<PAGE>
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, 1998
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)
One Greenwood Square, Suite #101
3333 Street Road
Bensalem, Pennsylvania 19020
(Address of principal executive offices)
Telephone: (215) 245-7500
(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 13, 1998: 11,356,018
(excluding 1,342,113 shares held in Treasury).
<PAGE>
FPA Corporation and Subsidiaries
Index to Financial Statements
PAGE
----
Interim Financial Statements for the quarter
ended March 31, 1998
Consolidated Balance Sheets at March 31, 1998
and June 30, 1997 1
Consolidated Statements of Operations and Changes
in Retained Earnings for the three months and nine months
ended March 31, 1998 and 1997 2
Consolidated Statements of Cash Flows for the
nine months ended March 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 4-6
<PAGE>
FPA Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
March 31 June 30
--------- ---------
1998 1997*
--------- ---------
(Unaudited)
<S> <C> <C>
Assets
Cash $ 2,361 $ 1,582
Receivables
Trade accounts 7,513 3,223
Mortgage and other notes 387 404
Real estate held for development and sale:
Residential properties completed or
under construction 48,359 35,355
Land held for development or sale
and improvements 57,222 60,067
Property and equipment, at cost, less
accumulated depreciation 1,892 507
Deferred charges and other assets 6,817 6,475
--------- ---------
$ 124,551 $ 107,613
========= =========
Liabilities and Shareholders' Equity
Liabilities
Accounts payable $ 14,063 $ 12,759
Accrued expenses 8,520 5,519
Customer deposits 3,873 2,155
Mortgage and other note obligations
primarily secured by real estate
held for development and sale 64,207 53,637
Subordinated debentures 580 601
Other notes payable - related parties 10,481 10,722
Other notes payable 3,687 2,896
Deferred income taxes 2,517 2,587
Minority interests 166 686
--------- ---------
Total liabilities 108,094 91,562
--------- ---------
Commitments and Contingencies
Shareholders' equity
Preferred stock, $1 par, 500,000
shares authorized
Common stock, $.10 par, 20,000,000
shares authorized, 12,698,131
shares issued at March 31,1998
and June 30, 1997 1,270 1,270
Capital in excess of par value - common stock 17,726 17,726
Retained earnings (deficit) (1,561) (1,967)
Treasury stock, at cost (1,342,113
shares held at March 31,1998
and June 30, 1997, respectively) (978) (978)
--------- ---------
Total shareholders' equity 16,457 16,051
--------- ---------
$ 124,551 $ 107,613
========= =========
</TABLE>
*Reclassified to conform with fiscal 1998 presentation
See notes to consolidated financial statements
<PAGE>
FPA Corporation and Subsidiaries
Consolidated Statements of Operations
and Retained Earnings
(In Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Earned revenues
Residential properties $ 23,661 $ 19,249 $ 67,837 $ 65,053
Related party (Note H) 1,472
Land sales 232 2,728 658 2,728
Other income 393 380 1,152 1,371
-------- -------- -------- --------
24,286 22,357 71,119 69,152
-------- -------- -------- --------
Costs and expenses
Residential properties 20,213 16,465 57,806 55,775
Related party (Note H) 1,459
Land sales 222 3,055 549 3,055
Other 136 118 425 351
Selling, general and administrative 3,440 2,719 9,839 8,968
Interest
Incurred 1,855 1,534 5,351 4,505
Less capitalized (1,666) (1,423) (4,835) (3,963)
Minority interests in income
(loss) of consolidated subsidiaries (25) 5 (129) (23)
-------- -------- -------- --------
24,175 22,473 70,465 68,668
-------- -------- -------- --------
Income (loss) from operations
before income taxes 111 (116) 654 484
Income tax expense 42 248 85
-------- -------- -------- --------
Income (loss) from operations
before extraordinary item 69 (116) 406 399
-------- -------- -------- --------
Extraordinary item, net 594
-------- -------- -------- --------
Net income (loss) 69 (116) 406 993
Retained earnings (deficit) at
beginning of period (1,630) (3,067) (1,967) (4,176)
-------- -------- -------- --------
Retained earnings (deficit) at
end of period $ (1,561) $ (3,183) $ (1,561) $ (3,183)
-------- -------- -------- --------
Basic earnings (loss) per share:
Income (loss) before extraordinary
item $ .01 $ (.01) $ .04 $ .03
