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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM __________ TO _________.
Commission File No. l-6830
FPA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 59-0874323
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
2507 Philmont Avenue
Huntingdon Valley, Pennsylvania 19006
(Address of principal executive offices)
Telephone: (215) 947-8900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (l) 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
---- ----
Number of shares outstanding as of May 12, 1995: 11,695,618
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PART I. FINANCIAL INFORMATION
Item l. FINANCIAL STATEMENTS
FPA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, June 30,
Assets 1995 1994
------ ----------- ---------
(Unaudited)
Cash $ 2,230 $ 2,506
Receivables
Trade accounts 3,621 6,026
Mortgage and other notes 1,770 2,062
Real estate held for development and sale
Residential properties completed
or under construction
Under contract for sale 18,351 22,645
Unsold 17,652 12,371
Land held for development or sale
and improvements 51,311 46,681
Property and equipment, at cost, less
accumulated depreciation 586 521
Deferred charges and other assets 5,311 4,942
-------- --------
$100,832 $ 97,754
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Accounts payable $ 19,420 $ 18,188
Accrued expenses 8,896 6,851
Amounts due to related parties 4,717 3,419
Customer deposits 2,590 4,911
Mortgage and other note obligations
primarily secured by:
Mortgage notes receivable 1,506 1,900
Residential properties 24,336 19,835
Land held for development or sale
and improvements 11,496 15,071
Senior notes 332 664
Subordinated debentures 2,134 2,363
Other notes payable 9,643 10,509
Deferred income taxes 2,583 2,538
Minority interests 753 560
-------- --------
Total liabilities 88,406 86,809
-------- --------
Shareholders' equity
Preferred stock, $1 par, 500,000 shares
authorized, 50,000 shares of Series C
issued and outstanding at June 30, 1994
(liquidation preference of $120 per share) 50
Capital in excess of par value - preferred stock 238
Common stock, $.10 par, 20,000,000 shares
authorized, 12,698,131 shares issued at
March 31, 1995, 6,698,131 shares issued
at June 30, 1994 1,270 670
Capital in excess of par value - common stock 17,726 18,038
Retained earnings (deficit) (5,824) (7,305)
Treasury stock, at cost (1,002,513 shares at
March 31, 1995 and June 30, 1994) (746) (746)
-------- --------
Total shareholders' equity 12,426 10,945
-------- --------
Commitments and contingencies
-------- --------
$100,832 $ 97,754
======== ========
See notes to consolidated financial statements.
1
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FPA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND CHANGES IN RETAINED EARNINGS
(in thousands except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1995 1994 1995 1994
------- ------- ------- -------
Earned revenues
Residential properties $ 23,360 $ 16,305 $ 78,469 $ 46,833
Land sales 378 710 4,090 710
Other income 380 521 1,021 1,201
-------- -------- -------- --------
24,118 17,536 83,580 48,744
-------- -------- -------- --------
Costs and expenses
Residential properties 19,978 14,141 67,286 40,393
Land sales 293 570 3,380 570
Other 115 97 329 274
Selling, general
and administrative 3,388 2,743 9,602 6,914
Interest:
Incurred 1,509 1,172 4,393 3,107
Less capitalized (1,232) (866) (3,592) (2,437)
Depreciation and
amortization 27 28 72 52
Minority interests in income
of consolidated
subsidiaries 103 39 192 75
-------- -------- -------- --------
24,181 17,924 81,662 48,948
-------- -------- -------- --------
Income (loss) from operations
before income taxes (63) (388) 1,918 (204)
Income tax expense (benefit) (13) 437 96
-------- -------- -------- --------
Income (loss) from operations
before extraordinary items
and cumulative effect of
change in accounting
principle (50) (388) 1,481 (300)
Extraordinary gains, less
applicable income tax
expense (Note A) 7,519
Cumulative effect of change in
accounting principle (Note H) 3,970
-------- -------- -------- --------
Net income (loss) (50) (388) 1,481 11,189
Retained earnings (deficit),
at beginning of period (5,774) (6,888) (7,305) (18,465)
-------- -------- -------- --------
Retained earnings (deficit),
at end of period $ (5,824) $ (7,276) $ (5,824) $ (7,276)
======== ======== ======== ========
Continued...
