1998. The
increase was primarily attributable to the oil and gas properties acquired as
part of the Atlas acquisition.
Interest expense was $10.7 million and $21.8 million in the third
quarter and nine months ended June 30, 1999, an increase of $5.0 million (88%)
and $8.1 million (59%) as compared to $5.7 million and $13.7 million during the
third quarter and nine months ended June 30, 1998. The increase was primarily to
JLA's and Fidelity Leasings's on-balance sheet borrowings, the acquisition of
Atlas, and two loans payable incurred on March 31, 1999 in connection with the
purchase of a commercial mortgage loan.
Provisions for possible losses were $1.1 million and $3.1 million in
the third quarter and nine months ended June 30, 1999 an increase of $876,000
(333%) and $1.9 million (155%) as compared to a provision of $263,000 and $1.2
million in the third quarter and nine months ended June 30, 1998. The increase
in the third quarter of fiscal 1999 primarily relates to equipment leasing
($974,000) 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.
The effective tax rate increased to 34% in the quarter ended June 30,
1999 from 31% in the quarter ended June 30, 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.
25
<PAGE>
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, and the Company
has been able to obtain debt financing for its equipment leasing and real estate
finance operations, 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 equity capital
on terms similar to those available to it during the last three fiscal years may
be restricted. This restriction may limit the Company's ability to generate
additional debt financing on acceptable terms and, accordingly, may in the
future limit growth in its real estate finance and equipment leasing operations.
Any such restriction could adversely affect the Company's earnings potential.
Subsequent to the end of the fiscal quarter, the Company's equipment leasing
subsidiary filed a registration statement with respect to a proposed sale of
common stock in the subsidiary. There can be no assurance that any offering will
be completed or as to its timing.
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. Related interest rate swap agreements
outstanding at June 30, 1999 had an aggregate notional value of approximately
$208.4 million, required payments based on fixed rates ranging from 5.2% to
5.8%.
Sources and (uses) of cash for the nine month periods ended June 30,
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1999 1998
--------------- ----------------
(in thousands)
<S> <C> <C>
Provided by (used in) operations....................... $ 6,850 $ (4,309)
Used in investing activities........................... (129,442) (99,243)
Provided by financing activities....................... 89,882 118,643
--------------- ----------------
$ (32,710) $ 15,091
=============== ================
</TABLE>
The Company had $45.4 million in cash and cash equivalents on hand at
June 30, 1999, as compared to $78.1 million at September 30, 1998. The Company's
ratio of earnings to fixed charges was 2.0 to 1.0 in the quarter ended June 30,
1999 as compared to 3.2 to 1.0 in the quarter ended June 30, 1998.
26
<PAGE>
Cash provided by operating activities in the first nine months of
fiscal 1999 increased $11.2 million as compared to the first nine months of
fiscal 1998 primarily as a result of a reduction in gains on asset dispositions
and an increase in non-cash charges for depreciation and amortization and
provision for losses in relation to net income. These increases in cash
provided were partially offset by an increase in accretion (net of interest
collections).
The Company's cash used in investing activities increased $30.2 million
in the nine months ended June 30, 1999 as compared to the nine months ended June
30, 1998. This increase was attributable to the following:
(i) In small ticket leasing, the Company invested $205.7 million and
$59.5 million in the origination of 13,017 and 5,339 leases during the nine
months ended June 30, 1999 and 1998, respectively. Cash proceeds received upon
sales of leases amounted to $100.3 million and $17.3 million during the nine
months ended June 30, 1999 and 1998, respectively. The Company also invested
$18.3 million in the acquisition of JLA and as a result of this acquisition
payments received in excess of revenue recognized increased $56.4 million.
These changes resulted in a net increase in cash used in leasing operations of
$25.1 million.
(ii) In commercial mortgage loan acquisition and resolution, the
company invested $82.4 million and $213.1 million in the acquisition or
origination of four loans and ten loans in the nine months ended June 30, 1999
and 1998, respectively. In addition, the Company advanced funds on existing
commercial loans of $7.3 million and $5.1 million in the same respective
periods. Cash proceeds received upon refinancings or sales of senior lien
interests and loans amounted to $19.7 million and $147.6 million in the nine
months ended June 30, 1999 and 1998, respectively. These proceeds reflect the
sale of senior lien interests in or refinancing of three and 32 loans,
respectively. These changes resulted in a net decrease in cash used in
commercial real estate operations of $1.0 million.
(iii) In energy, capital expenditures increased $5.9 million, primarily
as a result of investments in wells drilled by Atlas.
(iv) The Company invested $19.4 million and $59.5 million in 274 and
1,363 residential mortgage loans during the nine months ended June 30, 1999 and
1998, respectively. During that period, the Company received cash proceeds from
the sale of some of these loans of $23.1 million and $53.6 million. These
changes resulted in a net increase in cash provided from residential real estate
operations of $9.6 million.
The Company's cash flow provided by financing activities decreased
$28.8 million during the nine months ended June 30, 1999 as compared to the nine
months ended June 30, 1998, primarily as a result of the sale of 5.9 million
shares of Common Stock in April 1998 partially offset by increased net
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 90% of the necessary remediation processes and that remediation
(including testing) will be completed in September 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 June 30, 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.
27
<PAGE>
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 June 30, 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.