Extraordinary gain $ .06
-------- -------- -------- --------
Total $ .01 $ (.01) $ .04 $ .09
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
FPA Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the nine months ended
-------------------------
3/31/98 3/31/97
------- -------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 406 $ 993
Adjustments to reconcile net
income to net cash (used in)
operating activities:
Extraordinary gain on early
extinguishment of debt (594)
Depreciation and amortization 136 96
(Increase) decrease in assets:
Receivables (4,273) 426
Real estate held for development
and sale (10,159) (7,129)
Deferred charges and other assets (342) (442)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 4,305 (1,324)
Other liabilities 1,128 (93)
-------- --------
Net cash used in operating activities (8,799) (8,067)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment, net (1,521)
--------
Cash flows from financing activities:
Proceeds from mortgages and loans payable 61,652 63,425
Repayments of mortgages and loans payable (50,553) (56,662)
Purchase of treasury stock (107)
-------- --------
Net cash provided by financing acivities 11,099 6,656
-------- --------
Net increase (decrease) in cash 779 (1,411)
Cash at beginning of year 1,582 2,617
-------- --------
Cash at end of quarter $ 2,361 $ 1,206
======== ========
Supplemental disclosure of cash flow activities:
Interest paid, net of amounts capitalized -- --
======== ========
Income taxes paid 109 54
======== ========
</TABLE>
<PAGE>
FPA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) In July, 1996, the Company completed a transaction to fully satisfy
notes payable with an outstanding balance of approximately $1,650,000
and reacquired 183,177 shares of Common Stock in exchange for a cash
payment of approximately $1,061,000. These shares have been retained by
the Company as treasury stock. This transaction resulted in an
extraordinary gain of $594,000 net of income tax expense of
approximately $100,000.
(B) Basic earnings per common share is computed by dividing net income by
the weighted average number of common shares outstanding. The weighted
average number of shares used to compute basic earnings per common
share were 11,356,018 shares for the three and nine month periods ended
March 31, 1998 and 1997. Diluted earnings per share includes additional
common shares that would have been outstanding if the dilutive
potential common shares had been issued. The Company's only dilutive
shares are certain stock options granted to directors and key employees
of the Company.
The following is a reconciliation of common share amounts used in the
computation of basic and fully diluted shares for the three and nine
months ended March 31, 1998 and 1997. There were no reconciling items
to consider for the numerators in the calculations. The income before
extraordinary items and net income amounts used were the amounts
reported.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total Common Shares issued and
outstanding (net of 1,342,113
Treasury Shares)
Basic EPS Shares 11,356,018 11,356,018 11,356,018 11,356,018
Add: Effect of assumed shares issued
under Treasury Stock method
for Stock Options 168,747 210,551 141,439 170,120
---------- ---------- ---------- ----------
Diluted EPS Shares 11,524,765 11,566,569 11,497,457 11,526,138
========== ========== ========== ==========
</TABLE>
Basic and diluted earnings per share are the same since the Company
does not have a substantial amount of dilutive securities.
A Convertible Subordinated 7% Note due January 2, 2002 issued to
Jeffrey P. Orleans, Chairman and Chief Executive Officer of the Company, in the
amount of $3,000,000 is convertible into Common Stock at $1.50 per share. This
security was not included in the above computation since the exercise price of
$1.50 exceeds the average market price of the
4
<PAGE>
Company's Common Shares. Its inclusion, using the Treasury Stock method, would
be antidilutive.
(C) Supplemental disclosure of non-cash financing activities:
As discussed in Note A, the Company recorded an extraordinary gain of
$594,000 during fiscal 1997 on the early retirement of approximately
$1,650,000 of notes payable for a cash payment of $1,061,000.