2
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FPA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND CHANGES IN RETAINED EARNINGS
(in thousands except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1995 1994 1995 1994
-------- -------- -------- --------
Primary earnings (loss)
per share (Note C):
Income (loss) before
extraordinary items and
cumulative effect of
change in accounting
principle $ (.01) $ (.03) $ .12 $ (.03)
Extraordinary gains .77
Cumulative effect of change
in accounting principle .40
-------- -------- ------ ------
Net income (loss) $ (.01) $ (.03) $ .12 $ 1.14
======== ======== ====== ======
Fully diluted earnings (loss)
per share (Note C):
Income (loss) before
extraordinary items and
cumulative effect of
change in accounting
principle $ (.01) $ (.03) $ .12 $ (.03)
Extraordinary gains .74
Cumulative effect of change
in accounting principle .39
-------- -------- ------ ------
Net income (loss) $ (.01) $ (.03) $ .12 $ 1.10
======== ======== ====== =======
See notes to consolidated financial statements
3
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FPA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Nine Months Ended
March 31,
-----------------
1995 1994
------ -------
Cash flows from operating activities:
Net income $ 1,481 $ 11,189
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Extraordinary gains, less applicable
income tax expense (Note A) (7,519)
Cumulative effect of change in accounting
principle (Note H) (3,970)
Depreciation and amortization 72 52
(Increase) decrease in assets
Receivables 2,697 884
Real estate held for development and sale (5,617) (493)
Deferred charges and other assets (506) (89)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 3,277 (2,056)
Other liabilities (785) 1,099
------- -------
Net cash provided by (used in)
operating activities 619 (903)
------- -------
Cash flows from financing activities:
Proceeds from mortgages and loans payable 62,986 46,035
Repayments of mortgages and loans payable (63,881) (48,227)
Repayments of amounts due to shareholder (869)
Cash acquired in business acquisition (Note B) 265
Proceeds from sale of Series A and
Series B Notes payable 4,000
------- -------
Net cash provided by (used in)
financing activities (895) 1,204
------- -------
Net increase (decrease) in cash (276) 301
Cash at beginning of year 2,506 956
------- -------
Cash at end of quarter $ 2,230 $ 1,257
======= =======
Supplemental disclosure of cash flow activities:
Interest paid, net of amounts capitalized $ 74 $ 107
======= =======
Income taxes paid $ 297 $ 1,105
======= =======
See notes to consolidated financial statements
4
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FPA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) 1993 Recapitalization Transactions
Overview
As part of its continuing efforts to restructure its
operations, eliminate high interest indebtedness, obtain new
capital for operations and improve its market share in its
primary operating areas, the Company consummated several
transactions with various of its principal stockholders,
creditors and investors during fiscal 1994 (herein
collectively called the "1993 Recapitalization Transactions").
The 1993 Recapitalization Transactions included: (i)
acquisition of Orleans Construction Corporation ("OCC"); (ii)
issuance of new notes by the Company and sale of Common Stock
by Jeffrey P. Orleans ("Mr. Orleans");(iii) a corporate debt
restructuring; (iv) capital transactions with the Flora Group;
and (v) a mortgage debt restructuring.
Acquisition of Orleans Construction Corporation
On October 22, 1993, the Company completed a transaction among
the Company, OCC, a Pennsylvania corporation, and Mr. Orleans,
Chairman of the Board and Chief Executive Officer of the
Company and formerly the owner of all of the outstanding stock
of OCC. Mr. Orleans exchanged his OCC stock for newly-created
Series C Preferred Stock, which was subsequently converted
into 6,000,000 shares of Common Stock in September, 1994. The
assets acquired by the Company consist of real estate located
primarily in Mount Laurel Township, New Jersey. This
acquisition was recorded at the OCC historical cost basis at
the date of the transfer, since it was conducted with an
entity deemed to be under common control.
Summarized below are the combined results of operations, on an
unaudited, proforma basis, as if the acquisition of OCC had
occurred as of July 1, 1993. The proforma financial
information does not purport to be indicative of either the
results of operations that would have occurred had the
acquisition occurred at the beginning of such period or of
future results of operations of the combined companies.
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For the Nine Months Ended
March 31,
-------------------------
1995 1994
-------- ---------
Actual Proforma
-------------------------
(in thousands except per share amounts)
(unaudited)
Earned revenues $ 83,580 $ 57,902
======== ========
Income (loss)from operations
before extraordinary
items and cumulative
effect of change in
accounting principle $ 1,481 $ (624)
======== ========
Net income $ 1,481 $ 10,865
======== ========
Primary earnings
per share $ .12 $ .88
======== ========
Fully diluted earnings
per share $ .12 $ .86
======== ========
Issuance of Series A Notes by the Company and Sale of
Common Stock by Jeffrey P. Orleans.