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
The following table sets forth certain information regarding 43 of the
45 loans held in the Company's portfolio as of June 30, 1999. The presentation,
for each category of information, aggregates the loans by their maturity dates
for maturities occurring in each of the fiscal years ("FY") 1999 through 2003
and separately aggregates the information for all maturities arising after the
2003 fiscal year. The Company does not believe that these loans are sensitive to
changes in interest rates since (i) the loans are subject to forbearance or
other agreements that require all of the operating cash flow from the properties
underlying the loans, after debt service on senior lien interests, to be paid to
the Company and thus are not currently being paid based on the stated interest
rates of the loans; (ii) all senior lien interests are at fixed rates and are
thus not subject to interest rate fluctuation that would affect payments to the
Company; and (iii) each loan has significant accrued and unpaid interest and
other charges outstanding to which cash flow from the underlying property would
be applied even if cash flow were to exceed the interest rate, as originally
underwritten.
28
<PAGE>
<TABLE>
<CAPTION>
Portfolio Loans, Aggregated by Maturity Dates,(1)
As of June 30, 1999
-------------------------------------------------------------------------------------------------
FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 Thereafter
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding loan
receivable
balances (to the
Company's interest) $11,201,903 $6,639,424 $18,565,358 $41,284,889 $60,901,973 $114,139,455
Carried cost of
loans (fixed rate) $7,525,488 $1,255,139 $4,563,740 $24,559,158 $24,311,024 $75,843,533
Average stated
interest rate
(fixed rate) 12.00% 13.00% 9.54% 9.65% 8.98% 12.28%
Carried cost of
loans (variable
rate) $0 $797,698 $338,548 $1,382,311 $721,602 $4,774,398
Average stated
interest rate
(variable rate) - 9.00% 7.61% 12.65% 9.00% 7.79%
Average interest
payment rate (2) (2) (2) (2) (2) (2)
Principal balance
of related senior
lien interests (3) $6,902,773 $2,781,000 $9,583,465 $5,336,062 $50,477,061 $186,963,602
Average interest
rate of senior
lien interests
(fixed rate)
8.00% 9.50% 9.41% 9.58% 7.77% 8.08%
</TABLE>
- ----------------------
(1) Maturity dates of related Forbearance Agreement or Company's interest in
the Loan.
(2) Pay rates are equal to the net cash flow from the underlying properties
after payments on senior lien interests and, accordingly, depend upon
future events not determinable as of the date hereof.
29
<PAGE>
(3) Maturity dates for senior lien interests are as follows:
<TABLE>
<CAPTION>
Maturity Date of Maturity Dates of Outstanding Balance
Company's Loans Senior Lien Interests of Senior Lien Interests
(FY Ended September 30) (FY Ended September 30) at June 30, 1999
---------------------- ------------------------ ----------------
<S> <C> <C> <C>
1999 2010 $ 6,902,773
2000 2000 685,000
2002 2,096,000
2001 2000 2,000,000
2001 5,209,000
2007 2,374,465
2002 2003 5,336,062
2003 2003 13,586,733
2006 2,182,595
2008 34,707,733
Thereafter 2001 2,010,000
2003 9,326,653
2004 4,448,399
2008 142,878,448
2009 20,477,195
2010 5,782,484
2014 2,040,423
</TABLE>
The following table sets forth information as of June 30, 1999
concerning one of the 45 loans held in the Company's portfolio that the Company
believes may be deemed to be interest rate sensitive. The loan matures October
1, 2003.
Outstanding receivable balance (to the
Company's interest) $38,851,872
Carried cost of loan $36,041,425
Stated interest rate Federal funds rate plus
87.5 basis points plus 200
basis points default
interest
Interest payment rate Net cash flow from property
underlying loan
Senior Lien Interest:
Principal balance $59,370,000
Stated interest rate LIBOR plus 250 basis
points; 8.875% maximum rate
Current interest payment rate 7.75%
Maturity date 10/01/03
30
<PAGE>
The following table sets forth information as of June 30, 1999
concerning one of the 45 loans held in the Company's portfolio that the Company
believes may be deemed to be interest rate sensitive. The loan matures April 1,
2004.
Outstanding receivable balance (to the
Company's interest) $57,240,864
Carried cost of loan $69,653,738
Stated interest rate 10.64%
Interest payment rate Net cash flow from property
underlying loan
Senior Lien Interest:
Principal balance $69,414,636
Stated interest rate LIBOR plus 300 basis points
Current interest payment rate 8.00%
Maturity date 04/01/04
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 Form 8-K/A dated April 20, 1999 regarding
the acquisition of JLA Credit Corporation.
31
<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: August 16, 1999 By: /s/ Steven J. Kessler
--------------- ----------------------------------
STEVEN J. KESSLER
Senior Vice President and Chief
Financial Officer
Date: August 16, 1999 By: /s/ Nancy J. McGurk
--------------- ----------------------------------
NANCY J. McGURK
Vice President-Finance and Chief
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000083402
<NAME> RESOURCE AMERICA
<MULTIPLIER> 1,000
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 45,370
<SECURITIES> 0
<RECEIVABLES> 17,215
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 69,282
<DEPRECIATION> (20,212)
<TOTAL-ASSETS> 821,326
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 231
<OTHER-SE> 254,472
<TOTAL-LIABILITY-AND-EQUITY> 821,326
<SALES> 0
<TOTAL-REVENUES> 41,377
<CGS> 0
<TOTAL-COSTS> 30,307
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,139
<INTEREST-EXPENSE> 10,696
<INCOME-PRETAX> 11,070
<INCOME-TAX> 3,752
<INCOME-CONTINUING> 7,318
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,318
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.32
</TABLE>