(D) Residential properties completed or under construction consists of the
following:
(In Thousands)
March 31, 1998 June 30, 1997
-------------- -------------
Under contract for sale $32,885 $21,300
Unsold 15,474 14,055
------- -------
$48,359 $35,355
======= =======
(E) The above statements are unaudited but include all adjustments which
the Company considers necessary for a fair presentation of the
financial statements. 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, 1998 and 1997 are not
necessarily indicative of the full year.
(F) 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. (the "Partnership"). The
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 be allocated 55% of the net profits and losses
of the Partnership and have exclusive management and control over the
development of the property. The financial statements of the
Partnership are included in the consolidated financial statements of
the Company. The limited partner's share of the income and capital from
this entity has been presented as minority interest in the accompanying
consolidated financial statements.
Orleans Construction Corp. (OCC) has 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. OCC is the managing general partner. OCC and the limited
partner share equally in the profits or losses of the entity. The
financial statements of the Partnership are included in the
consolidated financial statements of the Company. The limited partner's
share of the income and capital from this entity has been presented as
minority interest in the accompanying consolidated financial
statements.
5
<PAGE>
(G) Notes Payable - Related Parties include various note obligations, most
of which are payable to Jeffrey P. Orleans, Chairman and Chief
Executive Officer of the Company. These obligations bear interest at
rates ranging from 7% to prime +2%. These obligations have various
maturity dates through January 1, 2002.
(H) Related party residential property revenues for the nine months ended
March 31, 1998 included 27 low income homes with an aggregate sales
value of $1,472,000 which were purchased by Jeffrey P. Orleans,
Chairman and Chief Executive Officer of the Company. These transactions
satisfied, in part, the Company's low income housing requirements in
Mount Laurel Township, New Jersey. The selling prices for these homes
which are determined by state statute, are the same as if the homes had
been sold to unaffiliated third parties.
6
<PAGE>
FPA CORPORATION AND SUBSIDIARIES
Item 2. 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 homes, 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, sales of assets and various
borrowings, most of which are secured. At March 31, 1998, the Company had
$54,933,000 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 homes and amenities. The
Company believes that the funds generated from operations and financing
commitments from commercial lenders will provide the Company with sufficient
capital to meet its operating needs.
Results of Operations
The following table sets forth certain detail as to
residential sales activity for the nine months ended March 31, 1998 and 1997, in
the case of revenues earned and new orders, and at the end of the periods
indicated, in the case of backlog.
Nine Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
(Dollars in Thousands)
Revenues Earned $69,309 $65,053
Homes 386 381
Average Price Per Unit $ 180 $ 171
New Orders $99,192 $73,990
Homes 521 440
Average Price Per Unit $ 190 $ 168
Backlog $68,142 $49,142
Homes 345 278
Average Price Per Unit $ 197 $ 177
New orders for the nine months ended March 31, 1998
increased by 34% to $99,192,000 on 521 orders, compared to $73,990,000 on 440
orders during the nine months ended March 31, 1997. The Company continues to
expand its geographic marketing areas within Pennsylvania and New Jersey. This
increase in new orders resulted from the opening of seven additional selling
communities in fiscal 1998, including two new communities in Chester County,
Pennsylvania. In New Jersey, the Company opened new communities in Mount Laurel,
Evesham
7
<PAGE>
and Southampton Townships in Burlington County, as well as in Princeton Township
in Mercer County, and Gloucester Township in Camden County. The average price
per unit of revenues earned and new orders increased due to a change in product
mix towards higher priced townhouse and single family homes, along with the
settlement of fewer condominiums. The Company expects this trend to continue.
Backlog
The dollar value of backlog at March 31, 1998 increased 39% to
$68,142,000 on 345 homes, as compared to the backlog at March 31, 1997 of
$49,142,000 on 278 homes. The Company's continued geographic diversification
with its new communities, coupled with favorable economic conditions and
consumer sentiment, resulted in the increased backlog level. The March 31, 1998
amount represents the highest dollar value of backlog the Company has achieved
in more than a decade.