During the second quarter of fiscal 1994, the Company issued
an aggregate principal amount of $3,000,000 of newly-created
Series A Notes to investors in a private placement (the
"Series A Investors"), including Mr. Orleans, other executive
officers, directors, and key personnel of the Company for cash
consideration. The Series A Notes bear interest at 2% over
the prime rate with a maturity date of September 15, 1998.
Contemporaneously with the sale by the Company of the Series
A Notes, Mr. Orleans sold 1,674,000 shares of Common Stock of
the Company owned by him to the other Series A Investors. The
shares sold by Mr. Orleans were previously issued shares. In
addition, Mr. Orleans was issued $1,000,000 in new Series B
Notes for cash consideration. The Notes have similar terms to
the Series A Notes.
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Corporate Debt Restructuring.
During the second quarter of fiscal 1994, the Company issued
$1,800,000 of Series B Notes to Jeffrey P. Orleans in exchange
for approximately $7,700,000 aggregate principal and accrued
interest of Senior Notes and Subordinated Debentures owned by
Mr. Orleans. The $1,800,000 represents the acquisition cost
to Mr. Orleans for the Senior Notes and Subordinated
Debentures, together with the carrying costs. Mr. Orleans
acquired these securities from the former institutional
holders thereof during fiscal 1993. These securities were
first offered to the Company which did not, at the time, have
sufficient funds or other available financial resources to
acquire the securities. This transaction resulted in a second
quarter fiscal 1994 extraordinary gain of $3,718,000, net of
applicable income taxes of $1,989,000.
Transactions with Flora Group.
On August 27, 1993, the Company consummated a Note and
Stock Acquisition Agreement with the Flora Group, a group of
entities which were formerly principal stockholders and
creditors of the Company. The transaction included the
exchange of cash and certain real estate assets owned by the
Company for the retirement of certain subordinated notes.
This exchange resulted in an extraordinary gain during fiscal
1994 of approximately $616,000, which is net of income tax
expense of $377,000. Additionally, the Company issued new
debt securities to the Flora Group in exchange for the
retirement of mandatorily redeemable Preferred Stock and the
repurchase of 1,002,513 shares of Common Stock. This stock is
being retained by the Company as treasury stock.
Mortgage Debt Restructuring.
On September 14, 1993, the Company consummated an agreement
with the Federal Deposit Insurance Corporation ("FDIC") (which
had succeeded to the mortgage debt ownership as a result of
financial difficulties of the original lender) under which the
Company was able to fully satisfy mortgage obligations
aggregating approximately $10,700,000 in exchange for a
payment of approximately $5,700,000. This transaction
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resulted in a fiscal 1994 extraordinary gain on early
extinguishment of debt of $3,185,000 net of income tax expense
of $1,821,000.
Extraordinary Items.
The aforementioned transactions resulted in extraordinary
gains, net of applicable income taxes, during the nine months
ended March 31, 1994 as follows:
Early extinguishment of senior
notes and subordinated debentures $3,718,000
Early extinguishment of subordinated
note payable 616,000
Early extinguishment of mortgage
obligations 3,185,000
-----------
$7,519,000
===========
(B) Supplemental disclosure of noncash financing activities:
As discussed in Note A, during the first quarter of fiscal
1995, the 50,000 shares of Series C Preferred Stock owned by
Mr. Orleans were converted into 6,000,000 shares of Common
Stock.
The Flora transactions described in Note A include certain
noncash items which have not been reflected in the Condensed
Consolidated Statements of Cash Flows for the period. These
items include approximately $1,500,000 of real estate assets
given in exchange for the retirement of a subordinated note
payable with a principal balance of $2,559,000 plus accrued
interest. Further, $2,100,000 of new notes payable were
issued in exchange for 50,000 shares of Series A Preferred
Stock and the reacquisition of 1,002,513 shares of the
Company's Common Stock.