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 these
costs. However, there is no assurance the Company will be able to continue to
increase prices to cover the effects of inflation in the future.
Operating Revenues
Revenues for the third quarter of fiscal 1998 increased
$1,929,000 as compared to the third quarter of fiscal 1997. Revenues from the
sale of residential properties included 122 homes totaling $23,661,000 during
the quarter ended March 31, 1998, as compared to 111 homes totaling $19,249,000
during the quarter ended March 31, 1997. The expanding geographic scope of the
Company's operations and favorable economic conditions are the primary reasons
for this increase. The increase in average selling price is due to a change in
product mix towards more townhome and single family homes. The Company expects
this trend to continue. The reduction in land sale revenues is due to the timing
of a land sale which was completed during the third quarter of fiscal 1997.
Revenues for the nine months ended March 31, 1998 increased
$1,967,000 as compared to the nine months ended March 31, 1997. Revenues from
residential property sales and homes delivered (including related party amounts)
increased by $4,256,000 and five homes, respectively, to $69,309,000 on 386
homes for the nine months ended March 31, 1998. The land sale discussed in the
preceding paragraph accounts for the decrease in related revenues. Residential
property revenues for the nine months ended March 31, 1998 from related parties
included 27 low income homes with an aggregate sales value of $1,472,000 which
were purchased by Jeffrey P. Orleans, Chairman and Chief Executive Officer of
the Company. These transactions satisfied, in part, the Company's low income
housing requirements in Mount Laurel Township, New Jersey. The selling prices
for these homes, which are determined by state statute, are the same as if the
homes
8
<PAGE>
had been sold to unaffiliated third parties. Other income decreased $219,000
primarily as a result of the prior year sale of the Company's interest in a
joint venture.
Costs and Expenses
Costs and expenses for the third quarter of fiscal 1998
increased $1,702,000 compared to the third quarter of fiscal 1997. This overall
increase included an increase in cost of real estate sold (including land) of
$915,000 and an increase in selling general and administrative expenses of
$721,000. These increases are consistent with the increases in related revenues
coupled with start-up costs associated with the opening of new communities.
Costs and expenses for the nine months ended March 31, 1998
increased $1,797,000 which is consistent with the increase in earned revenues
(i.e., higher unit volume and product mix changes). Costs of real estate sold
(including land and related party amounts) increased only $984,000 (compared to
the related increase in revenues of $2,186,000) due to improved overall profit
margins for land and residential property sales. Selling general and
administrative expenses increased $871,000 which is attributable to start-up
costs associated with the opening of new communities and the increase in
residential property revenues.
Extraordinary Items
In July 1996, the Company completed a transaction to fully
satisfy notes payable with an outstanding balance of approximately $1,650,000
and re-acquired 183,177 shares of Common Stock in exchange for a cash payment of
approximately $1,061,000. These shares have been retained by the Company as
treasury stock. This transaction resulted in an extraordinary gain of $594,000,
net of income tax expense of approximately $100,000.
Net Income
Net income for the third quarter of fiscal 1998 was $69,000
($.01 per basic share) compared to a net loss of $116,000 ($.01 per basic share)
for the prior year quarter. The increase in revenues, coupled with the increase
in profit margins from land sales and slight increase in profit margins from
residential property sales are the primary reasons for the improvement.
Net income for the nine months ended March 31, 1998 was
$406,000 ($.04 per basic share) compared to net income of $993,000 ($.09 per
basic share) for the nine months ended March 31, 1997. The July 1996
extraordinary gain of $594,000 accounts for substantially all of the difference
in net income for the comparable nine month periods. The current year
improvement in income from operations before income taxes (due to improved
profit margins on the sale of land and residential properties) was offset by a
higher income tax rate in fiscal 1998 due to the utilization of certain tax
assets during fiscal 1997 which resulted in a lower effective tax rate.