On October 22, 1993, the Company acquired Orleans Construction
Corporation as described in Note A. The assets acquired,
liabilities assumed and other noncash effects of this
transaction which have not been reflected in the Condensed
Consolidated Statements of Cash Flows were as follows:
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(in thousands)
--------------
Receivables $ 1,814
Real estate held for
development or sale 29,843
Deferred charges and
other assets 3,207
-------
Total assets 34,864
-------
Accounts payable and
accrued expenses 13,937
Customer deposits 1,660
Mortgage loans payable 19,244
Equity 288
-------
Total liabilities and
equity 35,129
-------
Cash acquired $ 265
=======
As discussed in Note A, in September, 1993 the Company
consummated an agreement with the FDIC under which the Company
was able to fully satisfy mortgage obligations at less than
the carrying value of the debt.
As previously discussed, the Company issued $1,800,000 of new
Series B notes on October 22, 1993 as consideration in the
corporate debt restructuring.
During the first nine months of fiscal 1994, the Company
issued payment-in-kind obligations to a majority of its
Subordinated Debenture holders in lieu of scheduled cash
interest payments aggregating approximately $160,000.
(C) Primary earnings per common share is computed by dividing net
income or loss by the weighted average number of common shares
outstanding, net of treasury shares, during the three and nine
month periods ended March 31, 1995 and 1994 (11,926,730 and
12,077,982 for the three month periods ended March 31, 1995 and
1994, respectively, and 11,924,986 and 9,793,842 for the nine
month periods ended March 31, 1995 and 1994, respectively).
Fully diluted earnings per common share is computed by dividing
net income or loss by the weighted average number of shares of
common stock outstanding, net of treasury shares,
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and all potentially dilutive securities (11,926,730 and 12,081,027
for the three month periods ended March 31, 1995 and 1994,
respectively, and 11,924,986 and 10,181,720 for the nine month
periods ended March 31, 1995 and 1994, respectively).
The fiscal 1995 shares for both primary and fully diluted
earnings per share assume the conversion of the Series C
Preferred Stock and that the options (as described in Note F)
are outstanding as of July 1, 1994 or the date at issuance, if
later. The fiscal 1994 shares for both primary and fully
diluted earnings per share assume the conversion of the Series
C Preferred Stock effective October 22, 1993 and that the
options (as described in Note F) are outstanding as of July 1,
1993 or the date of issuance, if later.
(D) Mortgage and other notes receivables are shown net of allowances
for doubtful accounts of $42,000 and $55,000 at March 31, 1995 and
June 30, 1994, respectively.
(E) The above statements are unaudited but include all adjustments
which the Company considers necessary for a fair presentation of
the financial statements. The results of operations for fiscal
1994 include FPA Corporation for the three and nine month periods
ended March 31, 1994, and Orleans Construction Corporation from
the date of acquisition (October 22, 1993) through March 31, 1994.
All adjustments made for the periods presented were of a normal
recurring nature. The results of operations for the three and nine
month periods ended March 31, 1995 and 1994 are not necessarily
indicative of the full year.
(F) In December, 1992, the Board of Directors adopted (i) the 1992
Incentive Stock Option Plan relating to options for up to 560,000
shares (increased in August, 1994 to 660,000 shares) of Common
Stock of the Company and (ii) the Non-Employee Directors Stock
Option Plan relating to a maximum of 100,000 shares. Prior to
fiscal 1995, the Stock Option Committee had granted options
aggregating 540,000 shares to certain employees of the Company
under the 1992 Incentive Stock Option Plan and options aggregating
75,000 to three non-employee Directors (after expiration of an
option for 25,000 shares originally granted to a Director who
subsequently resigned).
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In February, 1995, the Board of Directors adopted the 1995
Stock Option Plan for Non-Employee Directors which allows for
options for up to 100,000 shares. On February 28, 1995, 75,000
options were granted under this plan to three additional non-
employee Directors. The Plan and the options granted
thereunder are conditional upon the receipt of stockholder
approval within one year of the adoption of the Plan.
The option price per share under all plans was established at
the fair market value at the dates of each grant which was
$.69 to $2.81 per share.
(G) In October, 1992, a wholly owned subsidiary of the Company,
Versailles at Europa, Inc. was established to act as the General
Partner in a newly formed Versailles Associates, L.P. This
partnership was formed to purchase and develop a tract of land in
Cherry Hill, New Jersey. The terms of the partnership agreement
provide that the General Partner will be allocated 55% of the net
profits or losses of this partnership and have exclusive
management and control over the development of the property.
Orleans Construction Corporation had entered into a joint
venture agreement with Bridlewood Associates, L.P., a limited
partnership formed to develop an 85 acre parcel of land in
Mount Laurel, New Jersey. Upon the OCC acquisition, the
Company succeeded OCC as the managing general partner. The
Company and the limited partner share equally in the profits
or losses of the entity.
The financial statements of both of the above partnerships are
included in the consolidated financial statements of the
Company. The limited partners' share of the income and
capital from these entities has been presented as minority
interests in the accompanying consolidated financial
statements.
(H) In February, 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes". SFAS 109 is an asset and liability
approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or
tax returns. In estimating future tax consequences, SFAS 109
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generally considers all expected future events other than
enactments of changes in tax law or rates. The Company has adopted
the principles of SFAS 109, as required, effective July 1, 1993 on
a prospective basis. The cumulative effect of adoption of SFAS 109
was approximately $3,970,000, as adjusted. This gain is primarily
the result of the effects of previously unrecognized net operating
losses and other carryforward tax benefits in excess of net
deferred taxable items and net of a valuation reserve of
approximately $1,000,000. The valuation reserve reflects the
excess of the carryforwards over existing net deferred taxable
items and expected taxable gains on certain of the 1993
Recapitalization Transactions.
(I) During 1993, the Company entered into an option agreement with
Orleans Builders and Developers, a New Jersey Limited Partnership
(the "Partnership"), the partners of which are Mr. Orleans and a
trust of which Mr. Orleans and Selma Orleans (the mother of Mr.
Orleans) are the sole trustees and beneficiaries. This agreement
allows for the acquisition of certain land holdings of the
Partnership for $2,800,000. During the second quarter of fiscal
1995, the Company acquired a portion of the land under the
aforementioned agreement and simultaneously sold it to an
unaffiliated third party.
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Item 2. FPA Corporation and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Liquidity and Capital Resources
The Company requires capital to purchase and develop land, to
construct units, fund related carrying costs and overhead and to fund
various advertising and marketing costs to facilitate sales. The Company's
sources of capital include funds derived from operations and various
borrowings, most of which are secured. At March 31, 1995, the Company had
$51,688,000 available to be drawn under existing secured revolving and
construction loans for planned development expenditures. These expenditures
include site preparation, roads, water and sewer lines, impact fees and
earthwork, as well as the construction costs of the units and amenities.
The 1993 Recapitalization Transactions, which are described in the Notes to
Consolidated Financial Statements under Item 1, will continue to have a
significant impact on the Company's capital resources and future
operations.
The Company believes that the closing of the 1993 Recapitalization
Transactions, funds generated from operations and additional borrowings
from commercial lenders will provide the Company with sufficient capital to
meet its operating needs through calendar 1995.
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Joint Ventures
The Company is a general partner in two separate joint ventures with
private investors which are developing communities in Cherry Hill and Mount
Laurel, New Jersey. These activities will provide additional operating
funds to the Company without the need for traditional land acquisition
funding.
Economic Conditions
The sluggish growth of the general economy in the Northeastern United
States, contradictory economic data and uncertainties regarding employment
within the Company's customer base have lessened the demand for new
housing. The homebuilding industry has continued to feel the effects of the
increased interest rates, resulting in decreased customer traffic at sales
offices and reduced sales. In response to these conditions, the Company has
continued to offer various incentives at certain communities to increase
sales velocity. These actions have reduced gross profits and cash proceeds
from residential property sales from recent historical levels. Any
significant further downturn in economic factors affecting the real estate
industry may require additional incentives or reductions in net sales
prices.
New orders for the nine months ended March 31, 1995 were 325 units
totaling $51,120,000 compared with 327 units totaling $61,482,000 for the
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nine months ended March 31, 1994. Fiscal 1994 new orders include OCC
from the October 22, 1993 acquisition date through March 31, 1994. For
comparative purposes, proforma combined company new orders for the
nine months ended March 31, 1994 were 395 units totaling $71,312,000.
The economic conditions previously discussed account for the reduction
in new orders on a proforma comparative basis. At March 31, 1995, the
Company had a backlog of 248 units with a sales value of $42,612,000
compared to 413 units totaling $73,701,000 at March 31, 1994. The
Company anticipates delivering all of its backlog units during
calendar 1995.
The significant reduction in the average price per unit of the fiscal
1995 new orders is a result of a change in the mix of the units sold.