9
<PAGE>
Litigation
During the second quarter of fiscal 1998, a judgment in the
amount of $2,500,000 was rendered against FPA Corporation, and in the amount of
$1,250,000 against the Estate of Marvin Orleans and Jeffrey P. Orleans, trading
as Orleans Construction Company, a partnership (collectively, "OCC") by the
Court of Common Pleas of Bucks County, in an action brought against FPA
Corporation, OCC, and an unrelated party arising out of injuries to two workmen
at an FPA Corporation project during its construction phase. The plaintiffs have
also requested "delay damages" based upon an allegation, which FPA and OCC will
contest, that FPA and OCC inappropriately delayed the trial. Although the amount
of delay damages, if granted, is uncertain, the portion thereof allocable to FPA
and OCC could be as much as approximately $2,250,000 between them. FPA and OCC
have filed post-trial motions challenging the judgment. One of FPA's
subcontractors is insured for up to $2,000,000 under two insurance policies;
that subcontractor's insurance company provided a defense to FPA and OCC and its
limits stand in front of FPA's primary insurance policy. FPA and OCC are insured
up to $1,000,000 under its primary policy in effect at that time, and FPA and
OCC are further insured under an umbrella policy for $15,000,000. The
subcontractor's insurance company, FPA's primary insurance company, and FPA's
excess insurer have acknowledged coverage up to their aggregate policy limits.
Therefore, the full amount of the judgment, including delay damages, is expected
to be satisfied from insurance proceeds.
Accordingly, the Company has recorded an accrued expense for $2,500,000
for its portion of the judgment discussed above. The Company also has recorded a
receivable for $2,500,000, representing the amount the Company believes it will
recover from the various insurance carriers to satisfy its portion of the
judgment. Based upon the outcome of post-trial motions challenging the judgment
and any potential future award of delay damages, the Company will adjust its
liability and insurance recovery amounts accordingly.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995.
The following important factors could cause FPA's actual
consolidated results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, FPA Corporation:
o Changes in consumer confidence due to perceived uncertainty of future
employment opportunities and other factors;
o Competition from national and local homebuilders in the Company's
market areas;
o Building material price fluctuations;
o Changes in mortgage interest rates charged to buyers of the Company's
homes;
10
<PAGE>
o Changes in the availability and cost of financing for the Company's
operations, including land acquisition;
o Revisions in federal, state and local tax laws which provide incentives
for home ownership;
o Delays in obtaining land development permits as a result of (i)
federal, state and local environmental and other land development
regulations, (ii) actions taken or failed to be taken by governmental
agencies having authority to issue such permits, and (iii) opposition
from third parties; and
o Increased cost of suitable development land.
11
<PAGE>
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 of Financial
Condition and Results of Operations Litigation".
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27 - Financial Data Schedule (included in electronic
filing format only).
12
<PAGE>
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 13, 1998 S/Benjamin D. Goldman
-------------------------------------
Benjamin D. Goldman
President and Chief Operating Officer
May 13, 1998 S/Joseph A. Santangelo
-------------------------------------
Joseph A. Santangelo
Treasurer, Secretary and
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 2,361
<SECURITIES> 0
<RECEIVABLES> 7,900
<ALLOWANCES> 0
<INVENTORY> 105,581
<CURRENT-ASSETS> 0
<PP&E> 1,892
<DEPRECIATION> 0
<TOTAL-ASSETS> 124,551
<CURRENT-LIABILITIES> 0
<BONDS> 76,504
0
0
<COMMON> 1,270
<OTHER-SE> 15,187
<TOTAL-LIABILITY-AND-EQUITY> 124,551
<SALES> 69,967
<TOTAL-REVENUES> 71,119
<CGS> 59,814
<TOTAL-COSTS> 70,465
<OTHER-EXPENSES> 296
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 516
<INCOME-PRETAX> 654
<INCOME-TAX> 248
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 406
<EPS-PRIMARY> .04
<EPS-DILUTED> .00
</TABLE>