New orders for the current year as compared to those for the prior
year include a significantly higher proportion of condominium and
townhome units as compared to single-family units. This increase in
multi-family units sold is primarily due to the introduction of
townhome and condominium communities at the Company's Warwick
Township, Pennsylvania development. Moreover, there was a decline in
the number of single-family units sold due to both an increase in
mortgage interest rates and a decrease in the number of single-family
communities being marketed, as the Company had substantially completed
selling units at certain of its single-family developments during
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early fiscal 1995. However, the Company commenced marketing three new
single-family communities at the end of calendar 1994. The decline in
both the number of units and dollar value of the Company's backlog at
March 31, 1995 as compared to March 31, 1994 is due to a decline in
unit sales as discussed previously as well as the transitional status
of certain single-family communities discussed above. In addition, the
significant backlog at March 31, 1994 was due in part to the severe
winter weather experienced during January through March 1994 which
hampered construction activity and delayed deliveries at all of the
Company's communities.
Inflation
Inflation can have a significant impact on the Company's liquidity.
Rising costs of land, materials, labor, interest and administrative costs
have generally been recoverable in prior years through increased selling
prices. The Company has been able to increase prices to cover portions of
the much publicized recent increases for lumber and other building
products. However, due to the current sluggish growth in the general
economy in the Northeastern United States, there is no assurance the
Company will be able to continue to increase prices to cover the effects of
inflation in the future.
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Operating Revenues
Revenues for the third quarter of fiscal 1995 increased $6,582,000
compared to the third quarter of fiscal 1994. This increase in revenues is
the result of an increase of $7,055,000 in residential property revenues,
offset by a decline in land sales revenue and other income of $332,000 and
$141,000, respectively. The increase in residential property revenues from
93 units totaling $16,305,000 for the quarter ended March 31, 1994 to 138
units totaling $23,360,000 for the quarter ended March 31, 1995 is due to
the introduction of sales at the Company's Warwick Township, PA condominium
community and increases in deliveries at a majority of the Company's other
communities. In addition, the severe winter weather experienced during
January through March, 1994, which hampered construction activity, resulted
in reduced deliveries during the prior year quarter. The decrease in land
sales revenue is a result of the timing of lot sales at one of the
Company's communities. The decline in other income is primarily
attributable to a decrease in income from bank-owned workout projects.
Several of these workout projects, from which the Company earns a
commission for the construction and marketing of units in communities owned
by various banks, were completed during the 1994 calendar year.
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Revenues for the nine months ended March 31, 1995 increased
$34,836,000 as compared to the nine months ended March 31, 1994. Revenues
and units delivered from the sale of residential properties increased by
$31,636,000 and 194 units. Approximately $9,000,000 and 67 units of this
increase is due to the timing of the OCC acquisition. Revenues include OCC
results for the full nine month period ended March 31, 1995. However,
fiscal 1994 revenues include OCC results only from the date of acquisition,
October 22, 1993. After accounting for the timing of the OCC acquisition,
the remaining increase is a result of increased deliveries at a majority of
the Company's communities and the introduction of the Warwick Township,
Pennsylvania community. Land sale revenues for the nine months ended March
31, 1995 increased $3,380,000 as compared to the nine months ended March
31, 1994. This increase is due largely to a second quarter fiscal 1995 land
sale of $3,336,000. This land sale, to an unaffiliated third party, related
to property acquired by the Company upon exercise of its option to purchase
a section of land located in East Brunswick, New Jersey under the option
agreement with Orleans Builders and Developers (as discussed in Note I of
the accompanying Notes to Consolidated Financial Statements under Item 1).
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Costs and Expenses
Costs and expenses for the third quarter of fiscal 1995 increased
$6,257,000 as compared to the same period in the prior year. This increase
is primarily the result of increases in costs of residential properties
sold, and selling, general and administrative expenses of $5,837,000 and
$645,000, respectively, offset by a decrease in costs and expenses from
land sales of $277,000. The increase in costs and expenses from residential
property sales is consistent with the aforementioned increase in earned
revenues from residential properties. The increase in selling, general and
administrative expenses is due primarily to a $450,000 accrual for
additional litigation expenses that may be incurred by the Company as fully
discussed under Environmental Regulation. The remaining $195,000 increase
is consistent with the increase in earned revenues. The decrease in costs
of land sales is due to the decrease in land sales as previously discussed
under Operating Revenues.
Cost and expenses for the first nine months of fiscal 1995 increased
$32,714,000 as compared to the first nine months of fiscal 1994.
Approximately $9,500,000 of this increase is due to the timing of the OCC
acquisition. Costs and expenses include OCC for the full nine month period
ended March 31, 1995. However, costs and expenses for the nine months
19
<PAGE> 21
ended March 31, 1994 include OCC only from the date of the acquisition,
October 22, 1993. The previously discussed East Brunswick land sale
accounted for the majority of the increase in costs and expenses from land
sales of $2,810,000. After accounting for the timing of the OCC
acquisition, the remaining increase in costs and expenses is due primarily
to increases in costs of residential property sales and selling, general
and administrative expenses of approximately $19,200,000 and $1,050,000,
respectively. These increases are consistent with the increase in earned
revenues from residential properties discussed under Operating Revenues
coupled with the $450,000 accrual for additional litigation expenses.
Extraordinary Items
As more fully discussed in Note A of the accompanying Notes to
Consolidated Financial Statements under Item 1, the Company had three
extraordinary items during the nine months ended March 31, 1994, each of
which resulted from the early extinguishment of debt. These transactions
are; (i) the retirement of a mortgage note obligation secured by real
estate which resulted in an extraordinary gain of $3,185,000 net of related
income tax expense of $1,821,000, (ii) the Flora transaction, which
resulted in the extraordinary gain on early extinguishment of a
subordinated note payable of $616,000 net of income tax expense of
20
<PAGE> 22
approximately $377,000 and (iii) the extraordinary gain on the early
extinguishment of a majority of the outstanding Senior Notes and
Subordinated Debentures which resulted in an extraordinary gain of
$3,718,000 net of related income taxes of $1,989,000. The combined effect
of these transactions resulted in net extraordinary gains of $7,519,000 net
of related income taxes for the nine months ended March 31, 1994.
Cumulative Effect of Change in Accounting Principle
In February, 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting
for Income Taxes". SFAS 109 is an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, SFAS 109 generally considers all expected future events other
than enactments of changes in tax law or rates. The Company adopted the
principles of SFAS 109, as required, effective July 1, 1993 on a
prospective basis. The cumulative effect of adoption of SFAS 109 was
approximately $3,970,000, as adjusted. This gain was primarily the result
of the effects of previously unrecognized net operating losses and
21
<PAGE> 23
other carryforward tax benefits in excess of net deferred taxable items and
net of a valuation reserve of approximately $1,000,000. The valuation
reserve reflects the excess of the carryforwards over existing net deferred
taxable items and expected taxable gains on certain of the 1993
Recapitalization Transactions.
Income (Loss) from Operations
Loss from operations for the third quarter of fiscal 1995 was $50,000
($.01 per primary and fully diluted share) compared to a loss from
operations of $388,000 ($.03 per primary and fully diluted share) for the
prior year quarter. This improvement is due primarily to the increase in
the units delivered offset by the related increase in selling, general and
administrative expenses, the $450,000 accrual for litigation expenses and
the previously noted decreases in land sales and other income.
Income from operations for the nine months ended March 31, 1995 was
$1,481,000 ($.12 per primary and fully diluted share) compared to a loss
from operations of $300,000 ($.03 per primary and fully diluted share) for
the nine months ended March 31, 1994. After accounting for the timing of
the OCC acquisition, this improvement is due to an increase in profits from
the sale of residential units of approximately $2,600,000, an increase in
22
<PAGE> 24
gross profit from land sales of approximately $450,000 and was partially
offset by an increase in selling, general and administrative expenses of
approximately $950,000.
Net Income (Loss)
Net loss for the third quarter of fiscal 1995 was $50,000 ($.01 per
primary and fully diluted share) as compared to a net loss of $388,000
($.03 per primary and fully diluted share) for the prior year quarter. This
increase is consistent with the increase in income from operations as
discussed above.
Net income for the first nine months of fiscal 1995 was $1,481,000
($.12 per primary and fully diluted share) as compared to $11,189,000
($1.14 per primary share, $1.10 per fully diluted share) for the first nine
months of fiscal 1994. This decrease is due to the extraordinary gains for
the nine months ended March 31, 1994 totaling $7,519,000 ($.77 per primary
share, $.74 per fully diluted share), and the cumulative effect of the
change in accounting principle of $3,970,000 ($.40 per primary share, $.39
per fully diluted share), as previously discussed, offset by the
improvement in income from operations for the current year of $1,781,000.
23
<PAGE> 25
Environmental Regulation
All testing required by Phase 1A of the phased remedial investigation
(RI) to be performed at Colts Neck Estates, a single family residential
development built by the Company in Washington Township, Gloucester County,
New Jersey ("Colts Neck") have been completed. The results of such testing
has been submitted to the New Jersey Department of Environmental Protection
("NJDEP") for its review and comment. At NJDEP's request, James C. Anderson
Associates, Inc. ("JCA"), Washington Township's consultant, submitted a
proposal to NJDEP to delineate three alleged pig manure areas on other
portions of Colts Neck. The cost of the delineation is estimated at
approximately $34,000; no agreement has been reached with NJDEP over the
Company's obligation, if any, to fund this work. The Company continues to
fund the cost of the phased RI testing, which is not expected to exceed
materially the original estimate of $136,000. Approximately 145 homeowners
at Colts Neck have commenced three lawsuits against the Company, which were
separately filed in state and Federal courts between April and November,
1993, and have now been consolidated in the United States District Court
for the District of New Jersey. The plaintiffs in the consolidated action
allege that the Company and other defendants built and sold them homes
24
<PAGE> 26
which had been constructed on and adjacent to land which had been used as a
municipal waste landfill and a pig farm. The complaints assert claims under
the federal Comprehensive Environmental Response, Compensation and
Liability Act, the federal Solid Waste Disposal Act, the New Jersey
Sanitary Landfill Facility Closure and Contingency Act, the New Jersey
Spill Compensation and Control Act, as well as under theories of private
nuisance, public nuisance, common law fraud, latent defects, negligent
misrepresentation, consumer fraud, negligence, strict liability, vendor
liability, and breach of warranty, among others.
In September, 1993 the Company brought a state court action against
more than 30 of its insurance companies seeking indemnification and
reimbursement of costs of defense in connection with the three Colts Neck
actions referred to above. That action has since been stayed and the
Company's claims against its insurers have also been brought as third-party
claims in the consolidated Colts Neck litigation in Federal court along
with third-party claims against the former owners and operators of the
Colts Neck property as well as claims against the generator of the waste
allegedly disposed on the property. The parties in the Colts Neck
litigation have agreed to mediation, which is currently being actively
conducted by a court-appointed mediator.
25
<PAGE> 27
Although the Company has admitted no liability in these matters and is
vigorously defending the claims brought by the homeowners and vigorously
prosecuting its claims against the insurance companies and former owners,
operators and generators, the Company has accrued estimated costs of
environmental testing as well as all other reasonably estimable future
investigatory, engineering, legal and litigation costs and expenses. Since
the Company has not received NJDEP's comments on the testing results of
Phase 1A of the RI, it is unable to predict whether any further testing or
remediation will be required and, if so, the cost and allocation thereof.
Neither the existence nor the extent of the Company's liability or any
potential recovery from co-defendants or insurance companies or other third
parties can be determined at this time. However, the Company believes that
the resolution of this contingency will not have a material effect on its
results of operations or its financial position, although there can be no
assurances as to the ultimate outcome of the litigation. Although the
mediation process is continuing and could result in a settlement of the
claims asserted by the residents at Colts Neck Estates, there is no
assurance that the litigation will not continue. Accordingly, the results
26
<PAGE> 28
for the third quarter and first nine months of fiscal 1995 reflect an
increase in the reserve of $450,000 in respect of additional litigation
expenses that may be incurred by the Company. The additional reserve is
solely in respect of litigation expenses and is not intended to reflect the
costs associated with a possible settlement. The Company is not aware of
any other environmental liabilities associated with any of its other
properties.
27
<PAGE> 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Registrant incorporates herein by reference the information
contained in Part 1 Item 2 "Management's Discussion and Analysis -
Environmental Regulation".
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibit 27 - Financial Data Schedule (included in electronic filing
format only).
28
<PAGE> 30
FPA CORPORATION AND SUBSIDIARIES
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.
FPA CORPORATION
(Registrant)
May 12, 1995 BENJAMIN D. GOLDMAN
----------------- ------------------------
(Date) Benjamin D. Goldman,
President and
Chief Operating Officer
May 12, 1995 JOSEPH A. SANTANGELO
----------------- ------------------------
(Date) Joseph A. Santangelo,
Chief Financial Officer,
Treasurer and Secretary
29
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<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> MAR-31-1995
<CASH> 2,230
<SECURITIES> 0
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0
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